Hyperinflation vs. Inflation: Understand the Difference

By Dr. Jeffrey Lewis   Sep 3 2010 2:42PM

Hyperinflation and inflation may share the same root, but they're two entirely different trees.  While many assume that hyperinflation is just inflation's oversized cousin, there is much more to hyperinflation than most are aware.

The Basics of Inflation

Investors, traders, and average Joes alike should all have a firm understanding of inflation through rudimentary economics studies.  Inflation is nothing more than an increase in the money supply that leads to changes in aggregated demand and ultimately higher prices for goods.  Increases in prices during inflation are certain, and they tend to happen over a period of years or decades, rather than months or days. 

Most commonly, inflation does not appear until eighteen months after monetary policy adjustments, as businesses rework prices to increase their market share of the aggregate demand for products.

The Basics of Hyperinflation

Hyperinflation shares some links with inflation in that the value of the currency is decreased, but at a much faster rate.  In a hyperinflationary scenario, decreases in the value of money result from two conditions: perpetual increases in the total money supply and a decrease in confidence in the currency.  The latter is the 800 pound gorilla in the room. 

When a population loses faith in a currency, it does so quickly, like all bubbles do when they eventually pop.  As we saw in the Weimar Republic, Reichsmarks fell in value by two-thirds in under a month, and by the next month, they had lost another two-thirds.  In just two months, purchasing power plunged by more than 88%.  You would have to be a fool to think the depreciation stopped there. 

Businesses lost so much faith in the currency that they posted higher and higher prices as a way to turn customers away.  Why sell today when the currency will be worthless tomorrow?  All told, in just over six months in 1922, the Reichsmark plunged more than 99%.  After two years, at the end of 1923, the Reichsmark was worth 1/15,000,000 of its 1922 value.

Hyperinflation Looms

For the Fed and the US economy, you really do reap what you sow.  The seeds of hyperinflation have been planted wide and deep, and nothing short of a perfect storm of monetary policy and fiscal policy reductions can stem the tide.  If history is any indication, the US dollar will follow in the footsteps of every fiat currency before it, losing piece by piece every year until finally all confidence is lost.

As to when hyperinflation begins, it is anyone's best guess.  However, we can be sure that it will happen quickly and without warning.  The best hedge still exists in gold and silver, with silver being the best alternative to paper money when the dollar eventually meets its demise.  Its ease of use, anonymity, and the wide array of different denominations, including one ounce rounds, pre-1964 silver dimes, and large bars, make it a perfect crisis currency.  Stock up because today's $19 per ounce price for physical silver will look like a going out of business sale when the dollar does “go out of business.”

Dr. Jeff Lewis

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Dr. Jeffrey Lewis, in addition to running a busy medical practice, is the editor of Silver-Coin-Investor.com and Hard-Money-Newsletter-R eview.com