“Gradually, then suddenly,” goes the , was “to assume not so much that their money was falling in value as that the goods which it bought were becoming more expensive in absolute terms.” When prices rose, “people demanded not a stable purchasing power for the marks they had, but more marks to buy what they needed.”

Hundred years later — a different time in different lands with a different money — the same doubts go through people’s minds. Inflation, of its hyper-variety or the ones we’re living through in the 2020s, muddies people’s ability to make economic decisions. It gets harder to know how much something “costs,” if a business is making a real profit or if a household is adding to or depleting its savings.

The Economist’s account of the effects of Turkey’s inflation last year summarized the economy-wide consequences of inflation running amok. Under high (or hyper-)inflation, time horizons shrink and decision-making collapses to day-to-day cash management. Like all inflations there are arbitrary redistributions of wealth:

1. The economic cost of high inflation is the unpredictability of the price system, the volatility of prices themselves. If you think bitcoin’s exchange rate to the USD is “volatile,” you haven’t seen basic prices in hyperinflating countries — wages, assets, grocery stores, rents. It undermines consumers’ ability to plan or make economic choices. Production gets delayed, investment decisions postponed and the economy squeezed since spending decisions are brought forward to the present.
2. In a similar vein, price signals don’t work as well anymore. It’s harder to see through the nominal prices to the real economic factors of supply and demand — like the car window into the economy suddenly becoming foggy. Haggling over exact prices makes transaction costs shoot up, which benefit nobody; partially substituting the failing money for foreign currency adds a second layer of (often black-market) exchange rates to juggle.
3. It’s unfair. Those best placed to play the inflation game, to shelter their wealth through property, hard assets or foreign currencies, can protect themselves. It causes a rift between those who can access foreign currency or hard assets, and those who cannot.

While most people’s economic lives are disrupted by (hyper)inflation and in aggregate everyone loses, some people benefit along the way.

• The most obvious losers are those holding cash or cash balances, since these are straight away worth less.
• The most direct beneficiaries are debtors, whose debt gets inflated away; insofar as they can have their incomes keep pace with the fast rises in prices, the real financial burden of the debt disappears. The flipside of that is the creditor, who loses purchasing power when their fixed-value asset deflates into nothingness. 

Do governments benefit from high or hyperinflation?

There is a lot of nuance to whether governments benefit from high inflation. The government itself usually benefits, since seigniorage accrues to the issuer of the currency. But general tax collection doesn’t happen instantly and so taxes on past incomes may be paid later in less valuable, inflated money. Besides, a poorer real economy usually makes for less economic resources that a government can tax.

Another way governments benefit is that their expenses are usually capped in nominal terms while tax receipts rise in proportion to prices and incomes.

As a large debtor, a government all else equal, has an easier time nominally servicing its debt — indeed, large government debts and financial obligations are major reasons to hyperinflate the currency in the first place. On the other hand, international creditors quickly catch on and refuse to lend to a hyperinflating government, or demand that they borrow in foreign currency and at additional interest rates.

Some institutional features matter too. To take two recent examples from the U.S.: Social Security indexation and the loss of income from the Fed. While the debt that gets inflated away involves a government’s pension obligation to retirees, there may be indexed compensation when prices rise. In December 2022, Social Security payments were adjusted upwards by 8.7% to account for the inflation captured in CPI over the last year. In more extreme cases of inflation or hyperinflation, such compensation might be delayed, or less stable governmental institutions may lack such features altogether, which would result in cuts in financial welfare for the elderly.

Similarly, when the Fed hiked rates aggressively during 2022, it exposed itself to accounting losses. For the foreseeable future it has therefore suspended its $100 billion in annual remittances to the Treasury. While a drop in the 6 trillion federal outlay bucket, it nevertheless shows how prior money printing can cause a loss of fiscal income in the future.

When a monetary authority has lost enough credibility (the money users give up a rapidly deteriorating money for precisely anything) it doesn’t much matter how one moves the small levers left under the monetary authority’s control. Hyperinflation, therefore, can be seen as a high inflation where the monetary authorities have lost control. 

Bottom line:

Hyperinflations happen when the nation-state backers of a currency go out of business — as in the Balkan states and former Soviet Bloc countries in the early 1990s. They also happen from extreme mismanagement, from the Weimar Republic in the 1920s to the South American episodes in the 1980s and 1990s, or Venezuela and Zimbabwe more recently.

Remember that the German hyperinflation took place between 1922 and 1923, after wartime inflation (1914-1918) and postwar reparations debacle had gradually degraded the country’s finances and industrial capacity. Much like today’s monetary struggles, there was plenty of blame to go around but the point remains: it takes a long time for a thriving and monetary stable empire to devolve into the jaws of hyperinflationary chaos.

Every currency regime ends, gradually then suddenly. Perhaps things move faster today, but spotting a USD hyperinflation on the horizon (like Balaji did in March 2023) might be too early yet. While we might not have reached the “suddenly” part yet, we can’t be sure that the “gradually” hasn’t already begun.

America in 2023 features many of the ingredients often involved in hyperinflations: domestic turmoil, runaway fiscal deficits, a central bank unable to imbue credibility or manage its price stabilization goals, grave doubts about the banks’ solvency.

The history of hyperinflation is vast but mostly confined to the modern age of fiat. If it’s any guide for the future, a descent into hyperinflation happens much more slowly and takes a lot longer than a few months.