## When Monetary Policy Goes Out of Control: A Deep Dive into Extreme Inflation Phenomena

### What is hyperinflation and its consequences

In the global economic system, price increases are a common phenomenon. Typically, governments and financial institutions coordinate to regulate price increases to ensure stable economic growth. However, there have been several historical periods when the speed of price growth surpassed all expectations, leading to a sudden collapse of currency value and a sharp decline in purchasing power. Economist Philip Kagan clearly points out in his work "The Monetary Dynamics of Hyperinflation" that when the prices of goods and services rise more than 50% within a single month, it marks the beginning of hyperinflation.

For example, a bag of rice rising from $10 to $15 in less than a month, and then further increasing to $22.50, triggers the critical point of hyperinflation. If this trend continues, the price of this bag of rice could soar to $114 within six months, and exceed $1000 a year later.

Hyperinflation often does not stop at a growth rate of 50%. In most cases, the price increase accelerates to unimaginable levels—commodity prices can fluctuate dramatically within a day or even a few hours. The surge in prices triggers a collapse of consumer confidence, accelerating the devaluation of the national currency. Ultimately, this uncontrolled rise in prices causes a chain reaction of business closures, rising unemployment rates, and the depletion of tax revenues.

### Historical Warning: Lessons from Three Out-of-Control Economies

#### The Post-War Predicament of Germany

Germany in the 1920s is one of the most famous cases of hyperinflation. After World War I, Germany borrowed heavily for military expenditures, originally expecting to repay the debts with war reparations after victory. However, the war ended in defeat, and Germany not only failed to collect reparations but was also required to pay billions of dollars in war compensation.

The factors leading to hyperinflation include: the abandonment of the gold standard, enormous war reparations, and the excessive issuance of currency. After abandoning the gold standard, the circulating currency was completely decoupled from the gold held by the state, creating conditions for the proliferation of paper money. To pay reparations in foreign currency, the German government significantly increased currency printing, resulting in the continuous devaluation of the mark. At that time, price increases sometimes exceeded 20% in a single day. The devaluation of the German mark reached an unbelievable level—many people simply burned banknotes to keep warm because it was cheaper to burn money than to buy firewood.

#### The Resource Curse of Venezuela

Venezuela has the largest oil reserves in the world, and its economy performed well for most of the 20th century. However, the oil price collapsed in the 1980s, coupled with poor economic management and rampant corruption in the early 1990s, leading to a deterioration by the end of the 20th century. The crisis that began in 2010 has now become one of the most severe economic disasters in human history.

Inflation in Venezuela skyrocketed from 69% in 2014 to 181% in 2015. Hyperinflation really erupted in 2016, reaching 800% by the end of that year, jumping to 4000% in 2017, and exceeding 2.6 million percent by early 2019. In 2018, President Nicolás Maduro announced the introduction of a new currency, the "sovereign bolívar," to replace the old currency at a ratio of 1 to 100,000. This seemingly radical move had limited actual effects—economist Steve Hanke remarked that it was merely "window dressing," emphasizing that "removing a few zeros is pointless if economic policy does not change."

#### The economic collapse of Zimbabwe

After gaining independence in 1980, Zimbabwe's economy was relatively stable in the early years. However, in 1991, President Mugabe implemented the ESAP (Economic Structural Adjustment Program), which is considered a major cause of the country's decline. The concurrent land reform led to a dramatic drop in food production, triggering severe economic and social crises.

The Zimbabwean dollar (ZWN) began showing signs of instability in the late 1990s, and hyperinflation fully erupted in the early 2000s. The inflation rate reached 624% in 2004, soared to 1730% in 2006, and peaked at 231 million% in July 2008. Due to the absence of central bank data, subsequent figures are based on theoretical estimates. According to economist Steve Hanke, Zimbabwe's hyperinflation peaked in November 2008, with an annual rate reaching 89.7 sexillion% (equivalent to a monthly rate of 79.6 billion% or a daily rate of 98%). Zimbabwe became the first country in the 21st century to fall into hyperinflation, while also setting the second highest inflation record in human history (only behind Hungary). In 2008, the Zimbabwean dollar was officially abandoned, and foreign currencies became legal tender.

### The rise of digital assets as an alternative.

In the face of the threat of hyperinflation, many people are looking beyond traditional monetary systems. Cryptocurrencies like Bitcoin are built on a decentralized foundation, with their value not controlled by any government or financial institution. Blockchain technology ensures that the issuance of new coins follows a predetermined schedule, with each coin being unique and unable to be forged. These features have made crypto assets increasingly popular in high-inflation countries such as Venezuela, and peer-to-peer digital transactions in Zimbabwe are also growing rapidly.

Some central banks in various countries are beginning to explore the feasibility of national-level cryptocurrencies. The central bank of Sweden is at the forefront, while the central banks of Singapore, Canada, China, and the United States are also experimenting with blockchain technology. However, the digital currencies launched by these central banks may not have a fixed or limited supply like Bitcoin, and therefore may not necessarily create a new paradigm for monetary policy.

### Conclusion

Although hyperinflation cases seem rare, history clearly shows that short-term political turmoil or social chaos can quickly destroy the credit of traditional currency. A decline in demand for a country's only major export can also become a trigger. Once a currency begins to depreciate, skyrocketing prices follow, ultimately leading to a vicious cycle. Many governments have attempted to combat this phenomenon by printing more money, but this effort is futile and only exacerbates currency devaluation. It is worth noting that as confidence in traditional currency declines, trust in cryptocurrencies is on the rise. This shift could profoundly rewrite global perceptions and usages of money.