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I count 49 different explanations for hyperinflation in my collection as of Sat Dec 20th, 2014.
I think it is fun that there are so many different, yet reasonably, ways of thinking about how hyperinflation works. Given how many I have found so far, I am sure there must be more good explanations out there. If there are other economic theories with different explanations for hyperinflation I would really like to add them to my collection.
I have decided I will pay $30 by paypal or BitCoin to someone who comments here with a new explanation that in my judgement is different from any in the existing collection but is as good or better than the average explanation so far. It should fit the experimental evidence for at least many historical hyperinflations.
I am not looking for different reasons that governments spend more than they get in taxes and will not pay for such things. Saying "supply shock", "war", "corruption", "external debt", "drop in taxes", "incompetence", "madness", etc does not earn anything.
I am looking for more good theory for the mechanics of how hyperinflation works. The why, the how, the process of hyperinflation. See existing explanations for an idea of the type of thing I am looking for and to be sure you are not submitting something already in my collection.
Please forward this offer to anyone you think might be willing and able to submit an explanation.
This offer starts today, Dec 20, 2014. I can afford at least 10 new explanations and even 5 good explanations every month. I may reduce this offer for future submissions if they come much faster than that. If I don't get many I may up the offer and if so the increase in payment will also be retroactively extended to previous winners.
To submit an explanation just comment below. The full explanation must be in the comment but it is good to also include a link to a source if you have one.
Hyperinflation works because I need my bitcoins to be worth something someday.
ReplyDeleteGib 30 actual money tokens now
This explanation does not work for the many previous cases of hyperinflation, since Bitcoin did not exist before. So rejected. :-)
ReplyDeleteHyperinflation can happen for numerous reasons but in every case it is when the holder of the currency loses faith that it will be worthed the more or the same tomorrow and the next day. This lost of faith snowballs as other people realize they don’t want to be left holding the wrong end of this economic stick. This financial avalanche gathers enormous speed and power as people rush to better store wealths.
ReplyDeleteLarge wealth transfers are a key characteristic of hyperinflation and always go from the people holding the depreciating currency to people holding a new stores of value. As people rapidly devalue the problematic currency less, that value is rushed into other assets which people see as a stronger store of value.
If you choose this comment, send the bitcoins here: 1czKr51Bn9gfmZKRXeSpoTbK3ia7Synk5
P.S Just discovered your site and really enjoy it - a lot of really good monetary research and history. Do you have a newsletter?
Your snowballing loss of faith reads is really about the same as my "loss of confidence" entry. I sent you $15 anyway as I might just take a few words from yours and add it to my loss of confidence one. Thanks!
DeleteI see a hyperinflation as the ultimate result of legal tender laws. These laws provide a central banker with an assurance that people can be forced to use their currency; this belief leads to institutional arrogance which tends toward catastrophe. None of their incentives are to correct the problem, because that would bankrupt the central banker and their cronies.
ReplyDeleteA Monopoly of any type, let alone one of a currency, is fragile, because it offers worse goods and services at a higher price than a free market would. Thus, every successful monopoly has been enabled through governmental violence.
Fundamentally though, this is an issue of trust. Oh! I know that confidence is part of that, but the effects are far deeper than a mere currency. Every trade in the market, every investment, every part of the production and distribution chain, every means of human survival including our individual plans for the future, our willingness to form families and to keep society functioning is built on trust. So too, is our belief in justice: our laws and the courts. People will refuse to protect themselves rather than to allow their conception of the world be turned up side down. This is why hyper-inflations are slow to get going. People resist accepting the belief that their society and culture is beyond redemption.
But when trust is gone, it is not easily regained.
It is the marginal buyer which determine price in a market. There will always be people acting to avoid a depreciating currency. The question is only how many there are and how willing they are to avoid losses. Barter is very clumsy; people would prefer to use precious metal coinage, or any currency which is not depreciating as much. The central bankers act to make it impossible for people to have such an alternative. They set up an endless series of roadblocks to keep hot money from chasing goods and services. But since money is fungible, it escapes their control in bizarre ways. They are constantly putting out fires while the whole world burns.
When enough marginal buyers refuse to participate in a currency, its days are numbered. Those marginal buyers stop being kooks and start leading a pack. Then, all the roadblocks are bypassed.
The only way to avoid this is to accept a deflation, but the Keynesians who control our central banks fear this more than a hyper-inflation.
I'm interest in your viewpoint not your bitcoins.
Hyperinflation is a result of using fiat money, and it is doubtful there would be fiat money without legal tender laws. So I sort of agree but I like explanations where you can see a clear positive feedback loop. I can try with::
ReplyDeleteAs more people ignore legal tender laws the legal risk or social stigma for ignoring them goes down. This in turn results in more people ignoring legal tender laws and you get death spiral.
However, to me it is not one of the more convincing or illuminating explanations.
Have you paid out? How much?
ReplyDeleteNobody has given a new explanation so no payouts.
Delete