Definition, measurement, and functions of money
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We now know a little bit about inflation and deflation. And now I want to introduce you to hyperinflation. And as the word implies, it's inflation gone wild. How hyperinflation, or at least the cases that we've seen in modern times, how they've happened is you have some type of a government just going wild with the printing press. They're just printing a ton of money. So the general cycle is they print money, they print like mad, usually because they don't have any other way of getting revenue. They print like mad. That leads to prices going up. And then because prices go up, they have to print more in order for them to be able to get the same goods and services or pay the government workers what they wanted to pay the government workers, or pay the soldiers what they wanted to pay the soldiers. This by itself would probably drive the hyperinflation in and of itself. But on top of this, we're used to thinking high inflation is 5% or 10%, but you could imagine what happens when inflation is 5% or 10% per hour. Because then there's no incentive to be actually holding currency. Every second that you hold currency it becomes worth less and less and less. And so what happens in a scenario like this is people want to hoard hard assets. So if the price of bread is going up by the minute or by the hour, or the price of shoes are going up by the minute or by the hour, the increase in prices is going to make people hoard things. Hoarding goes through the roof. And you can imagine if hoarding goes through the roof, if the shoe seller doesn't want to sell his shoes anymore, or he wants the hold them a little bit longer, then the supply of shoes are going to go down, and the prices are going to go up even higher. So hoarding leads even to higher prices. When people go to the bread market, and there's five loaves of bread, they buy all of them. And then the next person can't buy any because they know that the price of bread is going through the roof. So it just keeps getting worse and worse. And it's all started by the government just going nuts with the printing press. Now, the three most famous examples of this happening-- probably the most famous one is what happened in Weimar Germany after World War I. They had huge reparations to pay. That's what the Weimar government would have argued was their main cause. But they just printed money like crazy. Some people said that they were almost trying to destroy the economy so that they wouldn't have to pay reparations for what they did in World War I. But this just gives you a sense of how crazy it was. Here's the end of World War I. And they just printed money like mad. And isn't the rate of inflation. This is how much it was relative to a gold mark. So this is one gold mark over here. So only after about 2 and a half years it was over tenfold. And this is a logarithmic scale. Each slash year, this is a factor of 10. So after by the end of 1923, you're looking at-- This is what? Not 100,000, not a million, not a billion. This is a trillion. It had gone up a trillion fold in the span of one, two, three, four, five, six years. The other famous examples of this, Zimbabwe from 1980 until 2009. Once again, printing money like mad. And some of their productive capacity went away. This right here is a 100 trillion Zimbabwe dollar. And this shows you the Zimbabwean dollar relative to the US dollar. And once again, is a logarithmic scale. This is 10 to the 30th power. And then the largest or the most extreme hyperinflation ever was Hungary after World War II. And this right here is a 10 million pengo note, just to give you an idea of what people were carrying around in their pockets.