Economic Crashes: Hyperinflation, Recession, Stagflation

An economic collapse is a period of economic depression, civil unrest, and increased poverty. Hyperinflation, recession, and stagflation are common causes. Proper monetary and fiscal policies by the government are needed to re-establish a stable economy.

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Hyperinflation

Before we could understand what hyperinflation is, let us first define inflation. Inflation is the state of general increase in prices and fall in the purchasing value of money. Let’s say you have Php250.00($5.00). With today’s money, you could buy a whole chicken. When the country experiences a 50% rate of inflation, that means that the value of money went down by 50% and your Php250.00 is now only worth half as much meaning you can now only buy half a chicken. Let’s hope it doesn’t come to a point where you can only buy chicken feet for the same amount of money.

Hyperinflation is when a country experiences a monthly inflation rate of over 50%. An example of Hyperinflation happened in Germany after the end of World War I. In order for their government to pay-off the Allied forces, they had to print as much of Marks, their former currency, as possible. As we talked about in our discussion regarding monetary policy, an increase in money supply decreases the value of money. The Mark essentially became worthless. Families started using them as wallpaper and even started to use them to fuel fireplaces. They burned so much money that the Kardashians would look like beggars. The most famous case of hyperinflation happened in Zimbabwe. The inflation was so bad that the government had to make a Hundred Trillion Dollar Bill. The rapper 50 Cent would be known as 4 Billion Dollars back there.

This wasn’t the worst case of Hyperinflation in history though. That honor goes to Hungary. From 1945 to 1946 the value of inflation rose by a factor of 3x10^25. When you start using exponents to describe inflation, you know your country is screwed. Even Batman can’t save you.

Recession

Recession or depression is defined as a period of temporary economic decline during which trade and industrial activity are reduced. This is usually characterized by a fall in a country’s Gross Domestic Product(GDP), the monetary value of a country’s goods and services, in two successive quarters.

In the 1930’s the USA experienced what is now known as The Great Depression. A period so bad that economists replaced the term depression with recession. I kid you not. During this time, people began expecting lower prices which meant that people stopped spending and their economy basically stopped.

Lack of consumer spending meant that companies had to remove workers. This meant that there were more workers than there are jobs and supply far exceeded demand. Why would they stop spending you may ask. Let’s say that you expect an iPhone 7 to drop prices every day. Would you buy it now or would you wait a month or even a year from now? During that time everyone wanted to wait for the lowest possible price to happen that it actually ruined their economy. So lesson learned, don’t be a cheapskate, and don’t buy an overpriced phone. The Great Depression lasted for a decade. It was so bad that the USA only ever got out of it thanks to the large government spending during World War II.

Another case of recession occurred in 2008. This was caused by corrupt real estate agent’s selling worthless mortgages, banks accepting these and corrupt ratings agencies such as S&P and Moody’s giving false AAA ratings. Heck everyone wearing a necktie in wall street probably caused it. Read about it more here. The recession in the USA was on a very large scale that it triggered a global financial collapse. It even led to the complete default of several countries such as Greece and Argentina.

Stagflation

Stagflation is a period of rising prices and lower production. In other words, it is a combination of inflation and a stagnant economy.

An example of this happened in the USA during the 70’s when they experienced a rise in oil prices. A rise in oil prices meant that the price of basic commodities increased as well. The FED decided to increase the money supply and lower interest rates to address the issue. However, problems in raw materials in manufacturing companies meant that production cannot increase in relation to the money supply and this triggered an inflation.

This worsened as companies began to worry about the increase in inflation that they began firing employees and this led to a depression. Yup, the FED caused a double whammy on this one. In fact, the effects of the stagnation lasted for over a decade until the FED finally manned up and decided to decrease the money supply which led to lower inflation.

These extremes of economic collapse show us why it is important to measure the total economy. Proper government monetary and fiscal policies can either prevent or worsen these situations. It is, however, important to remember that an economy is reliant on the collective action of a country’s residents. If enough people feared inflation, it will actually cause inflation. So learn to make wise decisions and refrain from getting caught up in fear and hype.