Hyperinflation Definition: Day Trading Terminology

Hyperinflation is a loose term describing a sustained period of extremely rapid price inflation in one or more national currencies.

It is the product of the mismanagement of a fiat currency and/or national finances that causes a widespread loss of faith in the national currency. The rapidly increasing prices then create a feedback loop of ever-worsening expectations that requires extreme interventionist measures to halt and reverse.

The fear of the extreme damage that it can cause to a modern economy informs contemporary central bank policy, which aims to maintain a low and steady rate of inflation so that the mass psychology that underpins hyperinflation is unlikely to ever take hold.

The Cause of Hyperinflation

While there are a few exceptions and each case of hyperinflation is unique, it is almost always caused directly by a government that purposefully devalues its currency to lessen the real cost of its debt obligations, either internally, internationally or both. This reckless and uncontrollable path of devaluation often leads directly to the collective panic that fuels the vicious cycle of hyperinflation.

The Damage from Hyperinflation

It is so damaging to modern economies because of how reliant they are on a stable and respected currency. Complex modern economic activity cannot take place based on the barter system or a currency whose value changes daily, and it renders a currency next to worthless as a means of exchange.

Hyperinflation and Trading

The central role that the fear of hyperinflation plays in the policy oversight of a modern economy is very important for a trader to understand. The fear of hyperinflation is what drives the vast majority of contemporary monetary policy, which in turn has a substantial impact on the functioning of every modern economy and the market for every asset class.

Final Thoughts

Hyperinflation is an essential element in the development of modern economic policy. It is a natural product of economic mismanagement, and its enormous potential harm makes it one of the most widely feared man-made disasters.

The fact that countries continue to suffer from hyperinflation demonstrates just how integral and pervasive it is within modern economies, and how justified policymakers are in shaping much of their economic policy around its control.