The Pathology of Hyperinflation: A Dollar Disease in the Making?
By Tommy Schreiner
May 03, 2021
- Due to runaway inflation, the Venezuelan government directly controls both the monthly minimum wage and price of food. In response to food shortages, they set price controls on 26 food necessities such as eggs and sausages. Because of inflation, the price of those items cost more than the monthly minimum wage ($1 USD per month!).
- On October 7th, 2019, the state-run Grain Millers Association of Zimbabwe raised wheat prices from ZW$1,600 to ZW$2,200 per ton, causing the price of bread to increase 39% overnight, from ZW$6.80 to ZW$9.45.
- Since the beginning of 2020, Lebanon’s inflation ballooned from 50% to a peak of 550%, becoming the first country in the Middle East to experience hyperinflation. Since December of 2019: food and non-alcoholic beverages rose 402.3%; alcoholic beverages and tobacco rose 392.5%; clothing and footwear increased 559.8%; restaurants and hotels rose 609%; and furnishings, household equipment, and routine maintenance rose 655.1%.
- The Turkish lira continues to spiral to new lows against the US dollar. In an effort to combat inflation, the government announced it will raise the minimum wage by 16% to 2,828 lira ($376.71), which they calculated to outpace the 2021 inflation forecast of 9.4% by seven points. Despite this, experts say hyperinflation is expected to outpace this latest wage increase.
- In WW2, Hungary had managed to escape most of the ravages of war up until 1944, when it became a battleground between Russia and Germany. The resulting chaos destroyed 90% of Hungary’s industry. Without a tax base to conjure government funds, the government decided to print money. Before the war, 1 US dollar was worth 5 pengö. By April of 1946, 1 US dollar was worth 460 trillion trillion pengö. Yes, that’s two trillions. During this period, wages fell 80%.
- As the crisis in Venezuela deepened, more and more Venezuelans looked to switch their bolívares into US dollars to trade with on the black market. Others sought refuge in Bitcoin as a way of having complete sovereignty over their finances. "Many Venezuelans are using Bitcoin to convert their bolívares, which are being permanently devalued by hyperinflation, to keep something of value," says economist Asdrúbal Oliveros of Caracas-based consultancy Ecoanalítica. Gold, however, suffered in performance. Despite putting up 10,700% returns in bolívares, this wasn’t enough to outpace inflation, resulting in a real-return rate of negative 60%.
- With inflation rates of 19.2% per year since 1979 and overall inflation of 80,349.39%, Nigeria was the perfect home for Bitcoin to take root. One of the most widespread adopters of crypto in the African continent, Nigerians flocked to Bitcoin for its cheap transaction fees for remittance, resistance to local inflation, and its wild investment returns. Nigeria is the second largest market for Bitcoin on the peer-2-peer Paxful exchange after the US, with Bitcoin at one point trading at $80,000, a 60% premium, in February of 2021. At a public hearing, Nigerian Senator Sani Musa declared, “Cryptocurrency has become a worldwide transaction of which you cannot even identify who owns what. The technology is so strong that I don’t see the kind of regulation that we can do. Bitcoin has made our currency almost useless or valueless.”
- It’s worth noting another modern instance of hyperinflation in Brazil, during the two decades of 1980-2000, when inflation rose to 13,000,000%. During this time, gold was expected to do well as a hedge but lost 70% of its value instead.
- Amidst runaway inflation, Venezuela’s stock market experienced 114% returns versus the DOW’s 13% in 2016. Citizens turned in their bolívares for seemingly “safer” investments like stocks.
- Despite capital inflows into the Nigerian market slowing over 79% in Q2 2021, the Nigerian stock exchange index almost doubled its returns from April 2020 to 2021. Investors' doubts in the bond and credit market have forced them to turn to Nigerian “blue-chip” companies in an effort to find returns.
- Bitcoin replaces the US dollar. For this to occur, the US would have to undergo massive hyperinflation to the point where citizens no longer trust the dollar to pay for goods and services, can no longer afford to keep pace with their wages, and choose Bitcoin over gold as a safe haven asset. This seems a very unlikely doomsday scenario and, arguably, we’d have a lot more to worry about if the dollar lost its value entirely.
- Bitcoin replaces gold. For Bitcoin enthusiasts this is a more likely outcome. For this to occur, investors would have to shift their perspective from implicitly valuing physical goods to valuing digital ones. This is arguably already underway, both in the continuing and increasing interest in Bitcoin as an asset and developments in the DeFi and NFT space. While NFTs have yet to prove themselves as a replacement for physical collectibles, the trend is well underway, as you’ll see in our NFT section of this report.
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