Question concerning hyperinflation

Economics Economics Questions
1

I had the following conversation with someone on youtube concerning the buying up of real assets during periods of hyperinflation

Him: It is bad for the whole economy in the long run. If you hold assets like precious metals, and foreign currencies you can buy assets like businesses and land for pennies on the dollar. This is how you take advantage of hyperinflationary scenarios.

Me: You’re right. Historically in times of hyperinflation natural monies tend to emerge as the currencies of choice. Gold and silver being the most common but anything of a reliability large quantity that is easily divisible could function as money(salt, suger, beaver skins, and cigarettes being some historic examples).

With that being said I personally wouldn’t accept a hyberinflated fiat currency as a medium of exchange. Prices are subjective and my valuation of the dollar is zero.

Him: Don’t accept hyperinflated fiat currency like the dollar, trade real goods for real assets. For example, trade a few ounces of gold for a hotel, or a few hundred ounces of silver for a apartment building or a commercial building. That is what I am talking about.

Me: Why would anyone in their right mind except a few ounces of gold for a hotel? A hotel could make more then that in a single day. Just because hyperinflation occurs doesn’t mean people will value their property less.

Him: Most of these sheeple will think they are getting wealthier when hyperinflation hits. In the beginning, you can get a lot of worthless currency and buy off the real assets. Buy up all the real land, like the mines, the farms, the commerical real estate, apartment building, hotels, etc. The hyperinflation will be solved with a currency reform. They will come out with a new currency, and they will give you pennies or fraction of pennies on the dollar for the new currencies.

In a period of hyperinflation would people really be willing to sell their possessions for ridiculously small amounts of Gold, silver or newly issued government fiat? Is seems outrageous to me that anyone would value an emerging currency more then their current means of production.

2

Well in a hyperinflationary environment generally the economy has broken down and many factors of production are somewhat useles.. It depends on what the gold/currency can buy. Having apartments or land just sitting there not making any money because the economy has devolved into barter won’t help the average joe. They have to trade it for something.

3

Hyperinflation always comes with a depression. In other words, the nominal value of assets goes up while the real value of assets goes down. So while a Zimbabwean business may be worth more and more in Zimbabwean dollars, it is worth less and less when priced in more stable currencies like the US dollar or Euro. Also, since people would have no incentive to hold on to a hyperinflationary currency, they would do almost anything to get rid of it as quickly as possible.

So yes, during a period of hyperinflation, you could buy assets on the cheap when compared to stable currencies like gold, silver, AUDs, CNY, etc. Also, if a new currency were to be introduced, then yes, people would expect it on the cheap because they would expect their old currency to rapidly lose value.

4

Thanks for clearing this up. I was under the impression that hyperinflation could set in during the boom phase of the business cycle causing further malinvestmant in sectors of the economy that appeared to be profitable.

Is this true even when a company is providing a service that sees an increase in demand during the depression? For example consumers eating at restaurants offering a dollar menu opposed to the more expensive alternatives.

“So while a Zimbabwean business may be worth more and more in Zimbabwean dollars, it is worth less and less when priced in more stable currencies like the US dollar or Euro.”

This is confusing to me. How does the hyperinflation of one currency cause the price of an item to fall in another currency? Assuming there is no inflation or deflation of the currency in question, wouldn’t prices remain the same raising and falling in accordance to consumer demand?

I understand this concept when applied to a currency. The longer one holds on to a hyperinflationary currency the less that currency is going to be worth. So it makes sense to spend that currency asap and store whatever is left over in a more stable currency. What I’m having trouble seeing is how the price of real things would fall in real value during periods of hyperinflation without a coresponding change in demand.

Thanks for the help :slight_smile: