Hyperinflation & Stagnation

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The term "hyperinflation" refers to a very rapid, very large increase in the price level. Measurement problems will be too minor to notice on this scale. There is no strict formal definition for the term, but cases of hyperinflation tend to be expressed in terms of multiples rather than percentages. "For example, in Germany between January 1922 and November 1923 (less than two years!) the average price level increased by a factor of about 20 billion." Some representative examples of hyperinflation include

"Hyperinflation

1922 Germany 5,000%
1985 Bolivia >10,000%
1989 Argentina 3,100%
1990 Peru 7,500%
1993 Brazil 2,100%
1993 Ukraine 5,000%"
These quotations from other web pages are given mainly as examples of what people have in mind when they talk about hyperinflation, and I cannot say just how accurate the figures are. In any case, figures for the purchasing power lost in hyperinflations can only be rough estimates. Numismatics (coin and currency collecting) gives some examples of just how far hyperinflations can go: an information page for currency collectors tells us that, in the Hungarian hyperinflation after World War II, bills for one hundred million trillion pengos were issued (the pengo was the Hungarian currency unit) and bills for one billion trillion pengos were printed but never issued. (I'm using American terms here -- the British express big numbers differently).
The story behind the German hyperinflation illustrates how all hyperinflations have come about, and is of particular interest in itself. After World War I, Germany had a democratic government, but little stability. A general named Kapp decided to make himself dictator, and marched his troops and militias into Berlin in an attempted coup d'etat known as the "Kapp Putsch." However, the German people resisted this attempt at dictatorship with nonviolent noncooperation. The workers went out in a general strike and the civil servants simply refused to obey the orders of Kapp and his men. Unable to take command of the country, Kapp retreated and ultimately gave up his attempt.

However, the German economy, never very sound, was further disrupted by the conflict surrounding Kapp's putsch and by the strike against it; and production fell and prices rose. The rise in prices destroyed the purchasing power of wages and government revenues, and the government responded to this by printing money to replace the lost revenues. This was the beginning of a vicious circle. Each increase in the quantity of money in circulation brought about a further inflation of prices, reducing the purchasing power of incomes and revenues, and leading to more printing of money. In the extreme, the monetary system simply collapses. In Germany, people would rush out to spend the day's wages as fast as possible, knowing that only a few hours' inflation would deprive today's wages of most of their purchasing power. One source says that people might buy a bottle of wine in the expectation that on the following morning, the empty bottle could be sold for more than it had cost when full. Those with goods to barter resorted to barter to get food; those with nothing to barter suffered.

This is the way that hyperinflations happen: by a self-reinforcing vicious cycle of printing money, leading to inflation, leading to printing money, and so on. This is one reason why inflation is feared. There is always the concern that even a little inflation this year will lead to more next year, and so on. But some countries have experienced very great inflations -- 50 to 100% per year -- without ever falling into the cycle of hyperinflation, and there has never been a hyperinflation that could not have been avoided by a simple government determination to stop the expansion of the money supply.

The key point is this: the monetary system can function reasonably well as long as the value of the monetary unit is reasonably stable and predictable, and the high standards of living of modern societies cannot exist without a functioning monetary system.

Stagnation
A stagnation is a period of many years of slow growth of gross domestic product, in which the growth is, on the average, slower than the potential growth in the economy.
We should stress that this is quite controversial. There are economists who do not believe that stagnation exists as a problem. The difficulty is with the idea that growth is "less than the potential growth in the economy." But what is the potential? Those who see a great potential will see stagnation where those who see less potential will not.
In any case, the idea of stagnation was first discussed in the 1930's. The Great Depression, a period in which the growth of national product was generally negative, was thought of "by some economists" as a symptom of "secular stagnation." The word "secular" in this context meant that the causes of the stagnation were beyond the control of the government. The closing of the frontier, slowing technological progress, and higher savings rates because of higher average incomes were mentioned as possible causes.

Some economists believe that the U. S. A. has suffered from a stagnation in recent decades. One reason for their thinking is expressed in the following table:

Growth of Real GDP by Decades, U.S.A.

decade rate of
growth
1960's 4.46%
1970's 3.24%
1980's 2.84%
1990-1995 1.81%
Remember that in this table we are looking at rates of growth, not the levels of RGDP. Real GDP was greater in the 1990's, but is rising at a slower rate than in the 1960's. Since the middle of the 1990's, we have had a period of fairly steady higher rates of economic growth, around 4%, so it may be that the period of stagnation is over.

It is clear that in 1970-1995, American economic growth slowed down. But is a growth slowdown a problem? It might not be a problem, depending on the reasons for the slowdown.

Causes of Stagnation

There are several reasons why actual or potential Real GDP growth might slow down. The table below shows evidence on some of these possibilities. If both potential and actual growth have slowed to about the same extent, then perhaps we do not have a stagnation problem. (The Table is derived from data from the Bureau of Labor Statistics, Penn World Tables, The Economic Report of the President, and the U. S. Census Bureau).

Population growth might slow
Population growth increases both the demand for goods and services and the supply of labor to produce them, so slower population growth would mean slower potential economic growth. American population growth has slowed to some extent.
Fewer people might choose to work
The proportion of the population who choose to work is called the "rate of labor force participation." A decrease in the rate of labor force participation would slow the potential growth of output, while an increase in the rate of labor force participation would increase it. The American rate of labor force participation has tended to increase in the last few decades, to some extend offsetting the slowing of population growth.
The growth of labor productivity might slow
One of the most important sources of economic growth is the increase in output per worker. Labor productivity is output per unit of labor. If this growth of labor productivity is slower, the growth of total output would also be slower. Productivity growth itself might be stagnant -- that is, less than its own potential -- so it is not clear whether a decrease in productivity growth would be associated with stagnation or not. If productivity growth is itself below potential, we would see that as stagnation, but if potential and actual productivity growth have decreased about the same, then we would not see that as stagnation.
All of these related variables have indeed changed along with economic growth in recent decades.