Hyperinflation 1 of 2

A bear market implies major liquidation of any security, bond or property across the board. The majority of people think that switching back to cash is the best option when other investment vehicles fail. The proverbial cash is king supports the notion as cash is the most liquid asset to own, it is readily convertible to any item you wish to trade with, and in most cases, the preferred choice of payment by merchants. This is true, however, if you look at cash as a utility, it is virtually worthless. The value of money depends on how people think its worth and what the government and other economic forces dictate. People behave just like a herd, when one panics; others follow without even finding out why. With this state of mind in place, crazy things happen. Looking at its intrinsic value, paper money can be used to write with, burn it for heat, or use it to wrap other things with. This scenario normally occurs during times of hyperinflation, where money is valued less and the masses prefer items with high use for survival. Hyperinflation happens once in a while, but when it occurs, it devastates a countryís economy along with the lifestyles of its citizens. Hyperinflationís heyday started during the industrial revolution, during this era, the development of machines gave rise to automation. This increased production of goods at speeds unheard of. This increased production along with less cost to producer with the help of machines for automation, will increase demand. The result of this picture is inflation, however, this was kept in check with the available supply of gold and silver that was used as a basis on how much money is needed to be printed. If these two precious metals were to be removed from the system, the probability of uncontrolled inflation is very likely. This was an era where the idea to break free from the gold standard was attempted on a global scale.

After suffering defeat on the First World War, Germany and the disbanded Austro-Hungarian Empire stumbled into hyperinflation. Austrian Crown lost value first from 4.9 to a dollar to over 70,000 before it was put under control in 1922. This a prelude that would follow in Germany during the time when a country was forced into paying a bill that its economy cannot support. Under the treaty of Versailles, the allies gave Germany a 132 billion mark bill for war reparations. To meet this demand, Germany would have to produce twice its current GDP. The value of the German mark started to decline by 1922 as the Government started to print more money only to meet its obligations. By the end of the year prices inflated to as much as 1500 times the pre-war level.

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