What is Hyperinflation?
What is a hyperinflation and what causes it exactly? Hyperinflation is one of the scariest things that can happen to a country, as we've seen countless times in the past. Hyperinflation occurs when the velocity of money (the currency) increases very rapidly - this happens because people get rid of the currency as fast as they can to buy things before the things increase in price further. People are constantly spending the currency and buying things like food, gas, etc. This causes the currency to depreciate in value very fast, while goods and precious metals increase in price rapidly as well.
What is the Cause?
According to Wikipedia, the root cause of hyperinflation is a rapid increase in the supply of money. The symptom is much higher prices for things like food and gasoline:
The main cause of hyperinflation is a massive and rapid increase in the amount of money... This results in an imbalance between the supply and demand for the money (including currency and bank deposits), accompanied by a complete loss of confidence in the money, similar to a bank run.
Enactment of legal tender laws and price controls to prevent discounting the value of paper money relative to gold, silver, hard currency, or commodities, fails to force acceptance of a paper money which lacks intrinsic value. If the entity responsible for printing a currency promotes excessive money printing, with other factors contributing a reinforcing effect, hyperinflation usually continues. Often the body responsible for printing the currency cannot physically print paper currency faster than the rate at which it is devaluing, thus neutralizing their attempts to stimulate the economy."
Sound familiar? This is the path the United States is currently on, as well as other indebted countries in Europe.
A hyperinflation can have devastating affects on a country.
According to EconLibrary.org, the most widely studied hyperinflation occurred in Germany after World War I: "The ratio of the German price index in November 1923 to the price index in August 1922—just fifteen months earlier—was 1.02 × 1010. This huge number amounts to a monthly inflation rate of 322 percent. On average, prices quadrupled each month during the sixteen months of hyperinflation." Can you imagine gas prices or food prices rising 322 percent every month?
Where Has Hyperinflation Occurred?
It occurred During the Revolutionary War, when the Continental Congress authorized the printing of paper currency called continental currency. This amounted to the monthly inflation rate reaching a peak of 47 percent in November 1779, according to Wikipedia. "Not worth a continental" because a popular phrase afterwards.
Cash becomes trash! Plain and simple.
How to Protect Against It
God forbid we ever see a hyperinflation in the United States, you should be prepared for it anyway. I do believe there is a good chance we will see one in the next decade if the loose monetary policies of the Federal Reserve and central banks around the world continue. If it does occur, a lot of people will be wiped out. The savers - those holding their money in a bank, for instance - will be completely wiped out.
Gold is perhaps the best investment during periods of high inflation because it's a hedge against financial stress and currency devaluation. That is the sole reason why gold has risen from $300 to $1700 this past decade - gold does an accounting for all the money that has been printed.
Remember this tip - that price means nothing, and value means everything. The public is so fixated on price, not value. The fact is that gold could stay at $1,700 for the next 5 years and STILL be a good investment - if everything else falls in price relative to it, golds purchasing power will increase tremendously. I do believe that one gold ounce has the potential to be worth one share of the DOW Jones index sometime this decade - a 1:1 ratio. It's happened twice before in history, and it can certainly happen again. Check out this guide to gold and silver investing books if you want to learn more.
I also love silver as an investment because of it's industrial uses. Silver, unlike gold, is used up in small amounts and throw away. Silver is used in virtually everything we consume today - IPhones, computers, cell phones, batteries, etc. Silver is more volatile than gold, but I believe silver has far more upside than gold because of these uses. I also believe that silver could one day be a bubble, eclipsing prices of over $1,000 an ounce (today it's only $30 an ounce). Crazier things have happened - ever hear of the the tulip bulb mania?
Good luck investing, and hopefully we won't ever have to experience a hyperinflation in our lifetimes.