So for example, if the supply of currency (i.e., the quantity of units in circulation) remains unchanged and demand for that currency falls, its purchasing power will also fall. Similarly, if the supply of currency increases while demand remains unchanged, its purchasing power will again fall. We today generally label this decline in purchasing power as “inflation”, which clearly can result from changes in the currency’s supply, demand or both.
If the currency’s purchasing power falls far enough and does so quickly, hyperinflation results. Two well-known examples are Germany in 1923 and Argentina in 2001. In the former, hyperinflation occurred because of a rapid increase in the quantity of marks, which then led to a collapse in demand for the currency.
In contrast, in Argentina the quantity of pesos declined because of bank failures and government imposed restrictions, which caused demand for the peso to decline even more rapidly than its supply. Hyperinflation again was the result.
From these examples we can see the overriding role that demand plays. In effect, hyperinflation is a “flight from currency”. Hyperinflation results when the demand for the currency collapses. Fearful for the loss of their purchasing power, fewer and fewer people want to hold the currency, so they spend it or exchange it increasingly quickly for other currencies, which brings us to the importance of the Tipping Point.
As the Tipping Point rises above 20% and approaches 30%, demand for the currency declines. This decline occurs because historical experience shows that the currency is on the road to hyperinflation. So to be cautious, watchful observers start selling the currency and thereby move their purchasing power into other currencies or other forms of wealth to seek safety. Some, like the authors of “Bankruptcy 1995”, sound the alarm, further contributing to the decline in demand for the currency.
When the Tipping Point exceeds 30%, recognition of the government’s financial stress begins to spread with the result that the decline in demand for the currency begins to accelerate. That acceleration creates the inevitable flight from currency and ultimately leads to the collapse of the currency and hyperinflation.
- Source, James Turk via fgmr