WHAT IS Hyperdeflation
Hyperdeflation is an extremely large and relatively quick level of deflation in an economy. Hyperdeflation occurs when the purchasing power of currency rises drastically in a relatively short period of time. This increase results in debts being more pronounced, as the real value of goods and services increases and the value of the currency falls.
BREAKING DOWN Hyperdeflation
Hyperdeflation is a more or less theoretical term, and there is no exact measure of difference between it and deflation. However, hyperdeflation, like deflation, can lead to a deflationary spiral in which a deflationary environment leads to lower production, lower wages and lower demand, and thus lower price levels. This scenario creates a positive feedback loop that continues until an outside force (the government, for example) steps in.
The United States has experienced severe periods of deflation just before and right after the Civil War, and at the onset of the Great Depression. Some economists believe that the financial crisis of 2007-2009 brought on a period of deflation in the United States. Japan entered a severe period of deflation that has been ongoing since the 1990s.
Example of Hyperdeflation
Unlike hyperinflation, there are no real-world examples of hyperdeflation in history. Recently, however, the world has seen the emergence of cryptocurrency: decentralized digital currency that works through a blockchain, or public transaction ledger. Bitcoin, created in 2009, was the first digital currency and remains the most well-known. Many observers have labeled its recent volatility as an unprecedented example of hyperdeflation. Some cryptocurrency experts and economists label its rising prices as a bubble, noting that the currency has long-term prospects. However, they also point out the possibility that deflation will occur.
By design, the number of new coins decreases each year, but demand for Bitcoin is growing. This dynamic may lead to the digital economy entering a deflationary period. Since no centralized banking system or Federal Reserve equivalent oversees the currency, no intervention policies will be set into motion.
Furthermore, Bitcoin cannot be dropped and picked up by a fortunate passerby; if one loses their personal key, they lose the money, and the money is effectively pulled out of circulation. Additionally, there is a high level of wealth concentration among Bitcoin holders, meaning there is a relatively small number of users who can sell or, more importantly to this scenario, not sell. With rising value comes more incentive to buy and hoard Bitcoin, which only increases the price and further decreases supply. This situation could hypothetically lead to a real-world occurrence of hyperdeflation.