Hyperinflation's Effect on Stocks

Periods of inflation such as what took place in the U.S. during the late 1970s and early 1980s are generally not looked at as favorable economic times, with prices often rising faster than wages. Hyperinflation is even worse, due to the extreme rise in prices that accompanies it. The most notorious time of hyperinflation was in Germany right after World War 2, when it reportedly took a literal wheelbarrow full of paper money to buy a loaf of bread. During hyperinflation, stock prices will rise just like other prices.

Background

Hyperinflation is an economic condition resulting in the increase in prices at an extremely high rate. In a hyperinflation situation, prices can increase as much as 50 percent per month, perhaps even more. This situation is often caused by a near total collapse in a country's economic system, causing its currency to become nearly worthless. It is often caused by excessive deficit spending by a government, which then results in the government printing more money to fund its spending, significantly decreasing the value of that money.

Increasing Stock Prices

Stock prices will be affected in times of hyperinflation, driven by the overall increase in prices of all other goods and services. These increases in pricing would cause sales and profits to increase, which could also increase dividends paid by companies, as well as increasing the prices that stocks sell for, sometimes significantly.

Overall Economic Effects

Hyperinflation causes prices to rise dramatically, and although it is followed usually by wages rising as well, wages may not rise as quickly as prices, and it can lead to some people having significant problems paying for necessary goods and services. In addition, people who have cash in savings accounts or certificates of deposit will see that cash devalued quickly. The problems that people have making purchases due to hyperinflation can cause companies to have financial problems due to weak economic conditions and may also cause these companies to go out of business.

Protections Against Hyperinflation

Real estate is traditionally a good investment in times of high inflation, particularly if you have a fixed-rate mortgage. The reason for this is because you are paying back the mortgage with money that is reduced in value due to inflation. Stocks can work well in a hyper-inflationary economy, but generally only if your portfolio is well diversified with many stocks and you hold on to the investments over the longer term.

About the Author

Craig Woodman began writing professionally in 2007. Woodman's articles have been published in "Professional Distributor" magazine and in various online publications. He has written extensively on automotive issues, business, personal finance and recreational vehicles. Woodman is pursuing a Bachelor of Science in finance through online education.

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