Definition and Examples of Hyperinflation
Hyperinflation is an economic term that refers to an environment of unusually high inflation, which is an environment of generally rising prices of goods and services within a particular economy.
An extreme example of hyperinflation in America occurred during the Civil War period. The Confederate Government printed money to fund the war. As more money was printed, the value of the currency declined until it was almost worthless. Naturally, it took more money to buy the same items (the cost of goods -- inflation -- rose).
Today, it is not likely hyperinflation will occur because the Federal Government has more power to control the money supply by increasing or decreasing interest rates. As inflation rises above ideal levels (higher than 2.0%) the Federal Reserve will tighten (reduce) the money supply by raising interest rates. This can increase the cost of money (the cost of borrowing) but higher interest rates are generally effective at fighting inflation, especially hyperinflation.
Hyperinflation Investment and Hedge Strategies
Investing and hedging strategies during hyperinflation is similar to inflation: Generally, stocks are preferred to bonds in inflationary environments because bond prices fall as interest rates rise. When inflation gets above Goldilocks level (2% to 3%), the value of the US dollar may fall. Therefore , foreign stock funds can act as an automatic hedge as money invested in foreign currencies is translated into more dollars at home.
Categories of mutual funds that may perform well in inflationary environments include treasury inflation protected securities (TIPS), and bond funds best for rising interest rates, such as short-term bond funds.
Tip and Caution
Trying to navigate market and economic conditions with investment strategies is a form of market timing that carries significant risk of losing value in an investment account. For most investors, building a diversified portfolio of mutual funds is the best strategy for all market and economic environments.
The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.