Hyperinflations almost always begin this way because they combine a fiscal problem (the government cannot pay its bills) with a monetary solution (creating new money to cover those bills). Either one by itself is often manageable; together, they can create a self-reinforcing spiral.
Here's the logic.
1. The government has a large, persistent financing gap
A government spends much more than it collects in taxes. Normally, it can finance the difference by:
- Raising taxes
- Cutting spending
- Borrowing from investors
Hyperinflation becomes possible when those options largely disappear.
For example, imagine a government with:
- Tax revenue: $100 billion
- Spending: $180 billion
- Annual deficit: $80 billion
If investors refuse to lend—or demand prohibitively high interest rates—the government still has to pay salaries, pensions, military expenses, and other obligations.
2. The central bank creates money to finance the deficit
Instead of borrowing from the public, the government effectively borrows from its own central bank.
The central bank creates new reserves or currency and uses them to buy newly issued government debt or otherwise transfer funds to the government.
The government spends that money into the economy.
Now the money supply grows much faster than the economy's ability to produce goods and services.
3. People realize the process is continuing
A one-time increase in the money supply doesn't necessarily produce hyperinflation.
The problem is when everyone expects:
- The government will keep running huge deficits.
- Those deficits will continue to be financed with newly created money.
- There is no credible plan to stop.
At that point, people conclude:
"There will be much more money next month than today."
4. Money demand collapses
This is the key step.
People no longer want to hold cash because they expect it to lose value quickly.
Instead, they try to exchange money immediately for:
- Food
- Durable goods
- Foreign currency
- Real estate
- Gold
- Inventory
Economists describe this as a fall in the demand for money or an increase in the velocity of money.
Instead of holding $1,000 for a month, someone may spend it the same day they receive it.
5. Prices rise even faster
As everyone spends money more quickly:
- Businesses raise prices more often.
- Workers demand more frequent wage increases.
- Tax collections lose real value because they're received after prices have already risen.
- The government's real expenditures often rise faster than its revenues.
Ironically, inflation itself widens the government's effective budget deficit.
6. The government prints even more money
Now the deficit is even larger in real terms.
The government prints additional money.
That creates even higher inflation.
This becomes a feedback loop:
Large deficit
↓
Money printing
↓
Higher inflation
↓
People spend money faster
↓
Higher prices
↓
Government revenues lose purchasing power
↓
Even larger deficit
↓
More money printing
Eventually inflation can reach hundreds or thousands of percent per year.
Why not just print money without a deficit?
A central bank can expand the money supply for many reasons, such as quantitative easing or emergency liquidity programs.
Those episodes usually do not become hyperinflation because:
- The government is still viewed as fiscally sustainable.
- Investors still buy government debt.
- The central bank is expected to reverse its actions if inflation rises.
- People continue to trust the currency.
The critical difference is credibility. If people believe money creation is temporary and consistent with long-run price stability, they are much less likely to abandon the currency.
Historical examples
Many classic hyperinflations followed this pattern:
- Weimar Germany financed large deficits after the war and reparations with extensive money creation.
- Zimbabwe experienced collapsing tax revenues and persistent deficit financing through money creation.
- Venezuela saw falling oil revenues, large fiscal deficits, and extensive central bank financing of government spending.
Although each case had unique political and economic circumstances, the common pattern was a government that could no longer finance itself through taxes or borrowing and instead relied heavily on newly created money.
In short, hyperinflation is best understood as the result of a fiscal crisis monetized by the central bank. Money printing is the immediate mechanism that expands the money supply, but the underlying driver is often a government budget deficit that has become impossible to finance through normal means. Without that persistent fiscal imbalance, central banks generally have both the ability and the incentive to stop creating money before inflation escalates into hyperinflation.
