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Hyperinflation is a problem that begins at the very top of the food chain (or at the very bottom, depending on where you’re sitting.)

You will notice the very first effects of hyperinflation when gasoline goes to $10 per gallon; a loaf of bread jumps to $40, or it takes $27 just to buy this week’s Sunday newspaper. But, what could cause such a nightmarish scenario?

Guest post by  FXTM

The principle is rather simple -the more you have of something, the less it’s worth. In the case of the dollar, hyperinflation happens when currency has been flooded into the market very rapidly, and the demand stayed the same (“¦whether by central banks, or countries who are trying to dump the dollar quickly.)

In the past, this crisis has happened from various causes. For instance, hyperinflation happened in Yugoslavia, Zimbabwe, Argentina, and WWII-era Germany. It is seen as one of the worst economy-killers, simply because the shock of hyperinflation can seize the market, causing almost total debilitation. Because earnings haven’t gradually risen with the ‘cost of living’, these costs are simply impossible to afford for the average person. Entire markets can come to a screeching halt.

What Is Most Affected By Hyperinflation?

Hyperinflation becomes more of a problem; the closer you get to the dollars. For instance, a checking or savings account would be rendered worthless because of hyperinflation – the reason is because you might have had $400 in the account. Yesterday, bread was $4, meaning that you could buy 100 loaves. Today, bread is now $40, meaning that the accumulated value in your checking account can now only buy 10 loaves. This is very, very bad.

However, interestingly enough, a loan would also devalue during a time of hyperinflation. Say, you owe the bank $40,000 -and your car is only worth $8,000. During hyperinflation, your car could be worth $80,000 “¦but the loan amount stays the same. Before, you would have to sell your car 5-times over in order to payoff the loan, but then, you could sell the car for $80,000 and keep a $40,000 profit. Hyperinflation works both ways, which is a great way to figure out how to protect yourself from such a difficult time.

The Secret Weapon?

When analysts say that ‘gold is a refuge’, what they really mean is that it can stop hyperinflation in its tracks. Since gold is priced in US dollars, it goes up in value when the dollar goes down and despite the drop in gold this year, we have seen many nations continue to stockpile the metal.

China and Russia have been big buyers, whereas Germany and Venezuela have been bringing gold back home after storing it overseas – mainly in the US.

It could well be that these countries know something we don’t. That hyperinflation, or at least persistent inflation, is on the cards. Whatever the future brings, if you do foresee hyperinflation, precious metals like gold and silver are the best protectors of value.