Vicious cycle

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Vicious cycle

Hyperinflation is a spiral of inflation which causes even higher inflation.

The initial exogenous event might be a sudden large increase in international interest rates or a massive increase in government debt due to excessive spendings.

Whatever the cause, the government could pay down some of its debt by printing more money (called monetizing the debt).

This increase in the money supply could increase the level of inflation.

In an inflationary environment, people tend to spend their money quickly because they expect its value to decrease further in the future. They convert their financial assets into physical assets while their money still has some purchasing power.

Often they will purchase on credit. Because of this, the level of savings in a country is very low and a government could have problems refinancing its debt.

The government's solution could be to print still more money starting another iteration of the vicious cycle.

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