What Syria Teaches Us About Hyperinflation

Prices go parabolic following wars or revolutions.


Syria is a humanitarian disaster, of course, but it's an economic catastrophe too. The latter doesn't get much attention for obvious reasons, but 290 percent inflation certainly qualifies. It turns out you can't have much of an economy when your country is a war zone, and the regime is attacking civilians.

But functioning economy or not, the government still has to pay its bills. So what does it do when there's nothing to run or tax? Easy: It prints what it needs. That's what the pariah Assad regime has done to cover the difference between what it has to pay, and what its few remaining patrons have paid it. The predictable result of all this new money chasing fewer goods has been massive inflation.

Now, the regime has tried to hide just how massive inflation actually is with its "official" numbers, but Steve Hanke, a professor at Johns Hopkins, has estimated what it really is based off black market exchange rates. As you can see in the chart below, the ongoing civil war, foreign sanctions, and the threat of bombing have sent Syria's inflation rate well into the triple digits -- the latest reading, which isn't shown, has it at 292 percent, to be exact.

It's a depressing reminder that Milton Friedman didn't get it quite right. Inflation is always and everywhere a monetary phenomenon. But hyperinflation is actually always and everywhere a political phenomenon.

Now, there's always a lot of confusion about what inflation means exactly. It doesn't mean the cost-of-living has gone up -- that can happen when inflation is low or falling if wage growth is even lower or falling more. And it doesn't mean that the price of a few things has gone up. It means that, in the aggregate, the price of all things has gone up. This, as Friedman memorably put it, is a story about money. Overall prices rise too much when the government prints too much money.

But why would a government print so much money that it becomes worthless? Run-of-the-mill incompetence or political weakness can explain printing a little too much money -- enough, say, to get double digit inflation. But it doesn't explain printing so much that  you need to resort to scientific notation to keep track of it. So what does explain it? Well, let's look at Hanke's table of the ten worst hyperinflations in history to see what they have in common. (Really, try imagining what it would be like if prices doubled every 15 hours like they did in Hungary in 1945).

Look at those start dates again. Hyperinflations tend to happen following wars or revolutions. Now, Weimar Germany and Zimbabwe look like exceptions to this rule, but they're not really -- the former's resistance to reparations, and the latter's botched land reform halted economic activity as much as any conflict. So, to generalize, there's some kind of political crisis that destroys the economy. But the government can't stop trying to govern. In fact, it has to do even more to try to restore order, and reverse the collapse. And doing more means spending more money that it doesn't have to begin with. So it prints what it needs. And it keeps printing. But it turns out you can't print money and pretend you have an economy when you don't. Inflation skyrockets, and begins feeding on itself. See, it's not just about the money-printing; it's about people's expectations too. The more money the government prints, the more worthless people expect it to be -- and the quicker they dump it. There's a bank run on the currency. Now, this might succeed at getting the economy functioning again, but it does so at the cost of wiping out any wealth not held in real assets, like land or factories.

Inflation is something we understand, and understand how to stop. As Paul Krugman points out, we've basically whipped it the world over the past few decades. But hyperinflation is different. It's not about governments printing too much money to avoid hard choices. It's about governments printing way too much money because it's their only choice. It's something that more enlightened central banking can't fix, because it's not about central banking. It's about politics, and society, breaking down.

And that's the tragic reality for Syria today.