0: Jacob: I'm Jacob Clifford. Adriene: And I'm Adriene Hill.

3: Jacob: And today, finally, Crash Course, is gonna live up to its name. We're gonna talk

6: about crashes - economic crashes.

8: Adriene: Crash Course - we've been waiting for this!

10: [Theme Music]

19: Adriene: In Germany in 1923, people were doing strange things like using money to wallpaper

25: their houses and burning money for heat. What was going on? Had they all gone crazy?

30: Nope! In the early 1920's, Germany was in the grip of something called hyperinflation.

35: In order to pay massive reparations to the Allies after World War I, Germany printed

41: a lot of their currency - the Mark.

44: One result of all this additional money was higher and higher prices. By November 1923,

50: it took a trillion marks to buy one U.S. dollar.

53: There were one thousand billion mark notes in circulation. The mark was effectively meaningless.

59: A similar situation developed in Zimbabwe a few years ago. Starting in 2007, inflation

65: grew rapidly, like really really rapidly. By September 2008, the International Monetary

72: Fund estimated the annual inflation rate at 489 billion percent.

78: In practical terms, the Zimbabwean dollar lost 99.9% of its value between 2007 and 2008.

86: It's hard to even imagine what that looks like. Prices nearly doubled every 24 hours

91: and businesses revised prices several times a day.

95: In June 2008, The Economic Times reported that, "A loaf of bread now cost what 12 new cards did a decade ago."

103: The government issued currency in huge denominations to keep up with rising prices. The million

109: dollar bill, the billion dollar bill, and finally in 2009, the hundred trillion dollar

114: bill - the largest denomination of currency ever issued. The good news

119: was that everyone was a billionaire. But the bad news was that those dollars were virtually worthless.

125: Jacob: One definition of hyperinflation is when a country experiences a monthly inflation

129: rate of over 50% or around 13,000% annual inflation.

132: But believe it or not, Zimbabwe's recent inflation isn't unique, and it's not the worst inflation in history.

137: In fact the worst was in Hungary in 1946. Between July 1945 and August 1946, the price

143: level in Hungary rose by a factor of three times ten to the twenty-fifth. And yes, any

148: time you have to express your inflation rate using scientific notation, that's a bad thing.

152: Besides the obvious confusion over what prices to charge for things, why is hyperinflation so bad?

157: Well inflation, and especially hyperinflation, erodes wealth. In Zimbabwe, people who had

162: worked their whole lives and saved up for retirement, saw their savings just wiped out.

166: Extreme inflation also forces people to spend as quickly as possible rather than save or

170: lend, so there is no money available to fund new businesses. And all that uncertainty limits

174: foreign investment and trade.

176: So, hyperinflation is bad. But how does it happen? Let's go to the Thought Bubble.

180: Adriene: So, we're simplifying this stuff a lot. But the root of the problem in both Weimar Germany

185: and Zimbabwe was that the government was paying their bills by printing new money.

189: An increase in the money supply can have two effects. It can increase output or increase

195: prices or some combination of the two. Inflation starts when output is pushed to capacity and

201: can't rise much further, but policy makers continue to increase the money supply.

207: In theory, once output is maximized, the more money you print, the more inflation you'll get. Simple, right?

214: Well, that doesn't fully explain why Germany's or Zimbabwe's inflation rose exponentially.

219: Was the government really printing that much money? Not exactly.

224: After a couple years of doubling prices, people started to expect high inflation, and that

229: changed their behavior. Say you're planning to buy a new refrigerator, and you expect

233: prices to rise quickly. You buy it as soon as possible before the price has had a chance

238: to change. But with everyone following that logic, dollars start to circulate faster and

243: faster and faster.

245: Economists called the number of times a dollar is spent per year the velocity of money. When

250: people spend their money as quickly as they get it, that increases velocity, which pushes

254: inflation up even faster.

256: You get a vicious cycle of higher prices, which lead to expectations of higher prices,

261: which lead to higher prices.

263: The hyperinflation in Germany ended when the government replaced the worthless mark with

267: a new currency. Zimbabwe ended its hyperinflation by abandoning its currency altogether. Now,

274: its citizens use U.S. dollars or currencies from neighboring countries.

278: The good news is that prices have since stabilized and real GDP has begun to increase.

284: Jacob: Thanks Thought Bubble.

286: So, if you ever control a national economy, try to avoid hyperinflation. You might also

290: want to stay away from depressions.

291: A depression is kind of a hard thing to define, but basically it's when real GP falls and

296: keeps falling for a long period of time. This has all sorts of terrible effects like high

299: unemployment and falling prices.

302: Before the 1930's, economists use the term depression to describe sustained falls in

306: GDP. But after The Great Depression, economists started using the word recession for downturns

310: to avoid association with the 1930's.

312: I guess calling it a depression was just too depressing.

314: When the stock market crashed in 1929, it didn't just cause problems for stock brokers.

319: Everyone freaked out and stopped spending, and the economy ground to a halt.

322: Of course, that's not the only reason for The Great Depression. Actually, there's still

326: a lot of debate about the causes.

327: Anyway, when economies fall into deep recessions, there are more workers than there are jobs

331: and more output than consumers want to buy. So both income and prices fall.

336: Central banks can try to use Expansionary Monetary Policy to speed up the economy. So

340: for example, in the U.S. The Federal Reserve can lower interest rates. This encourages

344: consumers and businesses to take out loans, and hopefully, get the economy going again.

348: But if people start changing their expectations and anticipate further price declines, they'll

352: change their behavior in ways that work against the central bank.

354: Like, if you're planning to buy a refrigerator and you expect prices to fall, you're gonna

358: wait to get a lower price. But, if everyone follows that same logic, then spending declines

362: and so does the velocity of money.

364: That leads to further price declines and a vicious cycle of falling prices, which leads

368: to expectations of lower prices, which actually leads to lower prices. It also leads to layoffs

373: at the refrigerator factory and so on and so on and so on.

375: This is called a liquidity trap and some economists believe it's a worsening factor in economic

380: downturns including The Great Depression.

382: Adriene: Speaking of The Great Depression, after the initial crash of 1929, The Federal

386: Reserve dropped interest rates to zero, output and prices fell, and regular people started

392: to expect further price declines. Unemployment rose to 25%, and the average family income

398: dropped by around 40%.

401: This is.not great. Once interest rates hit zero, and prices were still falling, the central

407: bank was in a bind. Continuing deflation meant that borrowing money was a bad deal, even with no interest.

413: The money you pay back in the future would have more buying power than the money you

418: originally borrowed. This discouraged people from buying homes or cars and discouraged

423: businesses from borrowing to expand capacity.

426: In fact, getting out of The Depression took nearly a decade. And it wasn't really monetary

431: policy that put an end to it. It was the massive government spending of World War II.

436: Okay, you don't want hyperinflation. You don't want depressions. You also don't want stagflation.

443: That's when output slows down or stops or stagnates at the same time that prices rise.

450: So, stagnant economy plus inflation equals stagflation. Get it? It's a portmanteau.

456: Jacob: The U.S. experienced stagflation starting in the 1970's, after a series of supply shocks

461: including a rise in oil prices and, believe it or not, a die-off of Peruvian anchovies, which were important

466: for animal feed and fertilizers. This combination of events meant the economy couldn't produce as much.

470: The Fed tried to address this by boosting the money supply and cutting interest rates,

475: but output couldn't rise much because of low productivity and the oil shortage. So, all

478: that extra money just triggered inflation.

480: It got even worse when people began to adjust their inflation expectations. Businesses started to expect

485: costs to rise even further, so they laid off workers, and that put the economy back into a recession.

490: When The Fed boosted the money supply again, that raised inflation expectations even more.

494: This ended in the early 80's when a new Federal Reserve Chairman took over. His name was Paul

498: Volcker. He actually cut the money supply and raised interest rates dramatically.

502: Output plummeted, and unemployment reached ten percent, but prices stopped rising and

506: so did inflation expectations.

508: The economy gradually recovered, and Paul Volcker got the credit for ending stagflation.

512: So hyperinflation, deflation, depression, stagflation - they're all extreme economic

516: circumstances, but these extremes show us why it's so important to measure and understand the overall economy.

522: In some cases, government action or inaction made things worse. And in other cases, the

526: government helped the economy get back on its feet.

529: But it's important to keep in mind that the economy is made up of collective decisions of individuals.

532: It's people like us, our expectations matter. If enough people fear a recession, they're

538: gonna decrease their spending, and that's gonna cause a recession.

540: Adriene: Next week, we're gonna look at different economic schools of thought. But regardless

544: of philosophy, policies designed to steer the economy need to address expectations and

549: focus on creating confidence.

551: Jacob: Thanks for watching. We'll see you next week.

554: Thanks for watching Crash Course Economics. It's made with the help of all these awesome

558: people. You can help keep Crash Course free, for everyone, forever by supporting it at

563: Patreon. Patreon is a voluntary subscription service where you can support the show with

567: a monthly contribution. We'd also like to thank our High Chancellor of Learning, Dr.

572: Brett Henderson and our Headmaster of Learning, Linea Boyev. Also, our Crash Course Vice Principals,

578: Cathy and Tim Phillip.

580: Thanks for watching! DFTBA