All signs suggest that Afghanistan is in for a rough ride under the Taliban. The most urgent worries include reprisals against Afghans who helped the United States, reversals on women’s rights, and the possibility that the country will become a haven for international terrorist organizations.
But the state of the Afghan economy is working its way up the list concerns. The economy has not yet collapsed, but warning lights are flashing red. One of those flashing most brightly is the indicator for inflation. Is an explosion into hyperinflation an inevitability or only a possibility? We don’t know yet, but here is what to watch for.
What is hyperinflation and where does it come from?
Hyperinflation, loosely understood, simply means very rapid inflation. Percentage rates of inflation in the millions or billions have been observed in extreme cases like Weimar Germany after World War I, Hungary after World War II, Zimbabwe earlier in this century, and most recently in Venezuela. Afghanistan might well be next.
The origins of hyperinflation can be analyzed in terms of a simple formula called the equation of exchange: MV=PQ. In this equation, M stands for the quantity of money, V for velocity, P for the price level, and Q for the level of real GDP. Velocity, the least familiar term, can…
