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A very readable summary of how hyperinflation can come about is contained in Can Central Banks Go Broke? by Willem Buiter. On page 8, there's
even if the resources needed to recapitalise the central bank are less than the maximum amount that can be appropriated through seigniorage (given by the peak of the seigniorage Laffer curve at A in Figure 1), the extraction of these resources may involve an unacceptably high rate of inflation.
Up to here we're talking about politically unacceptable inflation, but still inflation.
Worse than that, even the maximum amount of real resources the central bank can extract though seigniorage may not be enough to close the central bank insolvency gap. This could happen if the central bank had a large stock of foreign-currency denominated or indexlinked liabilities. In that case, without a capital injection from outside the central bank, the central bank cannot meet its funding needs from its own resources. The result would be hyperinflation and/or central bank insolvency.
Weimar experienced hyperinflation because it had unsustainable debt reparations to pay in foreign currencies (or in gold, which under a gold standard regime amounts to the same thing). Domestic debt can always be paid through seigniorage, albeit at a possibly politically unacceptable rate of inflation falling short of hyperinflation.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Fri Jun 3rd, 2011 at 09:47:55 AM EST
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