Gold Silver Worlds | September 30, 2012
John Williams, who is the founder of ShadowStats.com, stated
during a recent interview that the US is on track to become victim of
hyperinflation the latest in 2014. He believes that “open ended QE” (which is
nothing more than monetizing debt) is the key problem. He explains there is an
annual deficit of 5 trillion dollar per year in the US, which includes the
unfunded liabilities. He declares the
situation “beyond containment”. Central planners are responding to the current
economic problems by simply increasing the amount of printed money. John
Williams his expectations are that we’ll
soon see a heavy sell off in the dollar, quickly followed by a significant
first spike in inflation. That will ultimately lead to hyperinflation the latest somewhere in 2014.
We are just before the kick off of inflation.
We recently mentioned in our article “Money printing and
inflation” that in fact inflation IS the expansion of the money supply.
Inflation results in price inflation (the phenomenon of rising prices). Usually
there is a time period between those two events, which makes it hard for most
people to relate them to each other. Inflation and price inflation are often
confused in spoken language but it’s
mandatory to understand this fundamental difference.
Hyperinflation is a situation that most people can’t imagine
they could go through in their lives. Among economic and financial experts and
commentators, it’s a subject that triggers a lot of debate. The least you can
say is that there is a consensus on when and how hyperinflation hits. If you
think about it, it’s very strange as the world has experienced so many periods
of (hyper)inflation. Even in the 20th century, the number of countries that
were hit by severe hyperinflations
exceeds what most of us expect (see table below; courtesy of Miles
Franklin). Honestly, it’s beyond us that even in the scientific world there is
no consensus. The funny result is that most people belong to one of the two
camps: either they think that inflation and possibly hyperinflation will hit,
either they expect a deflationary situation.
Hyperinflation vs inflation
First off, what exactly is hyperinflation? We think that the
blog post from FOFOA “Just Another Hyperinflation” is excellent and that it
provides an in-depth answer to our question. We consider it a must read for
anyone trying to understand the concept of hyperinflation. It also puts the
notion of deflation into perspective.
I would like to clear up probably the most common
misconception about hyperinflation. What most people believe is that massive
printing of base money leads to hyperinflation. No, it’s the other way around.
Hyperinflation leads to the massive printing of base money.
Hyperinflation, in most people minds, conjures images of
trillion dollar Zimbabwe notes. But this image is simply the government’s
reflexive response to the onset of hyperinflation, which is actually the loss
of confidence in the currency. First comes the loss of confidence
(hyperinflation), then, and only then, comes the massive printing to keep the
government and its obligations afloat.
You see, hyperinflation is exactly like deflation. The only
thing hyperinflation has in common with inflation is part of its name. It looks
just like a deflationary depression. In fact, it IS a deflationary depression,
with a different numéraire, being GOLD.
The key in this view is to understand that debt (owned by
banks & Central Banks) and credit (in the form of paper money) are not
balanced anymore, although they were in the past. A desperate move to rebalance
that situation is what (Cental) Banks are aiming to do with their actions.
That’s why you see today for example tightened conditions of commercial banks
in providing credit or the massive buying of mortgage backed securities and
bonds by Centrals Banks. These actions result in a widening gap between debt
and credit. It’s against that background that you should interpret FOFOA’s
fundamental statement: “Hyperinflation is the process of saving debt-backed
assets (MBS’s etc.) at all costs, even buying them outright for cash.”
The point here is that this tactic only works as long as all
circumstances remain unchanged. As soon as the awareness on a larger scale
kicks in and a tipping point is reached, it will be the market that pushes
interest rates higher. Several other types of events could cause the situation
to spiral out of control as well. It seems like it’s just a matter of time till
one of those things happen! When we reach that point, (Central) Banks will not
be able to justify money printing anymore … but the damage will be done, sadly
enough.
Mind also the unit of measurement that can make a huge
difference in understanding a situation, for example expressing an economic
situation in terms of fiat currency or in terms of gold. Measuring a situation
in gold for example could show a deflationary view, while in nominal US dollar
terms it can look totally different.
The bottom line is what Andy Hoffman wrote: “EVERY fiat
currency regime throughout history has COLLAPSED, and EVERY new attempt will do
the same.”
Grant Williams about (hyper)inflation
We asked Grant Williams if he thinks hyperinflation will hit
in 2014. He is the author of the respected newsletter Things That Make You Go
Hmm and is very well positioned to have a clear and neutral view on the
economy. He told us that the sharp sell-off in the dollar may not happen for a
while as just about every other currency is being overtly weakened
simultaneously. However, he believes there is a very real risk of extreme
inflation and he doesn’t rule out hyperinflation can kick in.
Grant Williams closely monitors the velocity of money which
has been falling since 2008 as well as the excess reserves parked at the
Federal reserve which have been rising during the same period.
Right now, the Fed is “confident” that once they get the
velocity of money rising, they can simply and effectively stop those excess
reserves from pouring into the economy in search of a productive home. Of
course, they were also ‘confident’ that subprime was ‘contained’ and that there
would never be a national decline in house prices.
If they fail to successfully extricate themselves from the
corner they have backed themselves into, then there is a very real possibility
of hyperinflation but for it to happen by 2014 is, perhaps, a bit of a stretch.
Protect yourself with gold & silver
So in the light of all of this to come, whether it is
inflation or hyperinflation, the most logic way for you to protect yourself is
by preserving purchasing power in the form of Gold & Silver. Since 1913,
which is the year where the Central Bank was founded, the US dollar has lost 98% of its value. By
contrast, Gold has preserved its purchasing power since then. During a
hyperinflationary period, Gold prices surge dramatically. It doesn’t mean
though you are making profits when, say, the gold price doubles. You are simply
preserving your purchasing power in an environment where the value of the
currency has declined by 50%.
Article by Gold Silver Worlds
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