Gold And The Threat Of Hyperinflation

With skyrocketing inflation beginning to worry many people around the globe, here is a look at gold and the threat of hyperinflation.

Gold And The Threat Of Hyperinflation
 (King World News) – Alasdair Macleod:  With the threat of dollar hyperinflation now becoming a reality it is time to consider what will be required to stabilise the currency, and by extension the other fiat currencies which regard the dollar as their reserve.

This article takes its cue from Ludwig von Mises’s 1952 analysis of what was required to return to a proper and enduring gold standard —metallic money, particularly gold, having been sound money for thousands of years, to which everyone has always returned when government fiat currency fails.

When Mises wrote his 1952 article the dollar was nowhere near the state it is in today. But Mises had had practical experience of what was involved, having advised the Austrian government during and after its hyperinflation of the early 1920s, making his analysis doubly relevant.

As a remedy for the developing collapse of the dollar, this article can do little more than address the major issues. But it shows how an economic and monetary collapse of the dollar can be turned to advantage — the opportunity it creates through the destruction of Keynesian and other inflationist fallacies to secure long-term economic and monetary stability under which economic progress can be maximised.

Introduction
There are two charts which sum up why the dollar and fiat currencies tied to it will collapse if current monetary policies persist, shown in Figure 1.

The growth in the M1 quantity since February 2020 has been without precedent exploding from $4 trillion, already an historically high level, to nearly $20 trillion this September. That is an average annualised M1 inflation of 230%. It is simply currency debasement and has yet to impact on prices fully. Much of the increase has gone into the financial sector through quantitative easing, so its progress into the non-financial economy and the effects on consumer prices are delayed — but only delayed — as it will increasingly undermine the dollar’s purchasing power. 

The more immediate impact on the High Street is also alarming, shown in the second chart. A combination of the covid lockdowns and Federal Government money ending up in consumers’ pockets has driven their liquidity relative to goods purchases to unprecedented and unaccustomed heights. This is the more worrying chart because it quantifies the immediate fuel for a potential crack-up boom. A crack-up boom is the condition whereby consumers finally discard the currency, spending it to just get rid of it. We are not there yet, but clearly, if consumers take the view en masse that prices will continue to rise, then they will attempt to reduce their cash balances all at once by bringing their future purchases forward, thereby driving prices up even further and more rapidly, and therefore the purchasing power of the currency down. But for the moment, it is mostly creating a scramble for real assets, such as housing, which for the moment can be bought with mortgage finance fixed at deeply suppressed interest rates.

Given supply constraints, rising commodity prices, and other production costs rising as well as unaccustomed levels of consumer liquidity, the rise in prices can only accelerate. Unless there is a fundamental change in monetary policy, which requires the expansion of currency to be stopped completely, there will come a point where consumers finally realise that it is not prices rising but the purchasing power of the currency falling. This is a difficult concept for most people to grasp because they are used to regarding currency as always possessing the objective value in their transactions. The history of monetary inflations confirms that ordinary folk have always been reluctant to understand that the currency is declining until too late. But today, a significant minority of the population has already been alerted to this development by their participation in or observation of cryptocurrencies such as bitcoin. And if the wider population learns the same lesson and acts accordingly all hope for the currency will be lost.

The reason that changes in the quantity of currency recorded by narrow measures such as M1 must be closely watched is that it is the underlying base upon which bank credit is expanded. When interest rates inevitably begin to rise, rates paid to bank depositors are likely to lag, improving lending margins for banks. Improved lending margins will encourage the banks to expand credit, for the benefit of government and agency bonds, and for speculators such as hedge fund managers looking to arbitrage the difference between borrowing rates and the dollar’s future purchasing power. The narrow currency quantity therefore has a multiplier effect with respect to bank credit when it begins to expand.

A dispassionate consideration of these established facts leads the independent observer to conclude that unless today’s fiat currency system is secured with a sound money regime a collapse of everyone’s circulating medium is inevitable. Putting to one side minor central banks, the most egregious debaser of currency is the Fed, as the charts above attest. But with the dollar as the world’s reserve currency, where the dollar goes, so will all the other western currencies. Fixing the dollar must be the priority.

In a revised 1952 edition of his The Theory of Money and Credit, Ludwig von Mises added a section on The Return to Sound Money. Mises, who had cut his teeth as an economist dealing with Austria’s 1920s inflation made proposals which are still relevant. Under the influence of Keynesianism, the monetary situation facing America today is rapidly deteriorating towards the circumstances faced by Austria in 1920-22, but with technical differences. This article attempts to update Mises’s section on the return to sound money for current conditions to provide a framework for the benefit of monetary stability and long-term prosperity…...more here

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