Hyperinflation monster will destroy the dollar
by GS Early
It’s not as if we don’t have enough to worry about.
The threat of radical Islam. A crazy hermit in North Korea with nuclear weapons. A massive humanitarian crisis and international war in the Middle East. An imploding domestic energy sector. A sluggish – at best – economy.
But one thing should trump them all in your mind. The global “easy money” policy pushed out from virtually every central banker in the world for the past eight years.
Why is this at the top of the “threat” list? Because hyperinflation in U.S. is a very real possibility, and it may well spread globally.
Let’s look at how hyperinflation happens, because if you’re careful regular people like you and me and can avoid the worst of it.
Inflation is not rising prices. Inflation is the increase in the supply of money.
Hyperinflation happens when a country starts printing money wildly and the value of the currency plummets since there is a massive supply of it but decreasing demand for it (sound familiar?).
Since global fiat currencies are a relatively new concept, hyperinflation is something that is what you might call a modern economic issue. Technically, you’re in hyperinflation when inflation hits 50 percent a month or more.
Recent examples are in Latin America in the 1980s and 90s, and you also saw it in Germany after World War I and Hungary after World War II. In Germany the monthly inflation rate was 322 percent during the worst of it. In Hungary it was 19,000 percent a month, or 19 percent a day.
In Peru and Ecuador and other South American nations, they took a lot of money from big U.S. banks on credit. When their economies tanked, the U.S. banks demanded payment, so the countries started printing money to pay the debt, only to find the value of the currency plummet.
I was in Ecuador when inflation was running at about 600 percent a year. Savings accounts were being advertised with 20 percent and even 30 percent interest. All the prices were written on chalk boards in front of stores because the prices were changing every day.
In this environment it is pointless to save money because it’s going to be worth less the next day. Car loans and mortgages are out of everyone’s reach but the richest. What was once a comfortable retirement nest egg now buys you tank full of gas.
And once the cycle starts, it only stops when the machine hits “Tilt” and the entire monetary valuation has to be completely re-booted.
Individuals’ savings are destroyed. Lending (and borrowing) is impossible for all but the people who don’t need to borrow (as usual). The middle class disappears and you are literally down to the haves and have nots.
The one upside in all this is if you have fixed rate loans on your car or house before the madness starts, those rates are locked in, so you will continue to pay what you owe. Of course, while this may be good for the consumer, it’s bad for the banks. That means they’ll get their political cronies to find a way to screw the little guy so they can survive.
How close are we to hyperinflation?
That’s tough to answer because we’ve never been down the current road we’re on. Major countries have negative interest rates and are printing money like crazy. Almost every central bank is continuing to ease (which means putting more money in the system). The U.S. was the only exception when it raised interest rates in December but even that was unsustainable and has not happened again.
Our biggest problem is that the bankers and politicians know how to game the system better than they did before. Now, we don’t even see the underpinnings of a serious economic crisis that are there because all the information is buried.
For example, the Consumer Price Index is the key indicator of inflation in the U.S. economy. It stands at 0.9 percent through March, including oil and food.
However, according the alternative economic site Shadow Stats, inflation is really at least five times higher than we’re being told. And we’re in a relatively solid economy relative to the rest of the world.
Another crack in the U.S. economic facade is the fact that the dollar is in a very difficult spot. It has come off its highs but depending on what happens with all the world’s loose ends, it could fall very fast.
The key reason is countries like China and Russia are no longer interested in having every major commodity valued in, or traded with, dollars – especially oil. Other agents actively interested in blowing up the dollar are Iran, the Saudis and about every emerging economy player.
We’re already seeing money moving into the Japanese yen, even though Japan has negative interest rates. People are buying yen even though they have to pay to hold them. The yen has always been a steady currency that traders use to “carry” their trades (park money in a stable currency). A big move out of dollars by the Saudis or Chinese and into yen could be a trigger for hyperinflation in the U.S.
This may not be breathing down our necks right now, but it’s a real possibility so take some precautions that will work whether hyperinflation ever hits or not.
Buy gold and hold it. The price is immaterial for a hedge against inflation because we are not buying it for investment. Whether its non-collectible coins (low premiums on the price of the metal) or bullion, this is a great investment now regardless. Gold – and to a lesser extent silver – is in an uptrend that will last as long as all this instability lasts.
Avoid variable rate loans for anything. Even if we don’t see 1,000 percent per year inflation, rates may rise very soon and very quickly. Again, we’ve never been in a situation where so much money is sloshing around the system. When the party is over it’s going to end abruptly and if you’re on the hook for rising interest payments you’re going to be in trouble. Lenders will shut off access to fixed rate options and leave you in the cold.
Hold some of your cash in foreign currency like Japanese yen or Swiss francs. Everbank is a good place to look for help with that.
If you’re comfortable with technology, look to store some of your money in bitcoin. It’s kind of like electronic gold. The new systems are safer so theft risk is much lower than in the early days. The Bitcoin Crypto Bank is one of the newer players in the sector. Go to the bitcoin home site to find out more.