Many of my detractors insist that hyper-inflationary price increases are impossible in the current global economic environment because asset-classes are falling in value, and therefore price pressure is deflationary. Further, these critics claim that the only way to get to a hyper-inflationary scenario is for currency to get into the economy through the fractional reserve banking system. They contend that, since the velocity of money is extremely low, no currency is getting into the economy through banks, and therefore we cannot have hyperinflation.
Balderdash. [1]
1. So help me out here. Fractional reserve banking and the existence of central banks haven’t been around for very long — relatively speaking. And yet empires have been collapsing from the results of hyperinflation for eons. How does that work?
2. Just because large asset classes are falling doesn’t mean all asset classes are falling. Have you seen the price of energy lately? How about gold? Have you been to the grocery store?
3. And what is the best indicator of coming inflation? That’s right: gold. In the late 1990s, when the Dow first crossed 10,000, gold was at about $250 per ounce. Today, the Dow hovers around 10,000, and gold is almost $1200 an ounce. I know I’ve pointed this out several times before, but some people just aren’t getting it. Do you think the correlation is merely spurious? Or do you think there just might be a meaningful relationship hidden in there somewhere?
4. Currencies fail most frequently because governments can no longer raise funds by issuing debt. Yes, eventually the government will print excessively in order to compensate for its evaporating credit from external sources, and yes, the government will do everything in its power to bamboozle [2] its citizenry for as long as possible by claiming there is no danger at all. Does this sound familiar? It should.
5. Do you really think “it’s different this time?” Really? Despite Rome, the Soviet Union, Argentina, Great Britain, Mexico, Weimar, blah blah blah… Really? You think a government can leverage itself to this extent, print currency, ease credit, and continue to borrow money from those “stupid Chinese?”
I have news for you: the Chinese aren’t stupid. They’re smart. And they’re winning.
1. The author positively loathes the word “balderdash” and won’t be using it again soon.
2. The author absolutely despises the word “bamboozle” and won’t be using it again soon either.
