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How High for Gold and Silver? Part II: Hyperinflation

|Includes: Randgold Resources Limited (GOLD)

In Part I, I presented readers with a very strange scenario.  We have had the price of gold and silver surging higher for a decade – as a response to unprecedented currency-destruction by our desperate and reckless central bankers, and endorsed by our political “leaders”, who serve those same bankers.

Thus, the surge in bullion prices has had little to do with the (absolute) “value” of gold and silver rising, and everything to do with the crisis of our paper-money being relentlessly driven toward zero. The monetary phenomenon where currencies approach zero is referred to as “hyperinflation”.

The Wikipedia “definition” of hyperinflation notes that there is no consensus on a definition of this term, but puts the most emphasis on the particular definition of “at least” 50% inflation per month (and compounding). This equates to well over 1000% per year, or roughly 100 times as much as almost any of us has experienced in our lives. Many precious metals commentators (including myself) have warned that hyperinflation in one or more Western economies (starting with the U.S.) is a highly likely result – if not a near-certainty (and yet few of us endeavour to specifically define it).

Now we get to the “strange” part. As a matter of simple arithmetic, we know that as a currency goes to zero, the price of goods (such as gold and silver) goes to infinity. Yet despite a plethora of hyperinflation warnings, when we look around for estimates/predictions of the future price of gold, we see numbers that go no higher than about $10,000/oz. Even those who never excelled at math know there is a gigantic gulf between the number 10,000 and infinity (starting with millions, billions, and trillions).

There are only a few ways in which we can attempt to resolve/explain this logical paradox. The price-targets could be only “medium-term” rather than long-term price targets, but I personally don’t recall seeing use of the phrase “medium-term” in most such analyses. The price-targets could be the “predictions” of these commentators if-and-only-if hyperinflation does not occur. Again, my own recollections are that most other authors are not making this distinction.

This leaves only one other possible explanation for this logical disconnect: precious metals commentators (including myself) are unable to truly understand hyperinflation, and therefore our “predictions” for future prices are a reflection of this lack of comprehension. I will argue that this is not only the obvious answer, but the only answer which fits – given our level of comprehension of such economic (and mathematical) phenomena.

While hyperinflation is a term with which most people are familiar, familiarity in no way implies comprehension. We’re familiar with the stars in the sky. However, none of us are capable of envisioning an object either as large, or as hot as these infinite number of other “suns” above us. Indeed, what we are most incapable of understanding when we look up into the night-sky are the number of stars, themselves: infinity. I doubt that I will get many objections when I say that the human mind is unable to grasp the number “infinity”.

If I were to ask some highly-intelligent stranger whom I happened to pass by on the street to “define” infinity, most likely I would receive some sort of dictionary-definition in reply. However, if I asked the same person to describe infinity, the response is fairly predictable. The other person would pause, and then confess an inability to do so – citing the fact that we lack the words in our own language necessary to embody that concept.

Clearly it requires some intellect of near-infinite capacity in order to genuinely “understand” (and thus be able to explain) what the mathematical concept known as “infinity” really represents. Not being able to grasp infinity, this immediately means we are unable to understand ½ of the hyperinflation “equation”: prices (including the price of gold and silver) going to infinity.

Getting back to the Wikipedia definition (or any of the alternatives), we encounter a fundamental problem: what is the use of a definition which none of us can really comprehend? Can anyone imagine weather 100 times “hotter” than the hottest day of our lives? Can we envision and comprehend sound 100 times louder than the loudest rock-concert?

A definition which no one can understand is, in fact, no “definition” at all. This leaves us with another paradox: trying to define something beyond comprehension. Clearly any useful definition must be in terms where comprehension is at least possible for most members of society.

This leads me to a definition which is accessible, if somewhat imprecise: hyperinflation is an economic phenomenon where prices cease to have meaning. Whether we are referring to the the miniscule, residual value of a currency, or the exponentially spiraling prices of all goods, once the progression of such numbers has expanded beyond our ability to firmly grasp their relative value, we can safely conclude that we have entered a hyperinflationary spiral.

Some will argue that whatever my “definition” gains in terms of being accessible, it loses for lack of precision. My rebuttal to that is that we appear to already have some crude “demarcation point” for when the hyperinflation spiral begins: when the price of gold hits/approaches $10,000/oz. While some will argue that this is nothing more than a convenient (and arbitrary) “round” number, in an economic phenomenon as massive as hyperinflation, simply being able to identify the correct “order of magnitude” for when hyperinflation may/will begin is about the highest level of certainty which we could reasonably seek to attain.

Before I proceed further in this analysis, there is the flip-side of the hyperinflation equation: our paper-currencies going to zero. Here, if I try to argue that no one “understands” this half of the process, I am certain to get an argument.

Everyone understands “zero” (or will claim to), and so most people would (erroneously) assume that they could “understand” the process of our currencies moving toward zero. This is the logical distinction which will be difficult for many to grasp. While we may have a crude grasp of the numerical significance of zero, this in no way implies that we would understand the process of something shrinking to such a minute size that it almost equates to zero.

Remember that we are merely examining the flip-side of hyperinflation: prices go toward infinity while the currency plunges toward zero. Having already established that we cannot grasp the upward movement in numbers toward infinity, it is logically absurd to then claim that we do understand the exact opposite phenomenon: the plunge toward zero.

For stubborn readers out there, who refuse to accept the logic of this proposition, here’s a question for you: can you really claim to “understand” how big an atom is? Or, how “big” is an electron, or a “quark”? If we acknowledge being unable to understand the size of objects millions of times larger than anything we can experience in our everyday lives, we must equally acknowledge the incapacity of our minds to comprehend objects which are the tiniest fractions in size of objects with which we are familiar.

In short, if we are unable to visualize atoms and electrons and quarks, then this lack of comprehension must equate to being unable to comprehend currencies which are worth only the tiniest increment of their current value. While some readers may consider this some useless exercise in philosophy, there is “a method to my madness”.

Having demonstrated that none of us is capable of truly understanding hyperinflation (and numbers moving extremely rapidly in opposite directions), it stands to reason that none of us is capable of properly preparing for hyperinflation. In other words, if we try to “think” of what we need to do, and what sort of financial “insurance” we need for such a catastrophe, we must acknowledge that our planning will be defective. More specifically, since we are unable to understand the severity of this economic phenomenon, this directly implies that we will under-prepare for it.

Immediately, prudent individuals out there will begin to mentally review their own preparedness for this possibility – and hopefully revise such planning to some degree. Yet, as alarming as it is to suggest to even informed readers that they are likely “under-prepared” for what lies ahead, this is only a minor shock, in comparison to a much greater horror.

We are being “led” by people who (we now know) are totally incapable of understanding hyperinflation. Yet, simultaneously these esteemed heads-of-state and bankers are willfully engaging in reckless monetary policy where the “goal” is to take us to the brink of a hyperinflationary spiral – and then to pull-back on such recklessness.

We have a century of detailed history to provide us with empirical evidence of the skill/success which these bankers have had in administering just the “right amount” of monetary medicine for a variety of economic scenarios. In virtually every case, these “experts” over-shoot their “targets”.

Until now, the recklessness and gross incompetence of these bankers has had only relatively minor (negative) consequences on our lives and economies – and these failures occurred with respect to sets of parameters which (supposedly) these expert-bankers completely understood. What should we expect today, where the same bankers are responding to totally unprecedented economic events with reckless (and totally untested) monetary policies – designed to take us only to the “brink” of a much larger, much more horrifying economic event, of which they don’t have the slightest comprehension?

To refer to current, global economic policy as “the blind leading the blind” is clearly an insult to those individuals who have lost their sight – in a number of ways. First of all, many blind people learn to “navigate” their lives with a much greater level of success and expertise than our central bankers have displayed in “navigating” our economies with their monetary policy.

More importantly, blind people realize they must adopt a higher level of prudence in their lifestyles – through being robbed of the sensory perception which alerts us to many types of risks/threats to safety. Central bankers have no such comprehension – as they pathetically stumble about, merely pretending to understand what is happening, and pretending to understand their own “solutions”.

Imagine taking the two, worst drivers in the world, putting them behind the wheel of a car, and then having them play a game of “chicken”. Now imagine these same two drivers being goaded-on (if not whipped into a frenzy) by a large group of spectators who are betting on this game (lets call them Wall Street bankers). Is this a scenario which is likely to end well?

Fear of the “unknown” is a very common reaction in our species. This fear manifests itself in a nearly infinite number of ways. We tend to fear people who are different from us, with this fear being so magnified in many members of society that it constitutes a mental “condition”: xenophobia. Similarly, we have many other “fears” in our day-to-day lives, with most of us having at least one form of “phobia” – or excessive fear with respect to some aspect of our life-experience.

We recognize such fears as being irrational in origin, and stronger-minded members of society will tend to try to overcome such irrational fears. While fear is generally an emotion which is a purely negative facet of our lives, rational individuals will never attempt to suppress or ignore all such fear – to the point where they abandon all prudence in their lives. And yet this is exactly what our governments are intent on accomplishing.

A metaphor comes to mind: a submarine, traveling deep under-water, with nothing but a tiny periscope to guide it – and absolutely no “radar”. In our economic metaphor, we know there is no radar, because we lack the technical capacity to construct “radar” capable of “seeing” hyperinflation ahead of us.

Damn the torpedoes, full-speed ahead!” shouts Admiral “Helicopter” Ben Bernanke.

Which way are we going?” asks First Mate Tim Geithner.

Who knows? Who cares?” snarls Admiral Ben, “Let’s just get there as fast as possible…”

I have provided readers with a long list of rational, carefully constructed reasons as to why we all need to “insure” our economic well-being with precious metals – real “physical” bullion which we can still purchase at reasonable prices, and which is a tangible form of wealth, beyond even the destructive capacity of our leaders and bankers.

Today, I will break with that pattern, and advise people to protect themselves based upon fear. However, the “fear” which I’m asserting as a reason to engage in further protective measures is not some irrational, or unquantifiable fear of some unknown economic future. No, the “fear” which should motivate us to increase our own preparedness is the fear of the clueless idiots who are in charge of our economies.

Dealing with economic problems of which they have not the slightest understanding, using the most-reckless economic policies in history (and thus totally untested ones) to try to “fix” those problems, and arrogantly rejecting even the possibility of a much greater catastrophe (hyperinflation) – which they comprehend even less (if that is even possible) is the scenario facing us. Even the most-depraved minds in Hollywood are unable to devise a “horror story” any more frightening than that.

There is an opposite psychological phenomenon to fear: mania. While rational readers would probably express a desire that our leaders not be overly fearful – since timidity can also lead to negative repercussions – I think it is safe to say that no sane reader out there can possibly be comfortable with the collection of literal “maniacs” who lead us today.

In many respects, we have no one to blame but ourselves for the reprehensible condition of our economies, after all, in our pseudo-democracies we are the ones who have put these maniacs in charge of us. Sadly, ridding ourselves of these ignorant, arrogant, incompetent, and oh-so reckless leaders will prove much more difficult than putting them in charge in the first place.

This strongly suggests that the harm being caused by these maniacs is still in its infancy. Meanwhile, hyperinflation looms before us, like the Mother-of-all-Icebergs. For all those who expect our current collection of leaders and bankers to skillfully navigate our economies around that iceberg (using nothing but their own, tiny periscopes), just sit back and relax – while humming the tune “Happy Days Are Here Again!”

For everyone else, buy gold and silver.

Disclosure: none