Gold is not backed by anything? Really?
I thought that I’d start the year off with a bit of comedy from 2011. The above link if you remember was a reporter explaining why Gold was down some $100 for the day back in Nov. of that year. She explained that Gold was being sold out of “fear”, fear that Gold was… “not backed by anything” whereas U.S. Treasuries had the backing of the full faith and credit of the U.S. government! Please keep in mind that at the time, the U.S. had just recently increased its “unlimited” debt limit and had been downgraded 1 notch from the credit ratings services. I thought that in light of the recent fiscal cliff circus and upcoming lifting of the debt ceiling, this clip might help put in perspective just how perverse our financial lives are.
“Hyperinflation.” This is a word bandied about by many writers. It rolls off of the tongues of many who own precious metals yet is so misunderstood that I thought a revisit is in order. Classic hyperinflation is when a government “prints” an excessive amount of currency at a rate far above growth rates and thus destroys the current value. I don’t know whether the “print rate” of money supply needs to be 25%, 50% or 100% or more to qualify as a hyperinflation. Many today think that because “velocity” is currently very low and other variables such as economic growth is slow (negative), unemployment is stubbornly high and interest rates nonexistent that hyperinflation cannot take hold. Completely untrue as I will explain later.
The Keynesian world in which we live has rewritten history and brainwashed the masses into believing that hyperinflation must be accompanied by an economy that strongly “demands” goods. In essence, an economy that is growing wildly and simply gets out of control with the aid of a central bank that creates too much money. This is fallacy. Was the economy in Weimar Germany too strong? Or the USSR in 1989? or Argentina in 2001? Or Zimbabwe back in 2009? No, they were all economic and financial basket cases in their own ways. One condition that they all had was that their “monetary reserves” (whether Gold or foreign currency) were lacking and they basically “ran out of money” to pay for trade with. This in turn made some everyday goods scarce and the locals then began to hoard which made various goods even more scarce which set the “cycle” of hoarding goods and getting rid of currency in motion.
The very best way to describe this is to say that CONFIDENCE in the money collapsed… In reality, THIS is what hyperinflation is all about. Yes, you do need various conditions present and one of them is certainly a goodly supply of the currency but a fiat currency can “hyperinflate” by a simple and broad loss of confidence. Look at it this way, if the populous for whatever reason loses confidence in a currency, they will “sell” it, spend it, trade it or whatever to GET RID of it. The effects of hyperinflation occur when confidence is lost. When an economy is “strong,” confidence is high and hyperinflation cannot occur, a weak economy is a prerequisite for a true hyperinflation. “Printing” on its own will lower the currency value yes, but it is not enough on its own to hyperinflate. You must have confidence destroyed as one mandatory condition to have a hyperinflation.
Confidence can be lost for many possible reasons. The obvious being “too much” is perceived to have been printed. How much is “too much?” There is no answer to this other than enough for confidence in the currency to break. Confidence can be lost if the main industry of a country gets leapfrogged by technology and that country remains rigid and continues to make buggy whips. The point? CONFIDENCE is what makes “value” in a fiat regime and lack of confidence is what breaks value. “Broken confidence” in the value of the currency is another name for hyperinflation, it “looks” like everything is “going up” when the fact is that the currency is depreciating.
Don’t get me wrong, there are many conditions that will go hand in hand with broken confidence (hyperinflation). Higher interest rates, a dysfunctional economy, higher prices (lower currency value) etc. but the important thing to remember is that NO ONE wants to be left holding the “hot potato” and EVERYONE tries to get rid of it as fast as they can. Some (think the Chinese) will see it coming and “contract” to purchase goods and assets with future payments of the hyperinflating currency. Though it seems like “all of a sudden” a currency hyperinflates, it is a process that occurs, it is a weakening of confidence that builds… until… it breaks and presto, EVERYONE wants OUT!
You can argue and say that this explanation is too simple and not “scholarly” enough but in the streets, in the real world, it really is just this simple. The loss of confidence in a fiat currency and hyperinflation of that currency are for all intents and purposes one and the same. Which leads me to briefly point out that “Confidence” is exactly what the U.S. has been trying to protect all along. ALL markets today are rigged (you can argue this with me if you’d like but I will not even waste my time since it is more than obvious). ALL markets absolutely MUST at this late date, “show” that all is well. NOTHING can act or be seen as an outlier because then questions will arise and we can’t have that because questions require answers… and in a fiat world there are no and can be no real, logical and mathematically sound answers.
This has gotten quite long, I will continue tomorrow and explain why I believe that a prolonged hyperinflation of the U.S. Dollar and the rest of the world’s fiat currencies cannot occur …to be continued.