As a continuum to “Hyperinflation 101” I will try to wrap it up with this piece. If you agree with what I wrote yesterday regarding the “cause” of hyperinflation at its most basic being a break, or lack of confidence in a fiat currency then you are ready for what follows. If you do not agree and instead have the view that dictionary definitions or the pablum spoon fed to you by Washington and Wall Street (CNBC) are correct then please keep reading, you may have an “a Ha” moment.
Just to backtrack a little, “fiat” money by definition is a currency that is not “backed” by anything real or tangible. It has value, whatever value, based on confidence or the belief… that it has value. This “confidence” or “belief” at its most basic and primal level is that the currency will SPEND. Once a population believes that a currency will one day NOT “spend”… this is exactly what they will do… spend it as fast and furiously as they can! They will spend EVERY last currency unit that they have for “stuff”… any “stuff” because “any stuff” can either be used or bartered and at least has SOME value and “some” value is more than NO VALUE. THIS is effectively what hyperinflation is… to the man on the street.
Another way of saying “loss of confidence” is to use the word “panic”. In the case of hyperinflation, a panic involves exiting a currency. In today’s world, please remember that there are no currencies anywhere on the planet that are “hard” currencies (backed by Gold or Silver) other than Gold and Silver themselves. Years ago when money WAS backed by Gold, a “panic” would involve a run on the bank where it would run out of Gold and be forced to close their doors. This happened in the 1930’s and resulted in mass “deflation” where Dollars (which 20 of them were readily exchangeable for 1 ounce of Gold) became scarce and people hoarded them. The reverse situation exists today. (Yes I know, the banks are hoarding them which is why velocity is so low). This is a very very important distinction, back then Gold and Dollars were officially interchangeable as where today they are officially “mortal enemies” and the exact opposites of each other.
My point is this, back in the good old days, a “panic” would usher in a deflation, today a true and uncontrolled panic will, must by definition usher in a hyperinflation. Follow this logic through and it doesn’t matter what government or central bank you think of because they are all sleeping in the same fiat bed and have all contracted the same disease. They all go to the same doctors and are covered by the same insurance company. In a word, they will all die the same deaths at identical times for identical reasons.
OK, mathematically the Treasury is broke. They can never tax enough or cut spending enough to actually pay back lenders with current Dollars. For that matter, the Dollars for future interest payments do not even exist today for future payment… they must be created (printed) but that is a story for another day. Keeping it simple and within an easy box to understand, the Treasury has simply borrowed and guaranteed too much to ever be repaid in current Dollars. The ONLY way to make payment is to print more which is another way of saying that the only way to make payment is to BORROW more. But round and round we go… too much borrowing IS the problem… logically “borrowing more” cannot fix the problem of having already borrowed too much! In a deflation “the money” becomes more valuable, I becomes worthless in a hyperinflation. In a fiat system, the money can NEVER become more valuable over a longer time frame and devalues into obscurity or uselessness. The only question is how long does this take to happen?
I could go off on all sorts of tangents, examples and proof how we are mathematically upside down and financially screwed, I assume that you already understand this. What I am trying to do is break it down to such a basic, grounded and simple equation that no one can misunderstand. Here it is: if the issuer of a fiat currency is fiscally, financially and mathematically BROKE then what does that mean for their fiat currency. Remember the words “the full faith and credit”? How much “faith” and how much “credit” would you give to an obvious bankrupt? None… right? (Yet every single day you wake up and wonder “what’s Gold doing”? You have it 180 degrees BACKWARDS! You should be wondering each morning whether or not the Dollar is being devalued further… you should be wondering whether or not the mathematically certain panic OUT of Dollars has begun. But no, you wonder where or not “Gold went up”.) Down and dirty, “How much is the IOU of a bankrupt lender worth?” The answer to this question gives you the ultimate “value” of the currency issued by the bankrupt which is exactly the same value as a hyperinflated currency… ZERO!
Let me put it this way, absolutely positively we are set up for a panic out of Dollars and all other fiat currencies because the very same Dollars that are issued by a bankrupt government are what all these other central banks use as their “reserves.” Just look at the latest 3 ring circus in Washington where they avoided the “fiscal cliff” by adding another $4 trillion in debt over the next 10 years while giving subsidies to Hollywood, Nascar and asparagus farmers… they can’t even do a “fiscal fix” without adding more PORK. Next they will raise the imaginary debt ceiling. The only real question that comes to my mind is “when”… “when” does the panic begin?
I know that I strayed a little from “hyperinflation” but in the case of a world where all money, all accounts, all savings… everything “financial” is fiat, a panic means hyperinflation. It means hyperinflation because the ONLY policy tool available is… you guessed it… print and thus borrow more and dilute the paper even further! I had planned to explain “why” I don’t believe that hyperinflation can be a long term phenomenon but got caught up in the layman’s nuts and bolts deeper than I anticipated. I will finish this tomorrow and explain why I believe this will most likely be a very short term event and one where you are either positioned correctly and survive… or you are not and you will find it nearly impossible to survive.