The Specter Of Hyperinflation
The nature of hyperinflation and the current state of the US dollar.
The US Federal Reserve is creating money at unprecedented rates that equate to hundreds of billions of dollars per week. The impacts of these “quantitative easing” policies are highly concerning and analysts are beginning to wonder if they could lead to hyperinflation. If this were to happen the devastating results would be felt around the world and generate enormous social unrest. In this article, we delve into the mechanisms of hyperinflation and look at what is currently happening to the US dollar.
“By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens.” — John Maynard Keynes
Hyperinflation is presented as a relatively rare phenomenon for developed economies but it has occurred many times throughout history. The subject is rarely discussed in contemporary culture but the effects of hyperinflation are terrifying. Hyperinflationary events have previously ravaged countries such as Germany, Russia, China, Yugoslavia and Hungry. The unprecedented actions of central banks today mean the discussion of hyperinflation may now be more prescient than ever before.
To understand the process of hyperinflation we must first define inflation. As we discussed in our previous article Inflation, Gold And The Dollar, inflation occurs when central banks increase the supply of fiat currencies. Fiat money is currency that is not backed by a physical commodity such as gold or silver. It is easily created through an accounting process used by central banks and all global currencies today are considered fiat. In simple terms, when the supply of fiat money is doubled the purchasing power of all the existing fiat currency is halved. Further information on this process can be found in G. Edward Griffin’s excellent book The Creature From Jekyll Island or you can watch the author discussing the subject in this video. In essence, inflation is a hidden tax on people who save in fiat currency. Price rises through inflation reflect the falling value of fiat currencies not the rising value of commodities.
Hyperinflation is inflation on steroids. It is defined as the “rapid, excessive, and out-of-control general price increases in an economy”. Many definitions put the threshold for hyperinflation at the point where prices rise more than 50% a month, however, there are examples of hyperinflation where prices rose 5–10% in a day! When prices rise this rapidly wages can’t keep up and people begin to starve. During 1922 and 1923 hyperinflation pushed the exchange rate of the Weimar Republic’s mark from 2,000 per dollar to over 1,000,000. The paper currency became meaningless and the price of a loaf of bread rose from 250 marks to 200 trillion marks.
As hyperinflating money becomes worthless the price of consumer products skyrocket. People begin to hoard commodities and many people cannot afford even the most basic necessities. Businesses become bankrupt because the population cannot afford to buy their products. Despair and misery accompany the unravelling of society. In such times of desperation, the population is easily manipulated as witnessed in Germany prior to WW2. We have seen these tragic scenarios replayed throughout every case of hyperinflation.
Hyperinflation often accompanies war and political theft but must be facilitated by central banks “creating” enormous quantities of fiat currency. The central banks of the world are independent of nations and organized through the secretive “bank for central banks”, the Bank of International Settlements. Should you be under any illusions about the independence of central banks you can watch Alan Greenspan, the former Chairman of the Federal Reserve, stating that the US central bank is not subject to the governance of any government agency during minute 7 of this interview. Central banks seem to do whatever they want and at the moment they are “creating” money at unprecedented rates. It is these actions that are giving rise to concerns about hyperinflation.
The graph above comes directly from the US Federal Reserve and shows the M1 money stock for the last 10 years. The M1 money stock is the country’s basic money supply which is used as the medium of exchange. Something unprecedented has happened to the US dollar this year. During the six weeks between March 16th and April 27th, the M1 money supply increased by $773 billion. Between the two weeks from November 16th to November 30th, the M1 money supply rose by $810 billion. The US Federal Reserve is creating more than $410 billion a week and this trend is rising. The unprecedented growth in circulating fiat money will undoubtedly have an impact on inflation rates. It remains to be seen if this will turn into hyperinflation but if these policies continue there will be serious repercussions.
Stories from survivors of hyperinflation crises are harrowing and always speak of the need to store value outside fiat currencies. Gold and silver are ideal for this purpose because they are universally accepted as mediums of exchange and are limited in supply. With the unprecedented printing of US dollars, it may shortly become imperative to have access to precious metals.
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