Research for Online Investors
This was originally published in MarketToday on 4/16/09
by John Dalt
Hyperinflation, it just
kind of rolls off your tongue. The doom and gloomers make it sound like the world is going to end tomorrow. The
government has printed over $2 trillion dollars in the last 18 months, but the CPI has languished. How can prices
go down if there is more money chasing the goods that everyone wants to
Your amateur economist
will try to explain. There is not more money chasing the do dads that
Joe retailer is trying to sell. There is more money in the system, but
the banks are holding it, because they have a bunch of junk real estate backed securities that are sinking in value
faster than the Titanic.
The government always
inflates the money supply. It is how they try to juice the economy in good times and bad to increase employment.
Vic the voter likes the good times, and there is nothing that helps incumbents re-election efforts like a
good time economy. If you juice the economy with a little inflation, business is happy because they sell everything
they make and can pay off their loans to build bigger factories. Joe six-pack gets a raise that barely keeps up
with inflation, but what the heck, he got a raise. The politicians get re-elected, everybody wins. Heck, if you
juice it and hold down interest rates, you can promise the American Dream of home ownership to people that cannot
qualify for a loan.
We live with
"inflation" everyday. The dollar has lost about 98% of its value in the last 100 years. Inflation
averages over 1% per year.
Hyperinflation is a
different animal. Hyperinflation is when you and others around you lose faith in the continuing value of the
states money. When people get scared. This is the danger of a
currency that is not backed by some store of value. Inflation does not
cause hyperinflation; it just has to be present.
Think of inflation as a
campfire. It is a good thing; we can cook over it, and keep warm. Then some dummy (Bernanke, congress) comes along
and puts too much wood on the fire. Before you know it, we have an honest to God Aggie Bonfire going. It takes on a
life of its own, growing bigger, flames licking anything that is flammable. It gets so hot that the green grass
starts to burn, everybody scatters trying to get out of the way before being consumed by the
So we have our nice
little inflation campfire and everyone is happy. Somebody adds a little fuel; start with TARP, a stimulus
package, an omnibus spending bill, and it gets a little bigger. Throw in national health care. The funny
thing is nobody worries about it; it is just a little fire. Like a frog in boiling water, it does not feel that
warm. It is dark outside and feels cozy. Then we notice an ember has spread a small fire to the brush on the side
of the fire. We are alarmed, but everything is ok, and it feels so cozy.
Then we notice a glow
through the trees. What is it? It could not be fire over there, could it? We get concerned, the tree’s are dry, the
underbrush cracks when you walk on it. We realize that this whole area could turn into an inferno. “Honey, pick
things up and let’s get out of here”. The crackling gets louder, and I can feel the heat of the glow now on the
side of my face. “Honey, leave it, let’s go now.” But where can you go? By now, the fire is all around us, the path
is not safe. You wonder if you can get to the car. You feel trapped!
Inflation sneaks up on
us. Milk that cost $1 a gallon gradually creeps up in price over the
years, until it costs $4 a gallon. It happened so slowly no one
noticed, or at least became alarmed. Then we read about a shortage of
milk, it seems the milk is worth more in China. The milk that is
available now costs $6 a gallon. Wait a minute, I did not get a raise,
and other stuff costs more too.
You mention it to your
wife and decide to buy a few extra cans of soup and vegetables, just to put in the pantry. Plus, they will probably
cost more next year anyway. You might as well buy them now, before they go up. You pat yourself on the back, when
you notice a month later that a can of corn has gone up twenty cents! Honey, why not take some money out of savings
and buy more food, we can store it in the basement.
This is where
HYPERINFLATION takes over; it is the VELOCITY of money. Spend it now;
buy something before it goes up in price. Food, guns, ammo, gold,
silver, houses (yes even houses); cars (yes even cars) all go up in price because of a herd
mentality. “Buy it now, it will cost more tomorrow” they
yell. People lose faith in the value of money. They want to trade it for something they need, or think they will
How bad can it
get? In 1921 it took 50 German marks to buy one dollar, by 1923 it
took 4.2 TRILLION marks to buy one dollar. This was when one ounce of
gold was worth $20 dollars.
The U.S. dollar was
always backed by gold or silver, until 1971 when President Richard Nixon removed the gold backing of our
currency. When the currency is not backed by some “store of value”,
then we seek to place a value on it with something that holds value to us. Therefore, we buy food, guns, ammo, gold, and silver as a safe store of
Conclusion: We are all doomed. Watch for the
signs of inflation. Commodities, gold, silver, and food are all
canaries in the coalmine. When you see prices increasing, when you
hear people talking about buying something now, because it will be more expensive next month, it is time to circle
If you want to plan
ahead, Gold and Silver prices are volatile, watch for good entry prices, you can start your hoard before the
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