Regular readers already know that hyperinflation is not
merely an economic “threat” looming in our near future, it is a
certainty . Indeed, it has already
occurred . Sadly, the term “hyperinflation” is still widely misused, and
thus widely misunderstood. Definition of terms is required.
The reason why the term “hyperinflation” is widely
misused/misunderstood is a very simple one. It is because the term
“inflation” is widely misused/misunderstood. If one does not have a clear
grasp of the concept of inflation, obviously it is impossible to have an
adequate comprehension of hyperinflation.
Inflation is an increase in the supply of money. That is
the economic definition of the term. It is the only correct definition of the
term. It is a derivative of the verb “inflate”: to increase (i.e. inflate)
the supply of money.
The term “inflation” is widely, erroneously, and (in the
case of central bankers) deliberately misused as meaning an increase in the
price of goods. But this price inflation is merely the direct and
inevitable consequence of the initial act of inflation: the increase in the
supply of money.
Thanks to decades of brainwashing (and the fraudulent “inflation”
statistics which came along with that), this simple but important distinction
is almost beyond the comprehension of most readers. Yet it is a concept which
is already well-understood in the realm of our markets. It is the concept of
dilution.
When a company prints up a new share, it has diluted its
share structure, and the value of all shares in circulation falls
commensurately/proportionately. This is nothing more than elementary
arithmetic. If a company which originally had a share base of 1,000,000
increases the number of shares to 2,000,000, the value of all those shares
decreases by 50%. If we priced the world in terms of the value of our shares
(rather than the bankers’ paper), the dilution of the share structure would
automatically result in proportionate price inflation.
This concept applies directly and identically to our
monetary system. If a central bank prints up a new unit of its (un-backed)
fiat currency, it dilutes its monetary base, and the value of all units of
currency already in existence falls. It is the fall in the value of the
currency through diluting that currency which directly translates into
higher prices: price inflation. Yet incredibly (thanks to our brainwashing)
this elementary concept is not accepted. A simple allegory is necessary.
Let us all journey to Gilligan’s Island: a closed system,
and a small population – ideal for our purposes. But let us change one
detail. For the sake of mathematical convenience, we will assume that there
are ten “castaways” on the island rather than only seven.
Even among the residents of the island, some commerce
takes place. Mr. Howell, the island’s resident banker, suggests that they
create their own currency, on the hand-operated printing press he happened to
have in his luggage.
He dubs this currency the Coconut Dollar, and each
resident is issued ten Coconut Dollars. No new currency is created, i.e. the
monetary base is perfectly flat. Under these circumstances, there would never
and could never be any (price) “inflation” on Gilligan’s Island – ever.
Initial prices (in Coconut Dollars) would be determined
by the relative preferences of the residents, and unless those preferences
changed, prices would remain absolutely stable, because the amount of
currency in circulation was not increasing – i.e. there was no inflation.
Then circumstances change. Mr. Howell, now the island’s central
banker, tells the island’s residents that they should not have to endure such
a meager standard of living. He tells the other residents he can raise their
standard of living by printing more Coconut Dollars, in order to create “a
wealth effect”.
He issues all the residents 40 more Coconut Dollars. The
island’s residents now all have 50 Coconut Dollars. They all feel much
“wealthier”. But what happens on the island?
The residents’ preferences for goods have not changed.
Mary Ann bakes one of her highly-prized, coconut-cream pies, slices it into
ten pieces, and (as she always does) offers slices for sale. After
months/years of baking and selling pies, the standard price for each slice
has always been one Coconut Dollar.
The Skipper, who has a much larger appetite than the
other residents, and now five times as many Coconut Dollars in his
pocket decides he wants to increase his own share of slices. He offers Mary
Ann two Coconut Dollars for a slice. But all the other residents also have
five times as many Coconut Dollars in their pockets, and they match the Skipper’s
price, in order to maintain their own level of consumption. The “price” for a
slice of coconut-cream pie is now two Coconut Dollars.
The Skipper, with still a large surplus of Coconut
Dollars in his pocket tries again to increase his share, by raising his ‘bid’
to three Coconut Dollars. The other residents again match that offer, and the
price-per-slice increases to three Coconut Dollars. This process continues
until a new price equilibrium is established for coconut-cream pies, as well
as all the other goods bought/sold by the residents.
With the supply of goods on the island being fixed, the
island’s residents would soon allocate all of their additional Coconut
Dollars, and new (much higher) “standard” prices would emerge. Naturally, no
increase in their standard of living ever takes place. The “wealth effect” is
purely an illusion. At that point; there would never be any additional
price inflation, unless/until Mr. Howell printed even more Coconut Dollars –
and “inflated” the monetary base, again.
Inflation does not appear out of thin air, conjured by
magical fairies, as the lying central bankers would have us believe. It is
always and exclusively a product of their own (excessive) money-printing.
That is “inflation”, in the real world. Hyperinflation, by obvious
extrapolation, is the extremely excessive money-printing of the
central bankers.
Skeptics and (central bank) Apologists will remain
unconvinced. They will point out that “the real world” is a place which is
much more complex than Gilligan’s Island, and thus the allegory carries no
weight.
Yes and no. Yes, the real world is much more complex than
Gilligan’s Island. No, the allegory loses none of its validity as a result,
because the underlying principles can be (easily) incorporated into the real
world.
Our real world is a world with a steadily increasing
population, and a steadily increasing supply of goods to meet the needs of
that growing population. But it is still a fixed system. It is not Gilligan’s
Island, it is the Island of Earth.
This is how the dynamics of our previous allegory
translate onto the Island of Earth. While our population is growing at an
alarming rate (from a long term perspective), the annual rate of growth is a
low, single-digit number, generally in the 1 – 2% range. The supply of goods
increases at a roughly parallel rate – to meet the demand of this (slightly)
growing population.
In economic terms; this is known as “the natural rate of
growth”. Equally, it can be described as the sustainable rate of
growth. In a finite system, with fixed resources, growth beyond that
“natural” rate is both artificial
and unsustainable .
In our monetary system; if the central bankers restrain
their level of money-printing to this natural rate of growth, i.e. if central
bank inflation matches this rate of growth, then there would, could, and
should be no price inflation in the world. The rate of growth in the supply
of currency matches the rate of growth in population/goods, and thus
price equilibrium can be maintained.
It is very interesting to note that over the long term,
the increase in the global supply of gold has always roughly paralleled the
natural rate of growth. This is but one of many reasons why a gold
standard, i.e. a gold-backed monetary system, is the optimal basis for
our monetary system.
Robbed of our gold standard in 1971, by Paul
Volcker and his
lackey Richard Nixon, the central bankers have been free to print their fraudulent
paper currencies at will. The “Golden Handcuffs” so despised by John
Maynard Keynes have been removed.
Cautiously, at first, and then with steadily
more-reckless abandon, the central bankers have accelerated their
money-printing. This has culminated with what readers have already seen on many
occasions: the Bernanke Helicopter Drop.
As has been explained before; this is the literal,
mathematical representation of hyperinflation : the exponential,
out-of-control expansion of a nation’s money supply. As readers now know, the
monetary base of any legitimate economy (and monetary system) is supposed to
be a horizontal line , as we see with the U.S. monetary base (and
other currencies) in all the decades during which we operated under some form
of gold standard.
As soon as the last remnant of our gold standard had been
eliminated, the horizontal line began to acquire an upward slope. This in
itself was visual/mathematical proof that the U.S. dollar, now just an
un-backed fiat currency, was being diluted to worthlessness – at a linear
(i.e. gradual) rate.
Then came the Crash of ’08. What was an upward sloping
line became a vertical line: conjuring new currency into existence at literally
a near-infinite rate. When the horizontal line of a nation’s monetary base is
transformed into a vertical line, this is absolute, conclusive proof that
hyperinflation has already taken place: the extreme and irreversible dilution
of a currency to worthlessness.
Again, the Skeptics and Apologists have their obvious
retort. If the U.S. dollar has already and “irreversibly” been diluted to
worthlessness, why has its exchange rate not fallen to zero/near-zero? The
glib and succinct reply to that question comes in two words: currency
manipulation .
The Big Bank crime
syndicate has been criminally convicted of manipulating all of the
world’s currencies , going back to at least – you guessed it – 2008.
However, this is only a small
portion of the complete answer to that question. A more comprehensive
reply will be the starting point of the next installment of this series.
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Jeff Nielson is co-founder and managing partner of Bullion Bulls
Canada; a website which provides precious metals commentary, economic
analysis, and mining information to readers and investors. Jeff originally
came to the precious metals sector as an investor around the middle of last
decade, but with a background in economics and law, he soon decided this
was where he wanted to make the focus of his career. His website is www.bullionbullscanada.com.
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The views and opinions expressed in this material are those of the author
as of the publication date, are subject to change and may not necessarily
reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the
accuracy, completeness, timeliness and reliability of the information or any
results from its use.