Hyperinflation Defined, Explained, and Proven: Part I - Jeff Nielson

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.

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.