Why Hyperinflation is not a Danger

Every day someone is on the radio or cable news talking about how there is going to be hyperinflation. Some of them profit big from this. Not that hyperinflation couldn't happen. Anything can happen. However, the dangers of hyperinflation of the US dollar is almost always exaggerated.

Many of the these so called experts refer to situations like the Vimar Republic. I myself have referred to this situation while talking about hyperinflation. I my myself have had concerns about hyperinflation. So why is hyperinflation not a danger?

According to the theory of quantity of money (the theory that most conservative, classical and Austrian economic followers refer to), an increase in money supply is equal to the increase in price level. That means price level will only increase (inflation) if you print money and will only do so at an equal level. You print money, you get inflation.

Even in the Vimar Rebublic they could not print enough cash to justify the inflation they had. The printing presses simply could not print fast enough. So how did inflation increase so fast? Expectations and currency trade my friend. Inflation started, no one had confidence in the Mark so they got out. People didn't want the Mark so they traded it for other currencies, increasing the supply of the Mark and decreasing its demand. I.e. hyper inflation.

The big question is what currency did they trade for? Well, in all inflation and hyperinflation situations since then, it has been the dollar that people want. Its the dollar that countries ban to try and prevent inflation. Its the "flight to security." Until we loose the flight to security, we will not have hyper inflation in the dollar. I don't see us losing the flight to security any time soon. In fact, the reason why we have had concerns of deflation recently is because there is such high demand for the US dollar.

Despite everything that is going on in the US, the rest of the world if far worse. The United States is the least bad of all the bad economies. It would take the entire world to do great while the US was crashing, for hyperinflation of the US dollar to be a reality. Fact of the matter is, the US economy is doing bad, so is the rest of the world, but hyperinflation of the US dollar is simply not a danger any time soon.

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Should I Buy Gold?

Gold has been a long standing choice for someone wanting security and protection against inflation and economic uncertainty. With all the financial turmoil in the world there is no wonder why Gold has recently hit record high prices. Even though more recently Gold has retracted a bit from it's high, it is most definately still in a bullish (upward) trend. It is also no wonder why there seems to be an infinate number of gold themed companies. Whether it's some ghetto shop on the corner wanting to buy or sell gold, or a mail order company, they are everywhere. Every concerned person has likely asked themself, "Should I buy some gold?"

There are a couple different reasons why someone would buy gold.
1. secure investment
2. protection against economic collapse
3. protection against inflation
4. wealth protection

1. Secure Investment: Gold is not a secure investment. The price of gold may not be as volatile as many other investments, but especially with renued market interest, it certainly can be volatile. The security felt by gold is based on it's intrinsic value. Unfortunately, the price of gold is not. Speculators and gold companies have driven the price beyond it's intrinsic value. The further from intrinsic value, the more volatile it will be. Unfortunately, it is very difficult for us to know the true intrinsic value of gold.

2. Protection against economic collapse: many of the gold companies sell gold as a way of protecting yourself from financial or economic collapse. It's true that gold will hold it's inrisic value during economic collapse, but as previsouly stated, what exactly is it's intrinsic value? There are two other points that must be considered.

First, in 1933 the U.S. government confiscated all gold exept for jewelry and collectable coins. So, in theory during financial economic collapse, the U.S could do it again. So if you wish to use gold to protect yourself from economic collapse, you would have to buy collectable coins or jewelry. The problem is, to do this you will easily have to pay a premium of 25% or more above the current gold price. That means that the price of gold would have to increase 25% or more just for you to break even on your "investment" (assuming you get spot price when you sell).

The second thing is that in the event of economic collapse, food would be just as valuable as gold. In the kind of turmoil we are talking about, a loaf of bread would trade for a bar of gold. Which do you think is cheaper to invest in, gold or wheat? Which do you think is going to be worth more in the event of utter economic and financial collapse, food or gold? You can't eat gold. So, if you are looking for something to protect you from economic collapse, try food storage or seed banks.

3. Protection against inflation: the government is printing our money. In the last few years alone the government has tripled the money supply. See "Money Supply and Inflation." Since President Nixon eliminated the gold standard without the approval of congress, the value of the U.S. Dollar has been inflating and the price of gold with it. Gold has little intrinsic value because it has limited industrial uses. In fact securities, real estate, and several other commodities have more instrinsic value and industrial uses than gold. However, the price of gold is protected by it's scarcity and investor mentality. It has forever been a symbol of wealth and a go to for protection agains insecurity and inflation. That sentiment will endure and florish through our increasingly tourbulent economy. However, there are several ways to protect yourself against inflation. Gold is only one of them. My personal favorite is real estate, but not because real estate values will be completely protected against inflation. My favorite is real estate because it can cash flow. When inflation occurs you can raise rent and pay of the debt easier. See "Real Estate to Protect from Inflation."

4. Wealth Protection: For individuals that have considerable wealth, gold can have a great degree of security. I am actually very bullish for long term gold. Do not assume this is a pass to buy gold. I would reserve this recommendation for individuals that have considerable wealth, and have done all of their preps including a Financial Survival Kit. The definition of "considerable wealth" will vary and I leave that up to you. Keep in mind that gold is volatile and will become increasingly more volatile. If you are looking for a consistently increasing balance, this is not for you.

In conclusion, in the right situation, for the right person and the right reason, gold can be a good choice for an investment. However, unless you can purchase a very large amount of gold, the premiums can be quite inhibiting. Something that would be more practical are gold etf's and gold mutual funds. For all the reasons people buy gold, there are alternative choices. Please do your research, pray about it and make wise decisions.

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