Hyperinflation: What Is It?
There’s a term being used more frequently of late that accurately reflects the fears of many experienced economists and financial gurus.
It’s hyperinflation and the United States and Eurozone economies are increasingly taking on risks that point towards a possible run of excessive, uncontrollable devaluation of the dollar and euro. But what exactly is it and how can you be prepared for it and in some cases even profit from it?
To understand hyperinflation, we must first talk about the nature of fiat currency. Fiat currency is a representation of wealth created, managed and controlled by a central body – in the case of the United States, that body is the semi-independent Federal Reserve Bank.
The US dollar started as a gold backed currency. This meant that money was printed based on the amount of gold in the economy and the ability of the government to provide gold in exchange for cash.
In short, paper money is a form of debt – the US treasury owes someone $1 when they hold a $1 bill.
When the United States abandoned the gold standard, they removed the checks and balances provided by a gold backed currency.
They now had a 100% fiat currency that was valued based solely on the confidence of those who used it.
As long as John and Jane Smith of Main Street, USA believed that $1 was worth $1, the currency would retain its value.
Combined with the fact that the US dollar became a world reserve currency, it was incredibly strong, regardless of the poor fiscal management of US debt in the ensuing decades.
However, a few things happen before hyperinflation becomes inevitable.
First, debt increases dramatically. The US debt has spiraled out of control to near $15 trillion, almost all of that in the last 25 years, after the gold standard was dropped.
Second, the government starts buying back its own debt in a process called quantitative easing.
In effect, the government is printing new money. By devaluing the money they owe, it makes it easier to repay their debts and to pay for new government programs that will ideally stimulate the economy (though it doesn’t always work).
However, when this happens, the value of the currency decreases due to the simple rules of supply and demand.
At a certain point, however, if the debt becomes large enough and the government reacts strongly enough, the process increases exponentially. Currency can lose value in a matter of weeks or even days.
For example, in Weimar Germany, one of the most famous examples of hyperinflation from the 20th century, a single Gold Mark went from being worth 1 Paper Mark in 1909 to 1 trillion Paper Marks at the height of hyperinflation, before a new currency was introduced in 1923.
Most of that inflation occurred in a 6 month period between 1922 and 1923. It can happen that fast.
What You Can Do to Prepare
If you look at the US economy today and the state of other world economies shortly before hyperinflation there are many similarities.
Massive, crippling debt, continued spending based on an increase in the money supply and a lack of public policy to slow the growth of that debt and stabilize the economy. Unless a massive overhaul is performed very soon, the US dollar is headed for hyperinflation.
The next question then is what you should do.
For this, you need to understand the nature of a wealth transfer cycle. In the late 1980s and early 1990s, the savings and loan crisis created a huge depression in the value of commercial real estate.
Those who owned this property lost billions and yet those who bought it made their fortunes in a span of days.
In 2000, the dotcom bubble crashed and billions of dollars were lost, only to be transferred into the housing bubble a few years later as the government made it very appealing to buy real estate.
Today, the housing bubble is gone. The current bubble is national debt and it is about to pop.
So, when it does, a huge transfer of wealth will occur as the actual physical wealth represented by all those US dollars is transferred into new containers for that wealth. Whether it is a new currency or physical stores like gold, you can profit by investing in them now.
Safe Investments Before Hyperinflation
The key to surviving a bout of hyperinflation is to simultaneously prepare for a shortage of goods and currency and move the majority of your wealth into stores that won’t be affected negatively by a crashing fiat currency.
So, set aside enough cash to help you survive, stockpile food and staples, and start investing your money in a diversified portfolio of precious metals like gold and silver, mining stocks, non-US companies, stable currencies like the Swiss Franc and Swedish Krona.
By spreading your wealth out of the United States and its unstable economy, you can protect it better and ensure that hyperinflation has as little of an impact as possible.
This is a very real possibility and because it has happened so many times before, we know roughly how it will unfold – for those unprepared it will be a trying time. Be prepared and keep your wealth and the welfare of your family protected.