The Three Steps to Avoiding Hyperinflation

Sometimes even contrarians like to know that we’re part of a crowd.

It’s true.

For the most part we like being on our own.

We don’t like the herd mentality. Or rather, we don’t like joining in on the herd mentality.

If we get in first and then a herd develops behind us, that’s just fine.

It happened when we were among the first to back a tiny natural gas stock two years ago, only for the herd to follow. And now it’s happening to something on a much bigger scale.

Do you hear the rumbling? The herd is growing…

We don’t mind admitting that sometimes we get things wrong.

For instance, take interest rates and inflation. Back from 2008 to 2010 we were firmly in the hyperinflation camp.

It just seemed so obvious. If governments print money, it has to result in hyperinflation. It would be just like in Civil War America, Weimar Germany, and Zimbabwe.

But then we realised something. It was something that many hyperinflationists still don’t realise. Hyperinflation is only a danger if an economy operates a dual currency system.

So as long as a government can control three key areas, hyperinflation as you understand it, won’t happen.

Governments in control
So, what are the three areas?

To avoid hyperinflation the government needs to:

  1. Centrally control the currency through legal tender
  2. Ensure that a black market in an alternative currency doesn’t develop
  3. Hope that all other governments and central banks increase their money supply at a similar pace

These are key points. Yet few people get it. In the most famous cases of hyperinflation, it could only happen because the government couldn’t influence or control these points.

In the case of the hyperinflation during the American Civil War and Weimar Germany, it took hold because the government issued two classes of currency — one backed by gold and another backed by the word of the government.

Needless to say the currency with gold backing became more valuable than the other currency. This led to rampant price rises and the devaluation of the non-gold-backed currency.

In the case of Zimbabwe, it was because people preferred to use US dollars. So when the government began printing more Zimbabwe dollars, the public tried to get rid of them as quickly as possible.

The more the government printed of them, the less the public wanted them.

In the West today this doesn’t exist. Today, legal tender laws make it hard for people to use other currencies. They know they can only use their local currency. There is little or no desire for Australians, Americans or Europeans to use anything but their domestic currency.

As long as it stays that way, central banks know they can keep printing and creating more money to keep interest rates at record lows.

This is why for nearly four years we’ve pushed the idea that interest rates are staying low and could go even lower. We’re not the only one to think that. We’ve got a big-hitting international economist on our side too.

Which will come first?
One of the keynote speakers at our March World War D conference was world-renowned economist Jim Rickards.

He’s written a book called The Death of Money: The Coming Collapse of the International Monetary System.

As Mr Rickards writes in the book:

‘The Death of Money is about the demise of the dollar. By extension, it is also about the potential collapse of the international monetary system because, if confidence in the dollar is lost, no other currency stands ready to take its place as the world’s reserve currency.

The question is how the demise of the dollar will happen. Will people lose confidence in the US dollar, leading to a collapse in the whole monetary system? Or will people lose confidence in all other currencies first, before finally losing confidence in the US dollar?

No one knows the answer just yet.

The far more important issue is what will happen with interest rates. As we’ve pointed out many times, contrary to what you read in the mainstream, interest rates aren’t going anywhere.

They certainly aren’t going up. As for staying where they are or going lower, that’s a different story. Interest rates are staying low, and Jim Rickards agrees.

Rates are zero forever
Rickards posted this comment on his Twitter feed late last week:

He’s right. Rickards explained everything at World War D.

Those were also the same people who said the stock market would crash and bond yields would soar as soon as the US Federal Reserve started to cut its monthly bond-buying program.

We told you at the time to ignore that junk. We hope you listened.

It was just over a year ago that the markets started to talk about the ‘tapering’ of the Fed’s bond-buying. The story was that if the Fed cut this program it would kill the market.

Only it didn’t. Over the past year, the US S&P 500 index is up 19.5%.

Why? Because gradually investors realise that this era of low interest rates won’t end anytime soon. Faced with the choice of tiny deposit rates at the bank or a much healthier looking dividend yield on stocks, investors are going for the latter.

We can’t blame them either.

Rickards is saying exactly the same thing that we’ve said. This is a low interest rate market. Governments and central banks know they have to do all they can to keep interest rates low to avoid a repeat of the 2008 crash.

And so as long as interest rates stay low, it means good news for stocks. We’re not saying we agree with this terrible manipulation of money and interest rates, but as long as it’s happening, we intend on finding every possible way to help you profit from it.

Cheers,
Kris
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Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

Money Morning Australia is published by Fat Tail Investment Research, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.


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