Money, Mud and Hyperinflation

Tue, Nov 16, 2010 - 11:44am


Since World War II, inflation has been engrained in Western society. It is embedded in our expectations and written into our legislation. Inflation is the culture of the Baby Boomer generation. Society expects prices to go up, and is convinced something is wrong if they do not.

The general fear of deflation is unfounded. Under the global fiat monetary system, to inflate or deflate is largely a policy makers decision. Amongst developed economies, deflation is invariably Public Enemy Number One.

The historically proven antecedents to hyperinflation currently exist to an overwhelming extent. Banking crises have been shown to ordinarily precede currency crashes. Currency crashes result in high to hyper‐inflation.

Hyperinflation is the single largest problem an economy can face and should be of extreme concern for anyone who is positioned defensively for deflation. It leads to the systematic destruction of savings and if not confronted correctly, the total destruction of middle‐class wealth. It empowers governments, but can also enrich anyone who sees it coming and positions themselves correctly.

Of greatest importance to the report, is an analysis of the ability to fight inflation. Evidence concludes, there is a limited capacity for developed economies to fight the onset of inflation, without being crippled economically.

This report delves into the key factors contributing towards the probability of high inflation, by providing a historical and present overview of the global monetary system; exploring historical empirical studies of crisis sequencing; examining the current inflationary forces, showing the key differences between now and the Great Depression; and evaluating the current economic and financial position, and performing a brief stress test displaying the limited ability for the Western World to fight inflation from a financial, economic and political standpoint.

We naturally imagine that the spot on which we ourselves stand is fixed, and that the things around us move. The man who is in a boat seems to see the shore departing from him, and it was the doctrine of the first philosophers that the sun moved round the earth, and not the earth round the sun. In consequence of a similar prejudice, we assume that the currency which is in all our hands, and with which we ourselves are, as it were, identified, is fixed, and that the price of bullion moves; whereas in truth, it is the currency of each nation that moves, and it is bullion, the larger article serving for the commerce of the world, which is the more fixed.
‐ Henry Thornton, An Enquiry Into the Nature of the Paper Credit of Great Britain, 1802

Money, Mud and Hyperinflation

About the Author

TRAC Financial

Chief Investment Officer
thomas [dot] coughlin [at] tracfinancial [dot] com [dot] au ()