Inflationomics

Could the U. S. Dollar Experience Hyper-Inflation?

Ever wonder why the German hyper-inflation of the early 1920s was limited to Germany? Ever wonder why the Hungarian hyper-inflation of 1946 was limited to Hungary? Ever wonder why the Zimbabwean hyper-inflation of 2008 was limited to Zimbabwe?

It‘s because the inflation was created by the local central bank in the area where it had a money monopoly and could require local recipients to accept the ever-declining local fiat currency for all debts public and private. Each time, the local central bank printed more and more currency until the supply was much greater than the demand for that currency. And as with all things, with the greater supply, given a certain demand, the price goes down (and the price of a currency is measured relative to the goods it purchases, with goods prices rising relative to the currency).

Inflation is a monetary phenomenon imposed on the people by the force of a government requiring its constituents to accept its fiat currency. In Zimbabwe, after the government stopped forcing Zimbabweans to accept Zimbabwean dollars and people were free to use whatever they wanted, they chose U.S. dollars, South African Rand, and gold. Inflation hasn‘t been a problem since they stopped using the Zimbabwean dollar. Clearly, the culprit was the Zimbabwean central bank and its excessive printing of Zimbabwean dollars.

In the United States, the U.S. dollar is legal tender, required to be accepted by Americans for all debts public and private. The U.S. dollar, however, is significantly different in that it is the world‘s reserve currency. U.S. dollars have been in demand around the world because most international trade is done with U.S. dollars, many central banks hold U.S. dollars in lieu of gold, and most people perceive the U.S. dollar as something that holds its value over time, relative to other fiat currencies. This international demand has allowed the U.S. central bank (the Fed) to inflate the U.S. dollar well beyond the local demand for dollars; however, at some point, when non-U.S. central banks and businesses decide that the Fed is no longer to be trusted because it has lost control of the quantity of currency it is printing, they will try to trade their U.S. dollars for any tangible assets they can with anyone who is willing to accept them. Of course, at that point, there will be a flurry of activity and a rush to get rid of U.S. dollars and the value of U.S. dollars will decline rapidly. That will be the beginning of the end for the U.S. dollar, and the advent of hyper-inflation.

When will that happen? Don‘t know! No one really knows, but it could happen any time. It could be precipitated by any number of things, from another bank failure (and the FDIC, too), a Japanese government debt default, a U.S. government bond auction failure, or a derivatives market collapse. It‘s hard to say what will cause the tipping point, but it‘s getting closer. Are you ready?

Robert Jackson Smith

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