Thursday, April 22, 2010

Hyperinflation Watch

“If the government tightens its own belt and stops printing (or otherwise creating) new money, then inflationary expectations will eventually be reversed, and prices will fall once more – thus relieving the money shortage by lowering prices. But if government follows its own inherent inclination to counterfeit and appeases the clamor by printing more money so as to allow the public’s cash balances to ‘catch up’ to prices, then the country is off to the races. Money and prices will follow each other upward in an ever-accelerating spiral, until finally prices ‘run away’…[i.e., hyperinflate]”
Weimar Germany took the second alternative.
The dollar has now reached its ‘Havenstein moment’. Will policymakers follow the prudent advice of Murray Rothbard and ‘tighten its belt’? Or like Herr Havenstein, will Mr. Bernanke continue to ‘print’?
No need to ponder these two alternatives. The Federal Reserve must ‘print’, for one reason. Despite the noble goals assigned to it in textbooks and offered in Congressional hearings, the Federal Reserve exists for only one reason – to make sure the federal government gets all the dollars it wants to spend, which consequently has put the dollar on a hyperinflationary course.
Spending by the federal government is out of control, causing it to borrow record amounts. The money to fund this growing mountain of debt must come from savings or ‘printing’, and the sad fact is that there is not enough accumulated savings in the known universe to satisfy the spending aspirations of Washington’s politicians. So beyond what it can collect from taxpayers and extract from the world’s savings pool, the dollars the federal government is spending can only come from one place – the ‘printing press’, which in the prevailing monetary system means bookkeeping entries of the Federal Reserve.
This process of creating new dollars ‘out of thin air’ creates the hyperinflation, which the ‘Havenstein moment’ indicates is near. Sadly, like Weimar Germany, few people are prepared for this impending destruction of the dollar, but the remedy is simple – as much as practical, avoid the dollar. Own physical gold and physical silver instead.

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