July 27, 2016
Regular readers already know that
hyperinflation is not merely an economic “threat” looming in our near future,
. Indeed, it has already
. Sadly, the term “hyperinflation” is still widely misused, and
thus widely misunderstood. Definition of terms is required.
The reason why the term “hyperinflation” is
widely misused/misunderstood is a very simple one. It is because the term
“inflation” is widely misused/misunderstood. If one does not have a clear grasp
of the concept of inflation, obviously it is impossible to have an adequate
comprehension of hyperinflation.
Inflation is an increase in the supply of
money. That is the economic definition of the term. It is the only correct
definition of the term. It is a derivative of the verb “inflate”: to increase
inflate) the supply of money.
The term “inflation” is widely,
erroneously, and (in the case of central bankers) deliberately misused as
meaning an increase in the price of goods. But this
price inflation is merely the direct and inevitable consequence of
the initial act of inflation: the increase in the supply of money.
Thanks to decades of brainwashing (and the
statistics which came along with that), this simple but important distinction
is almost beyond the comprehension of most readers. Yet it is a concept which
is already well-understood in the realm of our markets. It is the concept of
When a company prints up a new share, it
has diluted its share structure, and
all shares in circulation falls commensurately/proportionately.
This is nothing more than elementary arithmetic. If a company which originally
had a share base of 1,000,000 increases the number of shares to 2,000,000, the
value of all those shares decreases by 50%. If we priced the world in terms of
the value of our shares (rather than the bankers’ paper), the dilution of the
share structure would automatically result in proportionate price inflation.
This concept applies directly and
identically to our monetary system. If a central bank prints up a new unit of its
(un-backed) fiat currency, it dilutes its monetary base, and the value of all
units of currency already in existence falls. It is the
fall in the value of the currency through diluting that currency which
directly translates into higher prices: price inflation. Yet incredibly (thanks
to our brainwashing) this elementary concept is not accepted. A simple allegory
Let us all journey to Gilligan’s Island: a
closed system, and a small population – ideal for our purposes. But let us
change one detail. For the sake of mathematical convenience, we will assume
that there are ten “castaways” on the island rather than only seven.
Even among the residents of the island,
some commerce takes place. Mr. Howell, the island’s resident banker, suggests
that they create their own currency, on the hand-operated printing press he
happened to have in his luggage.
He dubs this currency the Coconut Dollar,
and each resident is issued ten Coconut Dollars. No new currency is created,
i.e. the monetary base is perfectly flat. Under these circumstances, there
would never and could never be any (price) “inflation” on Gilligan’s Island –
Initial prices (in Coconut Dollars) would
be determined by the relative preferences of the residents, and unless those
preferences changed, prices would remain absolutely stable, because the amount
of currency in circulation was not increasing – i.e. there was no
Then circumstances change. Mr. Howell, now
central banker, tells
the island’s residents that they should not have to endure such a meager
standard of living. He tells the other residents he can raise their standard of
living by printing more Coconut Dollars, in order to create “a wealth effect”.
He issues all the residents 40 more Coconut
Dollars. The island’s residents now all have 50 Coconut Dollars. They all
feel much “wealthier”. But what happens
on the island?
The residents’ preferences for goods have
not changed. Mary Ann bakes one of her highly-prized, coconut-cream pies,
slices it into ten pieces, and (as she always does) offers slices for sale.
After months/years of baking and selling pies, the standard price for each
slice has always been one Coconut Dollar.
The Skipper, who has a much larger appetite
than the other residents, and now
times as many
Coconut Dollars in his pocket decides he wants to increase
his own share of slices. He offers Mary Ann two Coconut Dollars for a slice.
But all the other residents also have five times as many Coconut Dollars in
their pockets, and they match the Skipper’s price, in order to maintain their
own level of consumption. The “price” for a slice of coconut-cream pie is now
two Coconut Dollars.
The Skipper, with still a large surplus of
Coconut Dollars in his pocket tries again to increase his share, by raising his
‘bid’ to three Coconut Dollars. The other residents again match that offer, and
the price-per-slice increases to three Coconut Dollars. This process continues
until a new price equilibrium is established for coconut-cream pies, as well as
all the other goods bought/sold by the residents.
With the supply of goods on the island
being fixed, the island’s residents would soon allocate all of their additional
Coconut Dollars, and new (much higher) “standard” prices would emerge. Naturally,
no increase in their standard of living ever takes place. The “wealth effect”
an illusion. At that point;
there would never be any additional price inflation, unless/until Mr. Howell
printed even more Coconut Dollars – and “inflated” the monetary base, again.
Inflation does not appear out of thin air, conjured
by magical fairies, as the lying central bankers would have us believe. It is
always and exclusively a product of their own (excessive) money-printing. That
is “inflation”, in the real world.
by obvious extrapolation, is the
money-printing of the central bankers.
Skeptics and (central bank) Apologists will
remain unconvinced. They will point out that “the real world” is a place which
is much more complex than Gilligan’s Island, and thus the allegory carries no
Yes and no. Yes, the real world is much
more complex than Gilligan’s Island. No, the allegory loses none of its
validity as a result, because the underlying principles can be (easily)
incorporated into the real world.
Our real world is a world with a steadily
increasing population, and a steadily increasing supply of goods to meet the
needs of that growing population. But it is still a fixed system. It is not
Gilligan’s Island, it is the Island of Earth.
This is how the dynamics of our previous
allegory translate onto the Island of Earth. While our population is growing at
an alarming rate (from a long term perspective), the annual rate of growth is a
low, single-digit number, generally in the 1 – 2% range. The supply of goods
increases at a roughly parallel rate – to meet the demand of this (slightly)
In economic terms; this is known as “the
natural rate of growth”. Equally, it can be described as the
sustainable rate of growth. In a finite
system, with fixed resources, growth beyond that “natural” rate is both
In our monetary system; if the central
bankers restrain their level of money-printing to this natural rate of growth,
i.e. if central bank inflation matches this rate of growth, then there would,
could, and should be no price inflation in the world. The rate of growth in the
supply of currency
matches the rate
of growth in population/goods, and thus price equilibrium can be maintained.
It is very interesting to note that over
the long term, the increase in the global supply of gold has always roughly
paralleled the natural rate of growth. This is but one of many reasons why
a gold standard,
i.e. a gold-backed monetary system, is the optimal basis for our monetary
Robbed of our gold standard in 1971, by Paul
Richard Nixon, the central bankers have been free to print their fraudulent
at will. The “Golden Handcuffs” so despised by John
Maynard Keynes have been removed.
Cautiously, at first, and then with
steadily more-reckless abandon, the central bankers have accelerated their
money-printing. This has culminated with what readers have already seen on many
occasions: the Bernanke Helicopter Drop.
As has been explained before; this is the literal, mathematical representation of
: the exponential, out-of-control expansion of a nation’s
money supply. As readers now know, the monetary base of any legitimate economy
(and monetary system) is supposed to be
, as we see with the U.S. monetary base (and other
currencies) in all the decades during which we operated under some form of gold
As soon as the last remnant of our gold
standard had been eliminated, the horizontal line began to acquire an upward
slope. This in itself was visual/mathematical proof that the U.S. dollar, now
just an un-backed fiat currency, was being diluted to worthlessness – at a
linear (i.e. gradual) rate.
Then came the Crash of ’08. What was an
upward sloping line became a vertical line: conjuring new currency into
near-infinite rate. When the horizontal line of a nation’s monetary base is
transformed into a vertical line, this is absolute, conclusive proof that
hyperinflation has already taken place: the extreme and irreversible dilution
of a currency to
Again, the Skeptics and Apologists have
their obvious retort. If the U.S. dollar has already and “irreversibly” been
diluted to worthlessness, why has its exchange rate not fallen to
zero/near-zero? The glib and succinct reply to that question comes in two
The Big Bank crime
has been criminally
convicted of manipulating all of the world’s currencies
, going back to at
least – you guessed it – 2008. However, this is only a
of the complete answer to that question. A more comprehensive reply
will be the starting point of the next installment of this series.
Jeff Nielson is co-founder and managing partner of Bullion Bulls Canada; a website which provides precious metals commentary, economic analysis, and mining information to readers and investors. Jeff originally came to the precious metals sector as an investor around the middle of last decade, but with a background in economics and law, he soon decided this was where he wanted to make the focus of his career. His website is www.bullionbullscanada.com.
The views and opinions expressed in this material are those of the author as of the publication date, are subject to change and may not necessarily reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the accuracy, completeness, timeliness and reliability of the information or any results from its use.