Hyperinflation Defined, Explained, and Proven: Part I - Jeff Nielson

Image: Red Balloons

July 27, 2016

Regular readers already know that hyperinflation is not merely an economic “threat” looming in our near future, it is a certainty . Indeed, it has already occurred . 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 (i.e. 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 fraudulent “inflation” 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 dilution.

When a company prints up a new share, it has diluted its share structure, and the value of 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 is necessary.

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 – ever.

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 inflation.

Then circumstances change. Mr. Howell, now the island’s 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 five 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” is purely 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. Hyperinflation, by obvious extrapolation, is the extremely excessive 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 weight.

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) growing population.

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 artificial and unsustainable .

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 system.

Robbed of our gold standard in 1971, by Paul Volcker and his lackey Richard Nixon, the central bankers have been free to print their fraudulent paper currencies 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 hyperinflation : 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 a horizontal line , 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 standard.

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 existence at literally a 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 worthlessness.

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 words: currency manipulation .

The Big Bank crime syndicate 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 small portion 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

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.

Product Upselling Spotlight

Don’t miss a golden opportunity.

Now that you’ve gained a deeper understanding about gold, it’s time to browse our selection of gold bars, coins, or exclusive Sprott Gold wafers.

About Sprott Money

Specializing in the sale of bullion, bullion storage and precious metals registered investments, there’s a reason Sprott Money is called “The Most Trusted Name in Precious Metals”.

Since 2008, our customers have trusted us to provide guidance, education, and superior customer service as we help build their holdings in precious metals—no matter the size of the portfolio. Chairman, Eric Sprott, and President, Larisa Sprott, are proud to head up one of the most well-known and reputable precious metal firms in North America. Learn more about Sprott Money.

Learn More


July 27, 2016 at 8:18 PM
Jeff, I have been a silent observer and disciple of the markets. I am sure you are strategic with the Aurum Partnership and wafers. But there is 'just-in-case' suggestion I want to make. Fungible, Tangible, Collateral free, Devoid of Counter party risk all needs are met. But what is not met with your wafer is "verification" of authenticity. Correct me if i am wrong here, but i do not believe a serial number is intrinsically verifiable. It does not need great technology, what it does need is innovation. Even a simple private/public key pair for say one block of notes ( say 1000 notes ), with a company internal passphrase, will let any-body request verification of a note. Yes it might be too much to handle , if it is thought in the spirit of human labor, but this is one of the things that can be so easily automated, especially with cheap computing costs that we have today. Please think it through, and hope you/Eric and team out there contemplate on these lines ( that is if you have already not done so ) because as i understand this volatile and uncertain market conditions is the best time for such a reform. what you will end up is a Wafer , that is certifiable to be real, not fake, and also certifiable that it was printed by/for you and not anybody else. The public key would decode only with your systems and your passphrase ! Best Regards, Chan
July 28, 2016 at 4:26 PM
While I generally enjoy the refreshing thoughts of J.N. this article in its utter simplicity ( no one works for their money, the money issued is debt free, coconuts have no growing scarcity or easy availability etc.) and in some cases incorrect facts make this piece a tab bit humorous. The basics of economic activity in describing inflation have all been left out under an "all things equal" supposition that never exits in the real world, let alone the dynamics of money velocity on an economy. Also expressed were suppositions like the human population is growing at an "alarming rate" when in fact the rate of growth is slowing significantly, or even declining in the west (open door policies?) and in some eastern nations, while maintaining high growth in areas like Africa. As a description of the causes of inflation this is bone thin and the example of base money escalation that never reaches the productive economy, other than in the dribs and drabs of trickle down, begs the question on why stagnation then as the whole world turns Japanese. While indeed the prices of the assets invested in by those on the receiving end of low 1/4 % interest rates and the economic apartheid wall have indeed inflated under a false wealth effect the general economy is not experiencing anything close to inflationary forces other than monopolistic price gouging in some areas which can have a ripple effect depending on the strategic importance of the commodity to the overall economy.
Mark Quello
July 28, 2016 at 5:43 PM
Thanks Jeff. I'm looking forward to part 2. Everyone I know either has no opinion on inflation or thinks of it as a mysterious force which comes out of nowhere, especially when the economy heats up. But luckily the Fed is there to fight it. I've been edging closer to your position that by definition it has already happened. Mark Q.
Dwain Dibley
August 4, 2016 at 1:46 PM
The only ones who benefit from the conflation of money and credit are the issuers of credit with no money. Neither the Fed or the banks possess the legal authority to create the nation's legal tender money, and they don't. What they do create is asset backed, debt based credit (private issue credit/debt), denominated in dollars, and it's not our money, it's an obligation to pay in the nation's money, and it is not part of the actual money supply. The U.S.G. has absolutely no legal obligation to make good on any of the Fed and bankster's promises to pay. They proved that point in the 1930's and again in 2008. You see, ours is a Legal Tender Monetary System. This means that our money is not defined by Ludwig von Mises, John Maynard Keynes, Murray Rothbard, Milton Friedman, Joseph Salerno, G. Edward Griffin, Paul Krugman, Mike Maloney, Peter Schiff, Ron Paul or any other economist or talking head. Nor is it defined by Austrian Economics, Keynesian Economics, Monetarist Economics, Capitalist Economics, Socialist Economics, Modern Monetary Theory, the Federal Reserve, the U.S. Banking system, conventional wisdoms, esoteric blather or what people may use. It means our money is defined by law. And nowhere in law does it designate or even acknowledge Fed and bank generated asset backed, debt based credit as being a legal tender, or money, or currency, or a medium of exchange, it is 100% private issue, Bank Debt, even when it is generated by the Fed. Currently, there is only $1.46-Trillion in U.S. legal tender money in circulation around the globe with about $280-Billion of that either in circulation or held in bank vaults as reserves within the U.S.. Of the $3.94-Trillion in reserves held by the Fed, only $1.78-Billion is in cash. The reserves held can be used as collateral to get more legal tender from the Treasury, if demand rises for the actual monetary medium, and that's the only way the Fed can get the monetary notes from the Treasury, by posting collateral of equal value to the notes received. There is no money in any deposit account of any type anywhere in all of westernized banking. They are all credited accounts, bookkeeping entries denoting the amounts of actual money owed to account holders, they are all bank debt. Whatever cash a bank has in its vault, is all the money it has (been that way for well over 600 years of banking and it hasn't changed). A bank's debt to you, is not your money. This will not end in hyperinflation, it will end in hyper-deflation, when all that private debt based credit generated by the Fed, banksters and Wall Street !POOF!s out of existence leaving nothing behind but debt. See 2008 Credit Collapse for real world examples.
Vincent Cate
August 6, 2016 at 12:22 AM
Everyone else talk about hyperinflation in terms of prices, not money supply. In hyperinflation the velocity of money is a key factor. If you just look at money supply you miss this. When things start to break what happens is there is a positive feedback loop. If you just look at money supply you miss that too. I think this is a much better way to think about hyperinflation:
August 17, 2016 at 11:51 AM
- The chart shows how much credit the FED has created. NOT how much "money has been printed".