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

Hyperinflation Defined, Explained, and Proven: Part I - Jeff Nielson
By Jeff Nielson 4 years ago 81488 Views 16 comments

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 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.

Chan 4 years ago at 8:18 PM

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,
Jeff Nielson 4 years ago at 12:47 PM
Sorry if I seem obtuse, Chan, but I`m unable to fathom how your comment relates to what I have written.
Chan 4 years ago at 3:49 PM
Not at all, the connection is among active hedges against hyperinflation is a stable instrument that can be used. in other worlds, it is in these situations where the true value of monetary metal backed assets are realized.

So i was merely saying, if u added an ability to verify "authenticity/originality" of your wafers in a easy manner , then your aurum wafers would be a strong contender for "general day to day" use when the respective countries currency went bonkers.

I think i was trying from my tablet keypad and hence was jumbled up. Hope this expands on where i was coming from. Thanks for responding.
Jeff Nielson 4 years ago at 5:15 PM
Chan, I would encourage you to think a lot more low-tech in preparing for hyperinflation. In the wake of the destruction the oligarchs have planned for us, we will be lucky to remain fully industrialized.

Think hard assets. And the best hard asset will always be good money.
BRF 4 years ago 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.
Jeff Nielson 4 years ago at 4:52 PM
I generally reply to comments in a comprehensive manner. However, the fact that you misquote and mischaracterize what I have written, consistently, shows that you haven't come here for a sincere dialogue.

Just Trolling...
Mark Quello 4 years ago 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 4 years ago 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 4 years ago 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: http://howfiatdies.blogspot.com/2014/08/positive-feedback-theory-of.html
Jeff Nielson 4 years ago at 1:42 PM
No, Vince, this is not correct. The article you cite talks about the real world, and real-world cause-effect relationships. In other words, it talks about RATIONAL cause/effect relationships.

We live in a world of utterly ridiculous propaganda, and totally rigged markets. In other words, there ARE no rational cause/effect dynamics taking place. Just lies and arbitrary numbers.

I look at the U.S. velocity of money all the time. It shows a DEAD ECONOMY. Why? Because most of the $trillions in hyperinflationary money-printing have been temporarily sequestered from the real economy (mostly by being hidden in the derivatives casino).

This ARTIFICIAL sequestering of mountains of funny-money cannot be extended indefinitely. Sooner or later; the funny-money will leak (or more likely cascade) into the real economy, and the price-inflation spiral will REALLY begin.
Ronald West 4 years ago at 6:09 PM
Exactly. The Fed is paying those evil banksters to not lend out their excess reserves that were all printed up to bail out the banks, so for now the banks are content to leave their excess reserves at the Fed collecting a risk-free .25% interest rate. At some point, the banks will tire of seeing their margins suffer and will unleash all of this new money that was printed 8 years ago but never benefitted the man on the street because none of them ever received any bailouts (of the new money) from the Fed as the greedy banks foreclosed on their houses. Only the banks got any benefit. Accordingly, none of the hyperinflation of 2008 ever made it into the hands of those who could make use of the new coconut dollars and cause any velocity and price inflation with it. The castaways had to get by on the $290 billion previously existing and the bastards are even trying to take away the peoples' cash in order to contain the inevitable price inflation. Make no mistake. The Fed is fully aware that if Mr. Howell (the banks) ever unleashes the other $4 trillion of 2008 minted hyperinflation on the Skipper (John Q. Public) and Gilligan and the others, they will suddenly get to their inflation target of 2% and much more than that, ie. rapidly accelerating price inflation, which will never happen until after the election, and then interest rates will rise and the banks will be rewarded for taking a hit for the team (the Fed). Your dissenting reader is partly correct that in a collapse, deflation or what he means is, declining prices during massive increases in the money supply, is the natural order of business in a recession, except that he obviously did not live thru the hyperinflation/stagflation era of the 70's, when inflation galloped as the economy was collapsing and it was only with 22.5% interest rates that brought the inflation under control, which is effectively, a reduction of the money supply because it reduces Gilligan's disposable income and unemployment is soaring. He is also unaware that prices of gold soared all the way up to 22.5% interest rates and double-digit price inflation, until 1980, before the higher interest rates finally brought a reprieve from price inflation because the economy collapsed as unemployment soared. If the Fed could have raised interest rates, the banks would have been allowed to lend out the $4 trillion because the interest rates that would be necessary to contain the inflation that would result from quadrupling the money supply would be at least 25%. But the Fed knows that the US government and its economy would be bankrupt at 5%, never mind 25%. The reality is though, that the banks will get their way in the end and all that money will be unleashed and the bond market will pull interest rates up, not from the Fed letting them rise. The Fed will lose control when the bond buyers sicken from losing money by lending to the US government, as they watch their bond values plummet under hyperinflationary price increases. Either way, the entire mess will collapse under its own dead weight and from the explosion of the $550 trillion derivatives market, coming soon, and interest rates will go to the moon anyway. The only protection we and Gilligan have, is to use Mr. Howell's counterfeit money to load up on gold while we still can because the reality is that fiat money is now completely worthless as the yield purchasing power of giving up cash to a counter-party is a .1 percent return in a savings account. That's where the inflation went. Into the asset bubbles and the dilution of the currency unit, to the point where a retiree now needs $8,000,000 to spin off an income of $80,000 @ 1% in a savings account. When interest rates were 8%, the same income could be had from $1,000,000 in capital. So by definition, inflation is a dilution in the value of the currency unit, as this example proves beyond question that cash is worthless. Price increases in the economy are only one symptom of money printing and they simply contained price inflation by not giving any new money to Gilligan and the others. You nailed it. Gold and silver reigns supreme as non inflatable money.
Dwain Dibley 4 years ago at 12:08 PM
Everything you just said is total, provable, BULLSHIT. There are no "mountains of funny-money" ARTIFICIAL sequestered anywhere. It's all accounting entries denoting DEBT, and not a penny's worth of money in any of it. You don't strike me as being a complete idiot, so why do you keep pushing that phony narrative?
Vincent A Cate 4 years ago at 10:14 AM
If over the last 8 years there is 4 times as much money but 3/4ths of it is sitting still at the Fed then there will be no price inflation. The money supply is up by 4x but the velocity of money is down by 4x and these cancel each other out as far as prices. However, if inflation starts then people won't want to leave their money sitting still at the Fed. They will be better off to take out their money and buy real things. As people take money out of the Fed and buy things it will make the average velocity of money go up and so prices will go up. As prices go up more then more people will take out their money and spend it. At some point you can get a positive feedback loop. Even if the money supply did not change any more you could get "out of control inflation".

To understand velocity of money read Wikipedia on Equation of Exchange:
Willy2 4 years ago at 11:51 AM
- The chart shows how much credit the FED has created. NOT how much "money has been printed".
Diablo 4 years ago at 1:50 PM
noun: credit

the ability of a customer to obtain goods or services before payment, based on the trust that payment will be made in the future.


that should clear it up for you Willy2, its not just money, its money someone looks upto, and plus someone owes upto ! you dont strike me as a "total" idiot either, so i guess you will gain "realization"
Jeff Nielson 4 years ago at 3:59 PM
Willy, now we're getting into semantics. Yes, the phrase "money-printing" is now something of a misnomer as most of the currency that is put into circulation is in electronic/virtual form.

However, describing what the Federal Reserve does as "creating credit" is, at best, a euphemism. In order to be creating credit, one must be extending SOMETHING OF VALUE to the recipients of this "credit".

The Federal Reserve simply conjures funny-money -- worthless funny-money. It hasn't been really "creating credit" since Paul Volcker assassinated the gold standard.


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