Hyperinflation and Gold

If there is hyperinflation in the US dollar, it will be good to own gold.  If there is none, then what?

One of my gold bug friends is seeing opportunity again.  While, I think there is little opportunity, I still thought it might be wise to take a look at hyperinflation tragedies. Specifically, the Hanke-Krus Hyperinflation Table published in 2012 by the CATO institute.  Using a definition of hyperinflation as a monthly rate of increase in price levels of 50% or more, they found 56 examples, most of them previously unknown to me.

Hungary after WW II is the champion with and average daily inflation rate of 207% for almost a year.  A little under 5% per hour. It was more erratic than that implies but a rate of change of 5% per hour is incomprehensible anyway.  If you put a roast in your grocery cart, should you pay based on the price when you picked it out or the price when you get to the till?

Can it happen to us?  I suppose, but not if we are relying on the conventional monetarist wisdom that printing money as the only reason for hyperinflation .

The question that is hard to answer is, “Does printing money cause hyperinflation, or does hyperinflation cause the printing of money?”

If you believe that is not a valid “or” question, then you are likely a gold bug.

Of the 56 hyperinflation identified by Hanke & Krus, none seem to be caused by the central bank authority printing money.  Most were caused by supply side shocks caused by war, drought or the collapse of price in some key export.  (Hungary, Germany, Greece, and Yugoslavia)  Some were caused by relying on imports paid for with borrowings in foreign currency.  (Zimbabwe is the most recent)

Government mismanagement contributes no doubt, but money is inside the economic system while the causes of hyperinflation seem to be more outside.  Being inside the system, printing money has a natural limit. Some inflation can exist and may even have value, but too much dislocates everything.  People are cautious and change behaviour.  Hyperinflation does not repeat without a reason that is beyond the people’s control.  It seldom repeats at all.

Outside shocks are not so constrained or manageable.

Like in Zimbabwe.  Farm production fell 75%, exports declined 57%, and unemployment reached 80%.  Emigration caused a further reduction in the economic base as those with capital left.  I suspect that for those who remained, hyperinflation was not their biggest concern.

Now to the likelihood of hyperinflation in the US, UK, or Japan.  Is there a supply side shock likely?  Not that I can see.  War on the home turf seems unlikely.  Collapse of agriculture is beyond unlikely.  No availability of a crucial input is invisible.

What about imports paid for with borrowings in foreign currency?  The US is hugely indebted to China or so it seems.  Does that matter?  It could but first you would need to define what “hugely” means.  Of the $17 trillion or so that the US owes according to folks selling gold with TV ads, less than 6% of it is due China.  Compared to GDP it is not quite negligible but close.  A currency war serves no one.  China could cause complications but a catastrophe seems outside the realm.

I have for a long time believed that any movie that is advertised heavily after release is a dog.  I think the spokespersons for why you need gold in your portfolio fit the same assessment.

In my view, gold is overpriced and will eventually adjust.  The short term is unknowable though.  Just because a price is stupid does not mean it cannot get stupider.  Fear, especially unreasoned fear, is a motivator.


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Don Shaughnessy is a retired partner in an international public accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. Contact: don@moneyfyi.com

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