Yes, hyper-inflation will occur. For me, it's not a question of if hyper-inflation will occur, but when it will occur. A few of us from work began discussing this and many other topics a few years ago. We discuss articles, books and current events on a somewhat regular basis. Because of our discussions I began doing in-depth statistical tracking in order to confirm or deny our hunches regarding what was happening in the economy.
Here are some of the more relevant statistical data points I track:
- Federal Budget (inlays, outlays): data going back to 1940
- Copper: data going back to 1850
- Consumer Price Index (BLS, ShadowStats): data going back to 1913
- Federal Debt: data going back to 1791
- Federal Reserve Notes (M1, M2): data going back to 1959
- DOW: data going back to 1900
- Gold: data going back to 1833
- Nickel: data going back to 1840
- Silver: data going back to 1792
The primary reason we will see hyper-inflation comes down to how our money supply is maintained. I originally discovered the effects of our monetary system on our economy via statistical tracking before I had a good understanding of the cause. The cause helps to explain the statistics. For that reason, lets cover the cause first.
For the vast majority of our country's history our money supply had been maintained by the U.S. Treasury. All money was on a gold standard in the form of certificates and was backed by real gold/silver. You could literally walk into a bank and exchange your dollars for gold/silver. Then came the Federal Reserve. It was created in 1913. It is not a government institution. It is a conglomeration of privately owned banks and always has been. The Federal Reserve got its first taste of power n 1933 when the government confiscated all privately owned gold from its citizens. At the same time the government also invalidated the ability for citizens to redeem gold/silver certificates for real gold/silver. However, the government still allowed certificates to be redeemed on the foreign market. So at this point we were on a hybrid version of a gold standard. Then in 1971 the government removed the last vestiges of the gold standard by invalidating the ability for foreign markets to redeem gold/silver certificates for real gold/silver. That ended the gold standard in this country. From that point on we have been on a completely fiat money system run and maintained solely by the Federal Reserve.
Here's how our money system works these days. Taxes make up only a portion of inflowing money used for government spending. A large portion comes directly from the sale of U.S. Treasury bonds which has been responsible for creating our large federal debt. These bonds basically work like a loan. They have a set lifespan and interest rate associated with them. China and Japan used to be the two largest purchasers of U.S. Treasury bonds, but last year the Federal Reserve passed up both of them and is still number one even now and doesn't appear to be turning back. The U.S. Treasury creates and sells bonds our of thin air to the Federal Reserve who in turn purchases the bonds using Federal Reserve notes (dollars) which were created out of thin air. The U.S. Treasury is then responsible for buying back the bonds over a given set of years and a set rate of interest. This setup provides the federal government with an endless supply of money used to fund all their various projects. The side-effect is that all of that money is attached to bonds which are to be paid back. That is where it gets a little weird. In order for the U.S. Treasury to pay off all the bonds it has sold to the Federal Reserve it must sell more bonds which increases our federal debt even more.
If you think that is crazy, it gets even stranger. The money that the U.S. Treasury obtains via bond sales goes into bank accounts. Banks have a standing rule that can be modified on a national level by the Federal Reserve. This rule is called the bank reserve and is currently 10%. For every 10 dollars that flow into a bank, 9 of them can be loaned out leaving a bank reserve of 1 dollar. For example, lets say $1 million is deposited in the bank. The bank then loans $900,000. That $900,00 then gets spent and redeposited into a bank. That bank now has a fresh $900,000 and can loan out $810,000. This process repeats itself around 28 times before finishing its course and finally multiplying the original $1 million by about 10 times. This whole process is called fractional banking and it is responsible for a large portion of the inflation we see in the economy. However, all of this gets its start when the Federal Reserve creates money. This is why the inflation tax is the largest tax of all.
There is one other source of inflation in the banking industry which is called the discount window. That is when a bank itself takes out a loan from the Federal Reserve and then must pay it back with interest. Banks do this quite a bit since they can borrow money from the Federal Reserve at a lower interest rate than they loan out to citizens. This whole operation in essence works just like the U.S. Treasury borrowing money from the Federal Reserve via bonds.
Okay that is the history and explanation of how our current money system works. It is a fiat system completely dependent on the existence of debt which is the cause of these strangely abnormal statistics. Even though the Federal Reserve was created back in 1913, our monetary system was not severely impacted until 1971 when we fully went off the gold standard. I think most people don't recognize the poor monetary shape of our country because our fiat system has been such a short lived experiment. However, anyone who studies the statistical data will probably start to see the patterns just like I did. Our monetary system was free from most inflationary trends prior to 1971. For the most part we would only see inflation during wars, which are inflationary by nature. By the way, we are involved in at least seven wars right now, which is the most in our entire history. I think our country will be a fully engaged war machine indefinitely. Okay, back to topic. The Consumer Price Index (CPI) is used to calculate inflation. The CPI, gold and silver were all extremely stable up until we went off the gold standard. I use that key year when determining average rates for statistics since that is when we migrated to a fiat monetary system. So the rates I provide are annual rates averaged from now back to 1971.
Annual rates averaged back to 1971:
- Debt: 9.39%
- DOW: 7.87%
- Gold: 11.85%
- Inflation: 7.45%
- Silver: 13.33%
Annual rates from 2010:
- Debt: 13.87%
- DOW: 19.21%
- Gold: 25.94%
- Inflation: 8.00%
- Silver: 37.62%
CPI (inflation) is the most difficult one to calculate because the Bureau of Labor and Statistics (BLS) keeps changing the formulas used to calculate the CPI in order to push the figures lower. Lucky for us there is a group called ShadowStats that uses the same base data as BLS and uses the unmodified pre-1980 calculations. You can view their graphs for free, but they charge an annual membership fee in order to see the underlying data. I have not yet become a member. So my inflation figures from 1983 going forward are based off eying the ShadowStats graphs. All other statistics are completely accurate.
In my opinion, gold is the best indicator of inflation because it is the most stable asset in existence. That is why entire monetary systems can exist on a gold standard. Most people think they can retire on $1 million. That may be true today, but it won't hold true much longer. The more inflation hits the market, the more money you will need for retirement. If you think Social Security is going to carry you, think again. Payouts for Social Security are directly tied to the BLS CPI figures which are pushed artificially low for the sole purpose of keeping government entitlement programs at a low payout. The sad part is that many people will never be able to retire. They just don't know it yet.
Now lets bring some more perspective. The cost of an ounce of gold:
- As early as I can track (1833) it was $20.65.
- In 1930 it was $20.65.
- During the gold confiscation (1933) it was $34.84.
- When we went off the gold standard (1971) it was $40.80.
- In 2010 it was $1,224.53.
- When I retire (2034) it will be $18,104.
- When I'm 120 years old (2098) it will be $23,518,093.
The price of gold remained stable for a hundred years 1833 - 1930. It then began rising slightly from the gold confiscation of 1933 to the removal of the gold standard in 1971. From that point on it has been climbing rapidly.
As you can see, inflation is a beast and it all stems from the Federal Reserve and fractional banking. There is a group out there called the National Inflation Association. They have predicted and been right on a lot of things over the years. They are predicting hyper-inflation will set in between 2013 and 2015. They also said they wouldn't be surprised if it set in the second half of this year. That doesn't give us much time to prepare. Like I said in the beginning. For me it is not whether it will happen, but when it will happen. My concern is how quickly it will happen and how devastating it will be to our economy. I have been working hard at hedging against the dollar in order beat inflation. Gold and silver are the absolute best hedges. They always have been. Even in the bible this holds true. What did the wealthy collect back then? It was gold and silver. That kind of logic still stands today. People in the 1930's knew it and people will realize it again as more and more of their wealth erodes due to the collapse of the dollar.
