Recently, I took some music equipment to a local music store. After checking through what I had, we agreed on a price. I asked the owner if he would be paying me in cash. He wanted to pay me with a check. My first thought was, “how much more money is this going to cost me?” I had already given him a great deal and in the process shorted myself. Now I was faced with spending gas money to get the cash that I had just negotiated. I certainly did not want to risk depositing the check into my account and dealing with the possibility, of a bounced check. He convinced me that his bank was not that far of a drive; so, I accepted the check. The bank did honor it and I walked away with my cash shortly thereafter.
So what does this have to do with inflation? EVERYTHING! Let’s first look at the basics of the transaction. He wanted to give me a piece of paper with his business’ name on it and expected me to trust that it had some real monetary value. I had given him several physical assets, that had physical properties, and in fact could be used, whether in resale or in the entertainment industry, to produce more value (normally paid in a paper currency). I got a piece of paper, a smile and the discomforting words, “trust me, it’s good”.
What if I did not trust him? What if his reputation for bouncing checks preceded him? I would probably have insisted on cash or I would have pushed for my gas money to be covered in the transaction as well. Hypothetically, if he was paying me $100 and I insisted on $5 more to cover my gas (it would be his gas or mine, because I wanted cash and I would never risk putting one of his bad checks in my bank account), our transaction would have just incurred 5% inflation. The reason: MISTRUST .
This may seem like an overly simplistic and vague answer; however, our research is conclusive. Every hyper-inflation is catalyzed by MISTRUST. The lack of trust itself may have its roots in various issues, such as war, too much debt or Governmental mis-management but none-the-less the core issue is NO TRUST. No one believes the government will “make good” on its IOUs (in either form, bonds or a fiat currency). [More information on this is available in our Client Only article “The Hyper-Inflation Script”, available to subscribers of our Economic Essentials service.]
So what would catalyze significant mistrust in the USD (United States Dollar) and send American inflation soaring? To answer this question, we should first explore how the dollar gained such amazing amounts of trust in the first place; and, although this description may be somewhat over-simplified, it does get the point across. Prior to 1971, the United States allowed you to covert paper money or paper certificates into physical gold or silver, depending on the printed bill. Yes, precious metal coins are heavier and thus more cumbersome to carry around, but for the most part you could trust they had physical value.
So back to my example story. If I had made the same transaction in 1914, not 2014, I would have taken my $100 in cash money, not a check, and rode my horse over to the bank, to get my gold or silver equivalent. Are you seeing the similarities? 100 years ago I would not be so sure about holding on to a piece of paper. Remember, a piece of paper, cash or check, is really just a smile and a “trust me”. I would want to hold on to something that I KNEW had physical value. Unbelievably, an amazing paradigm shift happened during the 1960’s. The US Dollar was revered with so much trust that it was PERCEIVED as having physical value. So, with the dollar already securing the position, of being the largest held reserve currency in the world, demand for the dollar drove it to “King Dollar” status.
The USA no longer had enough physical gold to secure all of the printed bills in circulation around the world. So, the powers at be, made the single largest mistake in world economics history in 1971. What was this horrific error? The world accepted a congressional decision to decouple the USD from the gold standard. The academy of economics officially became, “too big for its britches” and/or “too smart for its own good”. This kind of PERCEPTION of value under pinned the ultimate down-fall of many a currency in just the last century; ultimately, each currency is destroyed via hyperinflation. Historical record aside, the strength of the USA, and the resulting feeling of trust, lured people from around the globe into believing that the Almighty Dollar was INVINCIBLE. This leads to the slippery slope of over confidence, supporting the belief that it alone can endure all financial and political pressures, both foreign and domestic. “Why would anyone lose faith in the greenback?” Therefore, it could never collapse… right? We will see.
We can still use dollars to buy gold and silver, but we can no longer expect the government to honor a like-kind exchange. So what is a dollar? Is it really a promise to pay, like the check I received from the store owner? Hmmm, maybe that is the real reason it reads, “in God we Trust”. Do you find this a little concerning? What if the government does, in fact, run up such a significant amount of debt that no one is willing to buy our treasury bonds anymore? What if people start to get worried that a check might bounce? A check, in the form of a US Treasury Bond. It is, after all, just a piece of paper, with a smile and a “trust me”. What if everyone that is currently holding US Treasury Bonds says, “I would rather be paid what you owe me, now, and I am not interested in buying anymore”?
SIDE NOTE: How long do we believe that Germany will idly stand by as we return their 1500 tons of gold at a rate of 5 tons per year?
This is the startling reality of our enormous debt monster, Tyrannosaurus Debt . I am sorry to say it but there is no other outcome for our country. So it is time for us all to start planning and implementing strategies to protect ourselves from the inevitable. As we discuss in further detail in our Financial Disaster Preparedness Planning services. The path to hyper-inflation is predictable, but the pace in which we as a country, will proceed through these steps is completely unknown. Although we have reason to believe that it will be among the fastest in recorded history .
Read the path to hyper-inflation, understand and watch the key indicators, but most importantly make a plan! Client Only article, “The Hyper-Inflation Script”, Key Risk Factors Matrix and Financial Disaster Preparedness Planning… are all included in our Economic Essentials package.
Watch out for interest rates! The DXY! Amount of money printing!
