After seeing the latest string of events unfold right before our eyes, many are openly pondering whether we may see hyperinflation hit the US shores. But rather than ponder Trump’s latest executive orders or over the top pronouncements, let us first look at what hyperinflation is and how it works.
Hyperinflation is simply inflation that has grown out of control. The phenomenon is brought about by several factors although increased money supply is often the most likely culprit.
Indeed, when monetary supply goes unchecked, the price of basic goods goes up, and the currency loses its value. So, in a nutshell, if the conditions are right out of control inflation really can happen. Interestingly, there are many roads to rapid increases in prices. Let’s take a look.
War is one of the most common causes of hyperinflation. Investors have little confidence in a currency whose country is at war whether the war is political or economic. A loss of investor confidence can cause a rapid drop in currency values. When a currency falls quickly enough, other problems soon arise. Not the least of which is mass bank withdrawals.
Run on Bank Funds. If residents lose confidence in their nation’s paper notes, they often withdraw bank funds en masse. However, this doesn’t just impact the banks, it can tank an economy in a hurry.
Furthermore, given that most banks only keep 5% of their total deposits on-hand, if enough depositors request their funds at the same time it wouldn’t take long before banks run out of cash. As banks rush to sell assets and call in loans held by members, panic would ensue triggering more waves of bank withdrawals. The only way for banks to fulfil requests in such an event is to sell assets, but far below market rates, and this affects both cash and asset values.
Bank Closures. Mass withdrawals eventually lead to bank closures. In the past, this has led to losses so large that anyone who wasn’t quick enough to withdrawal their savings lost everything. Indeed, a similar scenario played out during the Great Depression. And as we know from that bit of history when banks suffer the population experiences even greater turmoil.
Travel throughout the US Grinds to a Halt. Interstate travel is crucial for business. When travel stops for any reason, the business community is significantly affected. Firms that operate in different states may be forced to shut down, and since business is a key economic driver, the effects will be felt immediately.
If we were to experience an economic collapse it would happen quickly. Indeed, financial meltdowns happen so quickly that most businesses, investors, and households scarcely have time to act.
If ever the US economy becomes so fragile that consumers decide their money is safer under the mattress than in the banks, get ready. It could happen in this manner.
China. Asia’s largest economy has already shown a propensity to buy large sums of gold. Hence, If a major depression were to break out in the US we could expect China to quickly sweep in and increase their reserves by acquiring record quantities of gold. Doing so could offset at least some of the losses that come about as a result of decreased manufactured goods demand in the US.
Russia. While once the second most powerful nation in the world, Russia’s Soviet fortunes faded away after the Cold War. However, Putin’s recent actions reveal a nation in a relentless pursuit to reclaim their former glory. His moves also show that Russia is not above flexing their military might to achieve their ends.
If the US economy collapses, Russia would likely do two things 1) look to replace US trade with trade from several other countries 2) exert their muscle first on their closest neighbors before branching out and doing the same throughout the rest of Europe. If this is their intent, military motives could explain help explain their most recent gold acquisitions.
Other Rogue States. Rogue states that the US is currently odds with such as Iran, North Korea, etc. could benefit immensely from an American depression. Given that the poor state of economic affairs could weaken infrastructure in the States, most of America’s resources would be tied up in the rebuilding process which would leave minimal resources to tend to the country’s national defense. As such, rogue nations could find themselves possessing a tactical advantage over the US.
While the likelihood of an economic collapse in the US is low, the current gold buying trends could be an indication that tough times are just on the horizon. That notwithstanding, there’s no immediate cause for alarm. Of course, that’s not to say that you shouldn’t prepare for the worst and for the best.
After all, the country suffered quite a blow in 2008, and the economy may not be as resilient if a recession of similar magnitude was to reoccur.
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