How Does Gold Fare During Hyperinflationary Periods?

Posted on June 26, 2012 by MN Gordon

How Does Gold Fare During Hyperinflationary Periods?
By Jeff Clark, Casey Research

Inflation is a natural consequence of loose government monetary policy.  If those policies get too loose, hyperinflation can occur.  As gold investors, we’d like to know if the precious metals would keep pace in this extreme scenario.

Hyperinflation is an extremely rapid period of inflation, but when does inflation (which can be manageable) cross the line and become out-of-control hyperinflation?  Philip Cagan, one of the very first researchers of this phenomenon, defines hyperinflation as “an inflation rate of 50 percent or more in a single month,” something largely inconceivable to the average investor.

While there can be multiple reasons for inflation, hyperinflation historically has one root cause: excessive money supply.  Debts and deficits reach unsustainable levels, and politicians resort to diluting the currency to cover their expenses.  A tipping point is reached, and investors lose confidence in the currency.

“Confidence” is the key word here.  Fiat money holds its purchasing power largely on the belief that it is stable and will preserve that power over time. Continue reading →

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Money Games

Posted on June 22, 2012 by MN Gordon

After much anticipation and hoopla, Fed Chairman Bernanke made his post FOMC meeting utterances on Wednesday.  In short: No QE3, for now.  More Operation Twist.

Markets didn’t know what to make of it.  Initially they rose on the announcement.  The Dow jumped over 100 points.  After that, however, it slid down 100 points before climbing back up…ending the day about 13 points off where it started.

Then, yesterday, at opening bell, the DOW barfed all over itself…and never recovered.  By the time the closing bell rang, the DOW had dumped 250 points.

Jim Cramer said it was the fault of commodities.  “Today was a day when lots of investors freaked out that there might not be enough end demand for everything that’s fashioned from commodities, not just the commodities themselves,” said Cramer.

Perhaps Cramer is right…and maybe he is wrong.  Here at the Economic Prism we don’t pretend to know what moves the stock market.  But we think the disappointment of no QE3 may have soured the moods of traders.

Operation twist, no doubt, involves significant market intervention.  While it doesn’t actually expand the money supply, like quantitative easing, it twists and contorts credit markets like a blacksmith twists and forges a wrought iron gate. Continue reading →

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Give Democratic Socialism a Chance

Posted on June 19, 2012 by MN Gordon

“It is not good to have a rule of many.” – Homer

A New Greek Tragedy

A country with a burgeoning economy offers an intoxicating sensation.  It warms the hearts and softens the minds of men to notions that would otherwise be impossible.  Suddenly their best and brightest shine brighter than everywhere else, their military might’s the mightiest, and their system of government is the most high.

For a time this appears to be true.  The evidence, for a while, shows no indication to the contrary.  But, then, when everyone least expects it, the seemingly impossible happens.  The money, the military, and the people’s dignity crash in rapid succession.

Athens, for example, lost its edge over 2,400 years ago.  When the Peloponnesian War ended in 404 BC, after 27 long years, Athens had been reduced from the strongest city-state in Greece to a state of complete devastation.  So, too, the Peloponnesian War closed the door on the golden age of Greece.  Athens’ pre-war prosperity and preeminence were gone forever.

To this day the shattered psyche of Athens’ population has never fully been pieced back together. Continue reading →

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Faux Capitalism and the Great Middle Class Debt Anchor

Posted on June 15, 2012 by MN Gordon

Economies, like ocean tides, rise and fall.  So, too, they fall and rise.  Sometimes a rising tide floats up all boats…even those captained by freeloaders.  Other times a falling tide pulls down vessels crewed by even the most industrious deckhands.

There are times when just showing up to work each day is rewarded with abundance.  Conversely, there are times when showing up and working like a mule earns you a kick in the teeth.  No doubt, most anecdotes of recent years have been of an economy yielding few rewards and plenty of hard knocks.  On Monday the Fed confirmed such anecdotes…and it’s worse than we thought…

According to the Fed’s Survey of Consumer Finances, U.S. wealth fell nearly 40 percent between 2007 and 2010…erasing 18 years of gains for median U.S. household net worth.  Specifically, median net worth declined to $77,300 in 2010 from $126,400 in 2007.  The last time median net worth was at this level was 1992.

Obviously, the housing crash – and the disappearance of illusory wealth – was the main contributor to the decline in middleclass net worth.  But incomes are falling too. Continue reading →

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