EC Global Inflation Watch

This article posits that fiat currencies are on the path to hyperinflation and looks at the evidence in the prices of financial assets and commodities. So far, gold has notably underperformed, which indicates that the early signals of hyperinflation are confined to the cryptocurrencies, whose participants broadly understand fiat debasement, to equities reflecting the desire not to maintain cash and deposit balances, and in international trade, where commodity prices of all stripes have risen in price.

Given that the early warnings of hyperinflation of money supply are here, the article then looks at the qualities required of a sound money to replace fiat currencies.

Image by Hebi B. from Pixabay 


Figure 1 shows how prices have moved from the Friday before the Fed’s announcement on 23 March that it would go all-in on its support for the US economy with unlimited quantitative easing. It amounted to a commitment to hyperinflate the money supply if needed. Before the Fed cut its funds rate to zero on 16 March nearly all these prices were falling.

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Since late-March every category has seen increases in prices. Sector and specialist analysts will always claim that there are identifiable reasons why prices for an individual category or commodity have risen. But the fact is that with the exception of the dollar and the other fiat currencies listed in the table all prices have risen. This cannot happen without the dollar and these currencies losing purchasing power.

While being far from exhaustive in its representation, Figure 1 shows that on the back of existing and perhaps anticipated expansion of money supply, cryptocurrencies have seen the most substantial rises. Putting to one side the debate as to whether cryptocurrencies can be a replacement for fiat currencies, in the general population it is their followers who are most aware of fiat currency debasement. In a monetary inflation, the fact that a significant minority of economic actors understand what governments are doing to money early in the hyperinflationary process does not appear to have happened before. It invalidates the old saying that not one person in a million understands what is happening to their money.

More people are flocking to cryptocurrencies, and while they appear to be predominantly driven by the prospect of profit rather than seeking an insurance against the demise of their local currencies, we cannot doubt that most of them have learned the lessons about money that evaded their forebears.

That being the case, we can assume that far from being just a speculative bubble, the rise in prices for bitcoin, ether and other cryptocurrencies anticipates further falls in purchasing power for government currencies, yet to be reflected in the other categories.

The rise in commodity prices varies considerably, but at a time of global economic slump, they are all higher not just in dollars, but measured in the other currencies represented in the table, which can only be a reflection of monetary debasement. Equities have also been strong with the more volatile Nasdaq 100 outpacing the S&P 500 index. And as if to ram the point home commodities and equity prices fell heavily on deflationary fears before the Fed’s unending stimulus was announced in March, only recovering and rising subsequently. The divide between deflationary and inflationary expectations could not be more marked.

Not all items in Figure 1 turned higher precisely on 20—23 March. Gold bottomed at $1452 earlier on 16 March, the day when the Fed cut its funds rate to zero. It rallied before falling to test $1456 on 20 March before closing at $1498.7. Nevertheless, a rise of 20.8% puts it between the increase in M1 money supply and M2. The WTI Oil price went negative on 20 April due to delivery problems on Comex before recovering strongly to rise over 90% on balance from late-March.

In the currencies, only the euro and sterling rose more than the dollar’s trade weighted index fell. And priced in all these currencies, the other items in Figure 1 increased.

The relationship between money and prices

There is usually a time lag between an expansion of the money quantity and its effect on prices, depending on the route it takes to full circulation. The lack of any distinction between existing and new circulating currency conceals its existence. And while every economic actor knows that government money loses purchasing power over time, it is still regarded by transacting parties as having the objective value while variations in price are reflected entirely in the goods or services being exchanged.

If the distribution of new money is channelled through increased government spending targeted at one part of the total economy, then the price effect is initially confined to a few corporations and locations in the sectors concerned, before it spreads to the wider economy before being disseminated by employees, contractors and subsidiary businesses. Alternatively, if money is distributed widely by a representational helicopter, the price effect is more instantaneous because it is more immediately spent mainly on consumer goods.

Even if the additional distribution of new money is made obvious to a population, it fails to grasp the consequences for the dilution of the existing stock of money. Like most analysts in the commodity markets, they initially think that prices are simply rising, and they fail to consider monetary debasement as the cause.

While the simple mathematical relationship between the quantity of money and the effect over time on prices is widely understood, other effects are less so. Changing the amount of money in circulation fatally corrupts statistical comparisons, yet financial analysts appear unaware of the profound differences between today’s money and that of the past. Furthermore, in more normal times the expansion and contraction of bank credit is usually a far larger variation of total money than its expansion by a central bank to fund a government deficit.

But the most profound effect on a money’s purchasing power comes when foreign owners of it domestic users gradually realise that the debasement will continue and even accelerate. Since 23 March, when the Fed told the world it would inflate limitlessly, there were two important categories of actors who immediately understood the inflation message. The first was the cryptocurrency community, as discussed above, and the second was the Chinese government, which accelerated its purchase of commodities, including iron ore, copper and oil. Wheat, cooking oil, and soybeans have followed. Predictably, commentators have seen the ramping up of commodity stockpiles, but not the unseen winding down of dollars. That is the point the Chinese appear to have understood, confirmed by the timing of accelerated commodity purchases. And their currency has also risen by nearly 8% against a weakening dollar, a marked change in official exchange policy.

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Disclaimer: The views and opinions expressed in this article are those of the author(s) and do not reflect those of Goldmoney, unless expressly stated. The article is for general information ...

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William K. 1 month ago Member's comment

Interesting while also quite depressing. And while it appears to all be correct, I would vainly wish that it were all wrong. But wishing does not make things true, no matter what Jim Moore thinks.

The irksome part of it all is that the flaws of promoting inflation were clear to me as a 16 year old high school sophomore back in 1963. Why couldn't thoe federal bankers see the truth??? Or has it been "cony capitalism" all this time, doing what helps the friends who already have a lot? And now the smell of it all is becoming overwhealming.

Gary Anderson 1 month ago Contributor's comment

There is a cult of inflation warriors. I think their legitimacy is uncertain.

Laurent Eliane 1 month ago Member's comment

Unfortunately, central banks have become the credit card of the kids (politicians) who put the responsabilities of disaster to the voters. As long as politicians are not accountable for their actions, they will not grow up (see the debate Trump Bidden).

As long as central bankcan print oaper gold, there is no insurance that they arenot printing more paper than the gold they have ( see the diif.of Germany to reappatriate a part of their solid gold.

This week was a perfect view of manipulation by central banks feeling, like this article, that hyperinflation is inevitable. So sharp discouragement of buyers, inflate zombie companies like Tulipe Musk with a horde of hypernationflagspeculator of irrealistic economic view. Tesla is not the only car but it is the "tulip" of our time.

Government with higher rate will bankrupt in no time. It is not an option for them. Hyperinflation is the only outcome with a collapse of the politics as we know today. Cash, like physical gold will be banned first as gov. cannot see who has what snd what they do with it. We enter totalitarian governments lead by corporates. The value of individual is reduce to numbers. No more, no less.

Lets go back to small villages nearly in autarcy where everybody help each other. This will survive.

Gary Anderson 1 month ago Contributor's comment

Like a boy calling wolf, inflation warnings lose power when they are continually published. Many just don't see inflation as a big threat anymore.