Lately, I’ve run across a number of articles warning people to prepare themselves for hyperinflation in the United States. Inevitably, these warnings are accompanied by comparisons to Germany’s Weimar Republic and its infamous bout with hyperinflation in the aftermath of World War I. But is this really something to be worried about?
To answer that question, we must first understand what hyperinflation is. In simple terms, hyperinflation is a rapid increase in the general price of goods and services, brought about as a result of a rapidly expanding money supply.
Given the current worldwide credit crunch and subsequent actions by the Federal Reserve, a number of people are predicting a period of hyperinflation for the United States. These commentators point to the U.S. Treasury, the Federal Reserve, and the massive amounts of “liquidity” each institution is injecting into the marketplace. Their theory rests on the assumption that in its drive to end the current credit crisis, the federal government is essentially printing money in order to stimulate economic activity. Since the U.S. dollar is a fiat currency, meaning its sole value is derived from a holder’s faith in the promise of the U.S. government to back it up, no limits exist on how much currency the government can print. The theory goes that as the U.S. government prints more and more dollars and extends more and more credit, the value of its fiat currency is eroded and the world is flooded with an excess supply of U.S. dollars. As a direct result, it takes more and more U.S. dollars to purchase goods and services.
Based on these assumptions, quite a few websites are advising readers to be on the look out for hyperinflation and to prepare themselves and their families accordingly. As such, people are being encouraged to buy gold, silver, and other precious metals as a hedge against hyperinflation. This is sound advice if the diagnosis of hyperinflation is correct. But unfortunately, it’s not.