Why hyperinflation maybe inevitable

by elimc

First of all, I am going to say that there are definitely people who have a financial interest in selling fear. I would be wary of anyone who claims to know the future.

Having said that, I am going to be a contrarian and say that it is possible that we can have hyperinflation at some point. I say this because I have a fundamental question about whether or not democracy can coexist with free market capitalism. There is an area of economics called Rational Choice Theory. Most rational people don’t like free markets. Even rich CEOs don’t want their own corporations to exist in a free market. They want their competitors to live in a free market, and they want their own companies to be subsidized by the government. Now, think about someone who pays no Federal Income tax. The person who pays no Federal Income tax receives benefits from the government, at no cost. Mitt Romney was right. When 47% of the population paid no Federal Income tax in 2009, they will rationally decide to vote for the politicians who promise free money and low taxes (I’m not promoting any politicians on either side of the aisle, as their self-interests are rarely aligned with my own). This may be bad for our country in the long term, but it is completely rational for the voter who is receiving short term gain.

Since 1975, the United States has spent more on entitlement spending than on the rest of the budget combined. The majority of government expenses are cash transfers. With Social Security, old people are taking money from the labor of their grandchildren, who will likely be poorer than them. This is known as inter-temporal maximization. It is rational for the elders to vote for a program that will burden their grandchildren. In fact, their grandchildren could not even vote to stop Social Security, because they were not born yet! This is an example of democracy is creating an ever larger government.

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The size of the government continues to grow. Medicine, housing, and education have all skyrocketed in price and created massive inequality. This is due to actions by the government. Stopping these problems would require the government to get out of these sectors. For example, all economists from both sides of the aisle agree that the Mortgage Interest Deduction needs to be eliminated. However, no politician will ever do it, because it goes against their rational self-interest of keeping their job (the voters would vote them out). Because of Rational Choice Theory, we can guarantee that the goal of politicians will be to hold hearings on steroids in baseball, and giving ribbon cutting ceremonies. The unpalatable alternative to these insignificant actions is to try to fix actual problems in society by reforming populist programs.

If you follow the linear trajectory of increasing government interference in the free market over the last 100 years, and if you understand Rational Choice Theory, you realize the inevitable conclusion is a cumbersome bureaucracy where business only succeed or fail with the blessing of politicians. Because GDP growth is so low, in this scenario, The Federal Reserve is forced to print money to make up for policy failures in DC. But, this merely creates more inequality (because of overinflated asset prices) and hides the lack of real GDP growth. When enough years pass by, and enough debt builds up, people start to lose confidence in the dollar. Because GDP growth only comes from printing, people get concerned that the dollar can truly be the reserve currency of the world. If we reach this point, the gold bugs will be vindicated.

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Is the US going to have hyperinflation? We don’t know. 100 years ago, The Federal Reserve didn’t even understand how to manage a currency that wasn’t backed by gold. So, I doubt we have everything figured out. However, we really don’t know when/if hyperinflation will happen. However, the market can stay irrational longer that you can stay solvent. So, even if you are correct that hyperinflation is coming, and you hedge your position with gold, you might die of starvation before the fiat apocalypse happens. If you watched Too Big to Fail, there is an Autistic character who figures out housing is overvalued before anyone else. However, his fund almost goes bankrupt waiting for the crisis to happen, and he has to freeze jittery investors accounts so they won’t withdraw their money from his fund. You don’t want to predict a crisis too early.

Here is a strategy if you believe in hyperinflation: put 5% of your money into precious metals or cryptocurrency. If hyperinflation of the US dollar occurs and precious metals/cryptocurrency goes up 20X, you are still hedged 100% of your original position. Of course, at that point, it might not matter, because society could turn into a post-Katrina situation where people are killing each other for ice cubes. Wealth might simply be whoever has the most guns and water at that point.

There have been a number of currency collapses over the years. I have a $25 million dollar bill from Zimbabwe. But, it is worthless, because there currency collapsed a few years ago, and now no one accepts Zimbabwe dollars for anything, except maybe as a gag gift. banknoteworld.com/shop/Zimbabwe-100-Trillion-Dollar-Banknote.html?gclid=Cj0KEQjw4_DABRC1tuPSpqXjxZwBEiQAhMIp62MC2yQMiJiYE6gkXccYLp6z-u5bW4Mj7LT9Uyts0_0aAhWg8P8HAQ