When the Inflationary Party is Over, Who Gets Left Holding the Bag?
Posted on 08. Nov, 2011 by Apollo in Money, Politics
The US Federal Reserve has embarked on an unprecedented bout of money printing, creating more new US Dollars in the past few years than it has ever created before. As the chart below shows, the monetary base of the US has been soaring to incredible heights. But in fact, if you look at the long term trends, the incredible money creation of the past year is only an acceleration of the problem which the US Fed and US Government began in the 1970′s:
What happened? It appears that the people in charge of our economy discovered that they can keep spending much more money than they take in in tax receipts by simply borrowing and printing more and more money. This accelerated through the 1980′s and 1990′s and gave us the stock market boom. When that inevitably crashed, they pumped even more money into the system – and people poured this into real estate and derivatives borrowing.
When real estate and derivitives crashed, the Fed and the US Government stepped down even harder on the money-accelerator to reach the precarious position upon which we now sit. What can they do next? How high can this go before something really bad happens?
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Looking back over history, when governments have behaved like this in the past, it did not end well for the average citizen. It is estimated that as of January 2010, each US citizen’s share of the total US debt is over $300,000 and growing every second at an accelerating pace. Is it even possible that the US could actually pay off such an outlandish sum? $300k for every man, woman and child in the country?
There really are only two outcomes for this situation – either the US will ultimately default on this debt and not pay it, or the debt will be reduced by accelerating inflation – in effect paying off the debt in ever-devalued money. This seems the more likely option and looking at the recent increase in money supply, seems to be the path that the US Fed and the US Government have chosen to follow.
One of the biggest risks to increasing money supply and accelerating inflation is that at some point, everyone realizes that their money is becoming worth less and less every day, and suddenly, no one wants it anymore. Then you end up in Hyperinflation, like Weimar Germany in the 1920′s or Zimbabwe today – and you get things like the 500 Million Mark note above and people with wheelbarrows full of money to buy a loaf of bread.
However, even if hyperinflation can be avoided, the steep increase in money created will almost certainly mean that our money becomes worth less and less, year after year, and it would be wise for us to plan ahead financially with this in mind.
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There are several strategies to deal with high US inflation, including precious metals & commodities investing, foreign currency diversification, foreign and domestic real estate, TIPs, etc. Consult a qualified financial adviser for help planning your strategy (of course, be careful to choose an adviser who actually has knowledge and experience with this type of investing and not someone who will simply stuff your money in the typical mutual funds).
Someone enjoyed a great party in the 80′s and 90′s creating and spending money like crazy. But now the chickens have come home to roost and it looks like Generation-X and our younger siblings and children will be the ones who are left to clean up the mess. The first step is to make sure that our own financial houses are in order and then, we can try to work together to solve this problem and get the US back on the right path.
Some suggested sites for further information:
Financial Sense Podcast
Goldseek Radio Podcast
The Daily Reckoning
The Mogambo Guru
The Korelin Economics Report
Marc Faber’s Gloom, Boom, Doom Report
This information is general in nature and should not be construed as financial advice. Consult your financial planner for more information based on your individual situation.
TommyG
08. Jan, 2010
Yikes! That chart does seem scary, but I have heard from economists that the increase in money supply is needed since the velocity of money is so slow right now. Basically, no one is lending so by pumping in money, the Fed will keep the economy going. Then gradually, as the economy picks up, the Fed pulls the money back in. So hopefully, inflation will be avoided. Let’s keep our fingers crossed….
Apollo
08. Jan, 2010
Well that sounds good in theory, but I think the guys in Weimar Germany, Zimbabwe, Argentina, etc. and etc. had the same idea. So they may be able to keep the game going for some time longer, but I don’t see how all that debt is ever going to be paid off. The US economy seems to need more and more new money and new debt just to keep going.
I hope you are right though for all of our sakes – at the same time I am investing for my family to protect against inflation. — Apollo
Carlos
13. Jan, 2010
1973 is when the US stopped the Gold standard. That is when the chart starts moving up.