By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens,said John Maynard Keynes. As the central banks print like crazy to control interest rates on bonds they devalue the currency. While there are not many Bond Vigilantes there are many Currency Vigilantes.
Changes in the value of a currency directly affect "buying power" and the value of assets. Inflation, deflation, what is something worth? These are all very important questions to consider going forward. On Saturday, May 12, 2012, Vincent Cate wrote a post on his blog site titled, "Predicting the Timing of Hyperinflation" He starts by pointing out that debt over 80% of GNP and deficit over 40% of spending historically means a country is headed for hyperinflation. However, it may be a few years. He states that Hyperinflation is a positive feedback loop that is sort of a slow motion panic as the population comes to realize that the currency is going down.
While he concedes that it would be nice if we could predict the timing and onset of an inflationary panic with higher precision Cate gives possibilities he thinks are worth investigating. This post should be viewed as a list of ideas for hyperinflation researchers and not as an attempt to explain things. In this particular post, Cate goes on to give 48 signs of how or when inflation is about to raise its ugly head. His blog site is named "How Fiat Dies". Cate has a whole archive of articles from years of research studying inflation, what causes it, it makes for some of the best reading and information I have found over the years in researching the subject.
In another article, Cate writes about how hyperinflation has been his hobby for several years and how the subject is often viewed as theoretical and abstract. Still, it is amazing to watch things unfold. He then points to Japan as a real world example of how it works saying "It is like we have a ringside seat at a slow motion train wreck. Very strange and fascinating at the same time." Cate's articles cover a variety of subjects including how central banks are so aggressive on buying bonds that they are effectively controlling the price of the bonds. He states that because of this investors are not shorting bonds but instead focusing on currencies.
Cate says after hyperinflation hits Japan the myth that advanced Democratic countries are immune to hyperinflation will be destroyed. Soon after that people will realize that the Dollar, Pound, and Euro are not safe from hyperinflation and they will want to get out of bonds in these countries as well. This will result in a huge monetization in these countries and then hyperinflation. These four currencies make up about 95% of the central bank reserves backing other currencies. Faith in paper money, in general, will be shattered, Japan will be the first domino to fall, but not the last.
He thinks this hyperinflation cycle will happen far faster and much wider than others. In the past when hyperinflation occurred people did not understand what was going on, sometimes for years. When prices are shooting up people will quickly become interested in hyperinflation. With blogs, youtube, facebook, and other social media it will not be long before people realize the implications. Once people understand what is occurring the currency dies. So instead of taking three years, the cycle could go from start to finish in only three months. The big question is how soon will hyperinflation start in Japan, while we may debate that issue most of us will agree that we do live in interesting times.
Footnote; Your comments are welcome and encouraged. If you have time check out the archives for other posts that may be of interest. Below are two articles that delve deeper into inflation and what comprises or makes something valuable,