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Is Hyperinflation Coming? What Can You Do about It?

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inflationWith the Federal Reserve engaged in an asset purchase program designed to increase the money supply in an effort to stimulate the economy, many are starting to worry about inflation.

Inflation represents a decline in the purchasing power of your dollar. Essentially, it is a rise in prices. However, not only are many consumers starting to worry about protecting themselves against inflation, but they are also concerned about hyperinflation.

What is Hyperinflation?

“Hyperinflation results when governments print too much money, which is to say that governments create money at a faster rate than the economy is growing as measured by GDP,” says Dr. David McClough, Assistant Professor of Economics at Ohio Northern University.

However, even though the Federal Reserve is creating money through its purchase programs, McClough doesn’t think that hyperinflation is a real threat right now. “Although there is a key element in place for hyperinflation, hyperinflation remains an unlikely event in the U.S. as long as lenders are willing to finance government deficits.”

“Currently, bond markets indicate that this concern is premature,” McClough continues. “Indeed, with 10-year maturity bonds hovering around two percent, it is clear that the lenders to the U.S. do not foresee any risk of hyperinflation. If lenders were concerned with inflation or hyperinflation, they would demand higher interest rates to compensate for the risk.”

As long as lenders are convinced that the U.S. can handle its debt, inflation can be kept under control.

How Can You Protect Yourself from Hyperinflation?

“Hyperinflation results from too much money,” McClough explains, “but money is just a medium of exchange. As prices rise and buyers pay more, sellers receive more. If prices rise faster than costs, companies derive substantial profits so certain stocks might be an effective way to hedge against hyperinflation.”

McClough also suggests buying goods before prices rise on them. “When prices rise and the goods remain unchanged, it is wise to convert money into goods before the price increases,” he explains. “Buying durable consumption goods is another way to protect oneself from the deteriorating effects of inflation.”

Brian Luftman, an ex-commodity trader and founder of the American Farm Investors, agrees that tangible assets are desirable as hedges against inflation. “It’s hard to imagine rapid hyperinflation happening in the U.S., but there are feasible events that could cause a quick loss of confidence in global fiat currencies,” he says.

“For protection, I turn to real inflation-proof assets,” Luftman says. “My favorite are gold and silver coins. They are difficult to store with good security, but it beats investing in gold through an ETF, which could decouple from the gold bullion price in a dollar crisis.”

Luftman also says that invests heavily in farmland. “Instead of investing in grain or other commodity futures, I like growing grains on a farm every year and capturing higher returns as prices increase,” he explains. “Again, grain futures are dollar denominated and electronic. Having the real thing is always better, in my opinion.”

Finally, Luftman invests in foreign currencies of countries he things are fiscally strong, including Australia, Norway, and Canada. “These currencies will gain value if people lose faith in the U.S. dollar,” he says.

What do you think? Is government money-printing getting out of control? Are you afraid of hyperinflation? How are you protecting yourself?

(Photo: Chris Breeze)

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4 Responses to “Is Hyperinflation Coming? What Can You Do about It?”

  1. It’s not hyperinflation that bothers me so much as Argentina-style “stagflation” at rates above 10% per year. We don’t need 30%+ inflation for it to really hurt Americans.

  2. As is the case with most unprecedented actions, no one can predict with much confidence the consequences of the worldwide ongoing quantitative easing by central banks. But in my view, the foremost challenge to prosperity–certainly in the U.S., but also in many other countries–is the persistent refusal by individuals and governments to live within their means. Some sort of reckoning is inevitable, in my opinion. Unsustainable systems will tend to work their way toward a sustainable equilibrium–the path may or may not be voluntary, and may or may not be catastrophic for humans, only time will tell.

  3. Ben says:

    Excellent Article! Important questions! Certainly the out-of-control printing of money, staged as “Quantitative Easing” is bad, bad, bad policy.
    McClough interprets bond market indicators to mean we are not in trouble. I disagree. But even if I agreed with his assessment I would suggest that we not wait until we are “in trouble” to consider action. For instance there has been serious seismic activity in lender confidence. Consider these indicators: On August 6th, 2011, S&P deprived the U.S. for the first time of the triple-A rating it had held for over 70 years. Their justification was that the budget deal brokered in Washington was not addressing the fiscal disaster we know as the US Economy. Every few months Washington has a crisis because some want to keep spending trillions that we don’t have and a few have the courage to try to block it. The status of the U.S. dollar as the only world reserve currency is under direct threat. A look at history will show that a dollar today will buy you roughly 97% less of the same material goods than it did in 1913. How much deeper can we go and still have people saying “nothing is wrong.”

  4. admiral58 says:

    i think it’ll be slow going


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