With 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 )