SGM Metals LLC: UBS 'Hyperinflation is a Real Risk We are Watching at this Point'

July 20, 2012 - PRLog -- UBS reports: [ Global Risk Watch: Hyperinflation Revisited

   Hyperinflation: Paper money only has a value because of the confidence that the money can be exchanged for a certain quantity of goods or services in the future. If this confidence is eroded, hyperinflation becomes a threat. If holders of cash start to question the future purchasing power of the currency and switch into real assets, asset prices start to rise and the purchasing power of money starts to fall. Other cash holders may realize the falling purchasing power of their money and join the exit from paper into real assets. When this self-reinforcing cycle turns into a panic, we have hyperinflation. The classic examples of hyperinflation are Germany in the 1920s, Hungary after the Second World War, and Zimbabwe, where hyperinflation ended in 2009. Indeed, hyperinflation is not that rare at all. Economist Peter Bernholz has identified no fewer than 28 cases of hyperinflation in the 20th century.

Our monthly global inflation barometer tracks the risks to our global inflation outlook as part of our “Global risk watch” series. Apart from deflation and high inflation, we identify hyperinflation as a third risk to our view of moderate global inflation rates.

In particular, hyperinflation is not an escalation of "normal" inflation. "Normal" inflation denotes a steady and continuous decline in the purchasing power of money, which is ultimately attributable to an increase in the money supply.

Hyperinflation, on the other hand, is a collapse of confidence in money, which results in an accelerating flight out of money into real assets and goods, and thus an accelerating loss of the purchasing power of money.

Ultimately, hyperinflation is a fiscal phenomenon; that is, hyperinflation results from unsustainable fiscal deficits. Peter Bernholz notes that historically, cases of hyperinflation have been preceded by the central bank monetizing a significant proportion of the government deficit.  After investigating 29 hyperinflationary episodes, 28 of which happened in the 20th century, Bernholz writes: "We draw the conclusion that the creation of money to finance a public budget deficit has been the reason for hyperinflation."

When government deficits become unsustainable, austerity is often the first reaction. Austerity is deflationary, recessionary, and painful. If the austerity necessary to balance the budget is deemed to be too painful, a government can either choose to default or to inflate the currency.

If the country concerned has its own currency, it will usually choose to inflate it. If government finances do not improve sufficiently, confidence in the currency may evaporate at some point and hyperinflation may arise. Hyperinflation can be viewed as the result of a failed attempt at printing money to avoid the deflation that would be caused by austerity.

In our view, there is some risk that hyperinflation could arise in one or more large currencies. As a consequence of the burst credit bubble, we are seeing unsustainable government deficits in many large countries. Deleveraging and austerity are deflationary and recessionary. Central banks around the world are fighting these deflationary and recessionary tendencies by massively easing monetary policy. Having exhausted the interest rate instrument, global central banks are increasingly turning to the alternative measures of quantitative and qualitative easing ]

The fact that the global banking mega banks are identifying the threat of hyperinflation as a possible outcome to all of the endless inflationary monetary policies of the western banking system is reason enough for you to stop and realize “if the mega banks are worried about HYPERINFLATION than I should certainly take notice of the current level of INFLATION that could eventually morph into this hyperinflationary scenario”.

When the announcement of QE3 is unveiled we will see movements in all markets to reflect this tidal wave of newly printed US dollars and this will benefit the precious metals as dollar devaluation is inherently good for monetary assets such as gold & silver. Using history as our guide, remember that QE1 resulted in these metals practically doubling in price and the same was true of the introduction of QE2 which again saw gold & silver reaching all their current all time highs. So if EVERY piece of data pertaining to the US economy is negative, wouldn’t it stand to reason that we will need yet another Keynesian injection in the form of QE3 prior to the election so President Obama will have some blip on the radar of economic data to run for re-election on? Wouldn’t it make sense to hear a stump speech that goes a little something like this: “I was handed a disaster that forced me to do the unpopular thing in order to keep us from falling into the worst depression since the Great Depression. After 3 long years of fighting off this depression we are finally starting to see some positive signs of economic growth, let me stay in charge of this recovery and finish what I started because the alternative is to go back to the failed policies of the past decade that got us into this crisis to begin with”. Sound about right? Maybe its just that easy to see what is being telegraphed and therefor just that easy to protect yourself from the coming shock to the markets?

As stated above: If the country concerned has its own currency, it will usually choose to inflate it. We have our own currency and we have chosen to inflate so it may be wise to take heed of what this global mega bank is warning of and prepare for this possible future. At the very minimum we should take note of the rising prices everywhere and realize that the cost of living is rising and it would be wise to offset that currency devaluation. This is done simply by suspending your purchasing power through the acquisition of gold and silver to offset this erosion of purchasing power in the currency of the land. Maybe this is why China has signed trade agreements with a 147 nation alliance to move away from the dollar and trade in the Chinese currency moving forward. In case you are adding up the number of nations following China’s lead, its practically every nation that is not a western power house that actually benefits from the inflationary western banking system like BOE, ECB & the FED. If we fall into a scenario where the world turns its back on the dollar completely in the interest of protecting their economies from our inflation the world can become a lonely place very quickly. This is where the threat of hyperinflation becomes a real threat as mentioned above and the herd runs, not walks towards hard money assets like gold and silver to protect what is left of their purchasing power before the wildfire of hyperinflation spreads to their wallet.

Wake up to the looming threat of this whole inflationary solution to excessive debt crisis and make your “Plan B” in physical gold & silver bullion today. There is a reason that banks hold hundreds of metric tons of gold in their vaults and not washing machines or bags of rice. Global currency wars always leave severely wounded combatants and they are never really those who are battling, but those who are innocent bystanders who are devastated in the wake of the desperate actions of those behind the printing press. Don’t be a collateral damage statistic. Move a portion of your assets into gold & silver bullion today and take comfort in knowing that you will be at a minimum truly diversified into an asset that has gained on average 12% annually, and that was over a decade for the most part that didn’t have bailouts and stimulus that totaled in the tens of trillions. I can’t wait t see what the average earnings will be for the metals at the end of the next decade, in my opinion they will be higher than the past decade was! Tick, tock.