Time is Running Out to Learn From History How To Preserve Wealth
By Craig R. Smith
Like the citizens of Wiemar, Germany nine decades ago, most Americans today simply fail to notice the connection (and consequences) of creating vast quantities of money which always leads to debasement.
"The first impulse for Middle Class Germans in 1920 was to hold onto as any Marks they did not immediately need to spend...this slowed down the velocity of the outpouring of paper money," I wrote in my 2010 book Crashing the Dollar: How to Survive a Global Currency Collapse.
But, by the summer of 1922 the money velocity took an almost right-angle turn upward as people began spending their Marks faster and faster. The Wiemar politicians and Reichsbank central bank responded quickly by frantically printing more and more money trying to keep ahead of the inflation they, apparently unwittingly, were causing.
Astute readers will notice we today face a frighteningly similar situation in both the U.S. and Europe. Today the trillions of dollars in stimulus is like a dangerous inflationary drug, a snake venom that is about to enter the economic bloodstream.
Two Scenarios: High Inflation vs. Hyperinflation
Today we are following the exact same path Wiemar, Germany followed only on a global scale. As I see it, there are two probable outcomes; high inflation (similar to 1979-80 with double-digit inflation and interest rates), or hyperinflation which could end the dollar's reign as the reserve currency of the world.
Scenario #1 - High Inflation
Let's assume the U.S. continues with an anemic growth rate of just 1.5%. The Federal Reserve will likely continue to expand their failed policy of quantitative easing, in effect printing more dollars.
Scenario #2 - Hyperinflation
Let's assume that the U.S. makes progress and reaches a 5% growth rate. The $3 trillion currently sitting on corporate balance sheets, together with the $8 trillion consumers are sitting on will total $11 trillion. When the $11T in pent up demand is injected into a $15T economy in a short time frame, we could see an almost immediate doubling of consumer prices, which could easily morph from high into hyperinflation.
Hyperinflation hurts the poor, elderly and those on fixed incomes the most. Hyperinflation is defined as a price increase of 50% or more in 30 consecutive days. The enclosed chart shows what happened to the buying power of the German Mark, which eventually collapsed after reaching a million-to-one ratio compared with a gold Mark.
So whether we are in for slow growth or rising growth, both scenarios will create inflation, the only question is whether we are in for 5%, 10%, 20% or 50% inflation.
This anticipation of higher inflation is what is driving gold prices up today because the world knows that gold alone is able to maintain a store of value.
Gold has served as the world's ultimate form of inflation-proof money for thousands of years. Today we are witnessing a return to the gold standard by individuals and institutions regardless of whether our government acknowledges it or not.
Every smart investor and saver needs to come to grips with the reality that inflation is the only option central banks and governments have to solve our current debt crisis.
We have told our clients for many years to buy gold before it's too late. Now I am sounding an alarm to do it before the clock strikes midnight on 12.31.12 and we face another fiscal cliff - likely sending the dollar crashing.
Today all roads are leading to gold as the best wealth insurance on earth.
12 warning signs of hyperinflation