The Breakdown on Inflation, Hyperinflation, and the Role of Gold and Silver
May 1, 2013 9:44 am
This same scenario has occurred in almost every other aspect of life-food, clothing, services, medication, etc. We typically label the cause of this as the rising cost of living, but you can also look at from another perspective-the diminishing value of currency. This process is known as inflation.
Inflation, as defined in the dictionary, is “a persistent, substantial rise in the general level of prices related to an increase in the volume of money and resulting in the loss of value of currency.” In other words, the money that you have will not go as far as it used to. Governments measure this loss in value and increase in prices with the rate of inflation, which reflects the annual percentage that goods and services have increased in cost since the previous year.
You may be wondering, “How can money change value? If you have one dollar, won’t it always be worth a dollar-no more or less?” The answer is twofold: yes, one dollar will never equal five, or ten, or any other amount, but the value of that dollar fluctuates in the sense of what it can get you.
The rising cost of living and the loss of value in currency may be a bad thing, but inflation does play an important and crucial role in the economy, which is why it is a necessary evil. For one, inflation ensures that banks are able to adjust interest rates in order to protect against recession. It also fosters non-monetary investments.
If we can’t do without inflation, then why not makes sure there is enough money to go around in order to cover the rising costs? This kind of option is referred to as hyperinflation, and is not a viable solution.
Hyperinflation occurs when the government prints so much currency that its value drastically declines, and as the name suggests, causes an extreme case of inflation. The market is flooded with too much currency, and since there is more money going around, the value of it diminishes at a more rapid rate than natural.
Post World War II Germany is a prime example of hyperinflation.
In an effort to pay off their debt caused by the war, the government printed large sums of currency, which ultimately backfired. The flooded economy reduced the value of the money and caused the cost of living to skyrocket. For example, at that time, one U.S. dollar was worth 4 trillion German marks, and one pound of meat cost 36 trillion marks-much higher than the German population was able to afford, resulting in mass poverty and starvation.
With the current debt of the U.S. at an estimated $16.5 trillion (as of Feb. 9, 2013), and counting, similar concerns of hyperinflation are arising as the country is pressured to balance the national budget.
Hyperinflation is where gold and silver bullion comes into play.
Throughout history, gold, silver, and other precious metals have maintained consistent purchasing value. Paper currency is unstable because the value people ascribe to it is in a state of constant flux. But gold and silver has been proven to hold a fairly stable rate of value and slow level of depreciation, despite fluctuations in the market.
Our government, in addition to many others around the world, operates under a fiat monetary system, which is basically money that is backed by the government who determines its value. Unfortunately, the value of the governments backing can fluctuate, thus affecting the value of its currency and generating high inflation rates.
Governments who use the gold standard system exchange paper notes that are not innately valuable, but rather backed by gold, meaning the notes can be turned in for specified quantities of gold. It’s essentially buying and selling with gold, without the hassle of carrying it around in your pocket or purse. Gold backing, rather than the fiat system, results in a much more stable value rate, and countries that use the gold standard system rarely experience an inflation rate over 2%.
Investing in precious metals allows people to retain the value of their wealth, or even increase it. Oftentimes, when the value of currency falls, there is an inverse reaction with gold and silver-their values soar. When inflation undermines the worth of the dollar, investors repeatedly look to precious metals as an alternative, consequently increasing its demand (and value).
In any monetary system, inflation is inevitable, and to some degree beneficial, but it also has its downsides. For people looking to safeguard their money from the fluctuating value of fiat currency, gold and silver bullion is the best option.
This same scenario has occurred in almost every other aspect of life-food, clothing, services, medication, etc. We typically label the cause of this as the rising cost of living, but you can also look at from another perspective-the diminishing value of currency. This process is known as inflation.
Inflation, as defined in the dictionary, is “a persistent, substantial rise in the general level of prices related to an increase in the volume of money and resulting in the loss of value of currency.” In other words, the money that you have will not go as far as it used to. Governments measure this loss in value and increase in prices with the rate of inflation, which reflects the annual percentage that goods and services have increased in cost since the previous year.
You may be wondering, “How can money change value? If you have one dollar, won’t it always be worth a dollar-no more or less?” The answer is twofold: yes, one dollar will never equal five, or ten, or any other amount, but the value of that dollar fluctuates in the sense of what it can get you.
The rising cost of living and the loss of value in currency may be a bad thing, but inflation does play an important and crucial role in the economy, which is why it is a necessary evil. For one, inflation ensures that banks are able to adjust interest rates in order to protect against recession. It also fosters non-monetary investments.
If we can’t do without inflation, then why not makes sure there is enough money to go around in order to cover the rising costs? This kind of option is referred to as hyperinflation, and is not a viable solution.
Hyperinflation occurs when the government prints so much currency that its value drastically declines, and as the name suggests, causes an extreme case of inflation. The market is flooded with too much currency, and since there is more money going around, the value of it diminishes at a more rapid rate than natural.
Post World War II Germany is a prime example of hyperinflation.
In an effort to pay off their debt caused by the war, the government printed large sums of currency, which ultimately backfired. The flooded economy reduced the value of the money and caused the cost of living to skyrocket. For example, at that time, one U.S. dollar was worth 4 trillion German marks, and one pound of meat cost 36 trillion marks-much higher than the German population was able to afford, resulting in mass poverty and starvation.
With the current debt of the U.S. at an estimated $16.5 trillion (as of Feb. 9, 2013), and counting, similar concerns of hyperinflation are arising as the country is pressured to balance the national budget.
Hyperinflation is where gold and silver bullion comes into play.
Throughout history, gold, silver, and other precious metals have maintained consistent purchasing value. Paper currency is unstable because the value people ascribe to it is in a state of constant flux. But gold and silver has been proven to hold a fairly stable rate of value and slow level of depreciation, despite fluctuations in the market.
Our government, in addition to many others around the world, operates under a fiat monetary system, which is basically money that is backed by the government who determines its value. Unfortunately, the value of the governments backing can fluctuate, thus affecting the value of its currency and generating high inflation rates.
Governments who use the gold standard system exchange paper notes that are not innately valuable, but rather backed by gold, meaning the notes can be turned in for specified quantities of gold. It’s essentially buying and selling with gold, without the hassle of carrying it around in your pocket or purse. Gold backing, rather than the fiat system, results in a much more stable value rate, and countries that use the gold standard system rarely experience an inflation rate over 2%.
Investing in precious metals allows people to retain the value of their wealth, or even increase it. Oftentimes, when the value of currency falls, there is an inverse reaction with gold and silver-their values soar. When inflation undermines the worth of the dollar, investors repeatedly look to precious metals as an alternative, consequently increasing its demand (and value).
In any monetary system, inflation is inevitable, and to some degree beneficial, but it also has its downsides. For people looking to safeguard their money from the fluctuating value of fiat currency, gold and silver bullion is the best option.
Patrick T Langley
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