The Two Prominent Scenarios

The global economy appears to be moving toward one of two scenarios:  hyperinflationary depression or deflationary implosion.  The central banks will side on the hyperinflationary depression route by printing money at an ever-increasing rate.  They have no tools to combat a deflationary implosion.  This has the potential of getting ugly out there.  It might be wise to get as liquid as possible.  Keeping about 30 days of cash on hand is not a bad idea if you can swing it.

Hyperinflation results from a rapid and continuing increase in the supply of money, which occurs when a government prints money or creates credits in bank accounts, instead of collecting taxes to fund government activities.  Some view hyperinflation as being 100% inflation in one year.  Less than that is called high inflation.  I would suggest that hyperinflation varies from country to country based on historic levels.  I would call 30% inflation in the U.S. at the “hyper” level.  Couple that with a severe drop in economic activity and you have a hyperinflationary depression.

On the other hand, a deflationary implosion is where the money supply contracts at an increasing rate and the population quits spending, fearful of the future.  Economic activity dries up and spirals to lower levels.  The diversity of the U.S. economy would slow the process initially.  However, as executives see a drop in demand, they would respond by contracting their operations as quickly as possible.

Fear and uncertainty cause investors to rapidly move toward a position of preserving their wealth.  Gold and silver have been the historic investments of safety.  Currently, Central Banks around the world are increasing their gold reserves.  China and India have made noteworthy increases to their reserves.  Other countries are now considering a move to take possession of the gold reserves held at the NY Federal Reserve.  The EU wants to loan their members money with their gold as collateral.  I guess gold is no longer a “relic” in the minds of the central banks.

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