Monday, February 23, 2009

Dealing with Hyper-Inflation

The main problem in a hyperinflation is dealing with the collapse of the value of money, one of the main functions of money.

A short sentence on monetary theory that you must understand to proceed: Money has two jobs: 1) to facilitate commerce and 2) to store wealth. In the classic gold standard economy, gold held value, while real bills facilitated commerce. In the modern period, with fiat money divorced from the gold standard, American economic policy has been to uphold the value of the dollar as much as possible, while also printing enough money to provide the basis for international commerce. Our dollar, backed by the power of the American economy, substituted for the liquidity of the traditional real bill system, while the rock solid value of the dollar substituted for the stability of gold as a store of value.

However, that game is now over. Our government, under the goal of facilitating commerce (i.e. "stimulating the economy") has embarked upon a path of money-creation, through bailouts to banks and quantitative easing, which all boils down to one thing: money creation. Not only is the rest of the world along for the ride because the role of the dollar as the international monetary reserve, but all other central banks are doing the exact same thing at the exact same time. Simultaneous with a global economic contraction, the world is being flooded with money. The end result is easy to forecast: wild inflation and financial bubbles resulting from over-speculation and malinvestment. The cost of things will skyrocket as the value of money falls, i.e., everything will cost a lot more. We will all continue to get poorer with more and more unemployed as the business climate deteriorates in the atmosphere of unpredictability that is created by inflation, bubbles, and malinvestment.

The person solution to the problem of a collapsing dollar is to quarantine its effects. In short, to remove yourself from the dollar as a store of value or medium of commerce. On the one hand, that means moving your wealth out of dollars and into real objects that hold their value or even appreciate in value, like gold, cigarettes, ammunition, or whatever. You can also become part of an economy not based on the dollar. You may have heard commentators talking about a return to bartering, that is what I am talking about. Commerce without dollars is possible, but only if it is orderly and organized. The real danger in dollar collapse is the chaos and inactivity that comes from people not knowing what the hell is going on or what to do about it. Becoming part of a bartering community before the dollar collapse will help shield you from the pernicious economic effects that will come.

The use of real bills offers a solution to the non-dollar economy, which I will explain more in the next post.

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