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Hyper-stagflation and Gold

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September 20, 2012 – Comments (3) | RELATED TICKERS: GOLD

I found a great article on Kitco's website that makes the argument for a hyper-stagflation scenario (or "stagflation in extremis") and its effect on gold. It was an excellent read. Here is an excerpt:

 

 

Stagflation In Extremis and The Explosive Rise of Gold

Stagflation is where economic growth slows, unemployment is high and prices rise.

Stagflation’s appearance in the 1970s was like an outbreak of three-headed children. It wasn’t supposed to happen. Prevailing wisdom—an oxymoron among economists—held that high employment and rising prices were economic handmaidens; and that, conversely, slowing economies and inflation were mutually exclusive.

In the 1970s, for the first time in capitalism’s history stagflation appeared, i.e. prices rose and economic growth stagnated; and, while economists would search for reasons to explain the apparently inexplicable, it was only because they avoided the obvious that they did not find the answer.

In August 1971, President Nixon upon the advice of Milton Friedman—the same Milton Friedman who erroneously taught Ben Bernanke economic contractions can be reversed by monetary expansion—ended the convertibility of the US dollar to gold.

......

 Removing gold from paper money led not only to an era of economic instability; but it would eventually bring about the collapse of capitalism itself. Capitalism needed gold-convertible money to instill confidence in its debt-based paper banknotes; and without gold, capitalism’s confidence game would collapse, a collapse Buckminster Fuller had predicted.

Capitalism’s demise could well result from today’s hyper-variant form of stagflation—stagflation in extremis. Instead of a slowing economy and rising prices as in the 1970s, today we are facing a contracting economy along with unceasing money printing by central banks.

As a result, hyperinflation, not inflation, may accompany today’s contracting economies. In that scenario, inflation may well become virulent and once that line is crossed there is no going back—an outcome Friedman and Volker didn’t consider when they removed gold from capitalism’s fraudulently leveraged foundation of fractional reserve banking and paper banknotes.

 

 Read the rest here: http://www.kitco.com/ind/Schoon/20120918.html

 

 

3 Comments – Post Your Own

#1) On September 20, 2012 at 11:58 AM, chk999 (99.97) wrote:

To turn ordinary garden variety inflation into hyper-inflation, you need one critical ingredient. And that is that most wages are automatically adjusted for price increases and that that adjustment happens multiple times per year. The only way you get that is when most workers are union employees with COLA updates built into the contract. This condition hasn't been true in the US for years now. Since most wages are adjusted annually, this slows the rate at which wage changes get passed through to prices.

 

The pure monetarist view of inflation, that more money equals a rise in prices is only true if all the money is circulating. Since the money being created by the QExs is mostly sitting as reserves in various bank accounts, it isn't having a huge effect yet. 

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#2) On September 20, 2012 at 9:31 PM, awallejr (85.43) wrote:

Chk999 beat me to it.  I just don't see a wage/price lockstep spiral like we had in the 70's any time soon.  That isn't to say I am bearish on gold.  I am not.  I urge all to own at least some in their portfolio.

Personally I own Sandstorm, which was one of my top three picks I made for the year.  I own ALXDF, which has been quietly inching up off its 3 cent low.  I picked up some BRD recently because it actually has a PE and I liked their recent indicated holdings report. And I own TYHJF although I don't know why I do heheh.

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#3) On September 21, 2012 at 6:20 PM, ChrisGraley (29.87) wrote:

The flaw there then is economic growth. If wages don't keep up with inflation, less consumer goods are purchased and stagflation is a greater possibility.

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