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Hyper-stagflation and Gold

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 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