Deflation in gold, hyperinflation in dollars

I've been putting off writing my Grand Unified Theory of the Coming Monetary State Change post for a long time, and I've given up. So I'll do a short summary post instead.

Forget the words "inflation" and "deflation" for a moment. These are meaningless concepts. Think instead about "debasement" and "deleveraging."

What we've had over the last 30 years (100 years?) is a massive build-up of debt. Debt is a form of leverage. The way excess debt is resolved is deleveraging. In deleveraging, capital has to be sold off to pay back debts. Defaults happen. Personal bankruptcies occur. Value transitions from capital goods to value's most liquid form: money. Nature's money is gold.

Summary: The coming deleveraging will transfer value from capital to gold. Now, back to the popular price-level words. Deleveraging is essentially deflation in terms of money (gold).


In our fiat system, the powers that be are intent on preventing falling prices and paying off debts with useless dollars. Thus, they have the printing presses running day and night. They think they can control the amount of debasement that occurs, but like any central planner, they underestimate their limitations. Value is subjective, and the value of dollars is dependent not just on how many are in circulation, but how much the rest of us desire them.

Summary: The dollar will be debased nearly completely.


Super summary: The future involves a deleveraging carried out with respect to gold and a debasement of the dollar. In the parlance of the times, deflation in terms of gold, and hyperinflation in terms of dollars.

SuperDuper summary: The price of most things in dollars should increase. The price of most things in gold will decrease, or said another way, gold will increase in value faster than pretty much everything else.


Corollary: The prevailing disagreement among people who follow this stuff seems to be inflation vs deflation. So which is it?


This is the wrong framework. They're both correct. The underlying structural change to the economy involves a deflation, but it's deflation priced in gold, not dollars. At the same time, the Fed's money printing will cause a hyperinflation priced in dollars. The dollar price of gold will rise faster than the dollar price of anything else.

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Shamelessly picking your

Shamelessly picking your brain. Aside from gold, what would be a good place to invest your money, not as an investment but purely as a store of value, i.e. to reduce the risk of value loss? For example, supposing you have a hundred thousand dollars, would it be a good idea to buy the currency of some foreign nation? Or are all the currencies insecure?

Gold is the ultimate hedge

Gold is the ultimate hedge against inflation and to a certain extent, deflation. The fiat currencies are simply doomed, so priced in gold, they all lose value, thus inflating the price of gold. It is the ultimate arbiter of true value. If a currency loses value to gold (ie. gold gains in value in that currency), then that is a verdict of sorts. Gold pays no dividends, has negligible commercial involvement. Its value stems solely from its relation to fiat currencies. The run up in price has been at the expense of the dollar. If you priced it in some other commodity, say wheat, it is not nearly as impressive. Gold is a holding pattern. It gains or loses to very different circumstances then supply and demand, though that does play into it as well. I find gold to be fascinating to watch and have profited handsomely from my fascination.

Not really sure

Every single currency in the world is a fiat currency. As the US debases the dollar, other countries are trying to follow suit to try to keep their exports attractive. This is a race to the bottom.

Commodities, in general, are too dependent on the economy to be stable. Sure, they may do well, but IMO, they're a greater risk than gold. (Gold is not a commodity, but rather, money.) Also, they're hard to store. Where would you keep thousands of barrels of oil or bushels of wheat?

US bonds are in a bubble.

I think foreign real estate would be a good option, but the places I looked (Asia) seem very expensive.

Gold is the only thing that seems attractive. It seems the least risky value preserver of all to me.

Also, I would stay away from all paper assets, including paper gold (GLD). All paper assets are at risk of blowing up leaving you with just a piece of paper. I will go so far as to say that GLD absolutely WILL blow up some day.

Disclaimer: I have about 25% of my net assets in physical gold. I have cash ready for at least another 25%, but I'm trying to hold out for lower prices.

Buy any ETF index fund, DIA,

Buy any ETF index fund, DIA, QQQ, or a combination of foreign ETF's. I think it impossible to purely separate investing from inflation, since all assets and currencies are affected by both. Avoid gold and buy any asset (non-bubble). S&P 500 would be a good bet, not US commercial or residential real estate, not treasuries not bonds.

My opinion, US Market is not rising, dollar is falling. From rest of world perspective, they cancel out.

don't confuse money inflation & price inflation

There has been no price inflation because the money is not being used to buy consumer goods. The money is being used to send US jobs off shore.

Being international corporations and banks, our owners don't care what specie of money they make money in. The purpose is to destroy the American middle class. When the US population is again 70% working poor and 10% steady unemployment labor will again be an international commodity and local wages will depend upon local productivity.

Time is money. Does anyone think the situation would be different if there was a single world currency? Right now the money traders determine the value of the various currencies so that any major currency will buy the same amount of stuff in any major country. In other words, if one buys 1000 bbls of oil in New York or London it doesn't matter if it is bought in dollars or pounds because the exchange rate balances the deal.

Imagining Hyperinflation

I found this description of Chilean hyperinflation useful for my imagination. Also, I believe the print version of "Hyperinflation, Money Demand and the Crack-up Boom: Revisiting the Weimer Republic Experience" by Thorsten Polleit showed tables of average household budgets during the period prior to and during the crack-up boom. I'll see if I can find a copy online to link to.

As I understand it, when trust is destroyed in the media of exchange and agents of the State (as well as rampant private criminals) try to commandeer the vanishing economy, there is a severe disruption to the division of labor. Most economic activity is reduced to the basic necessities of acquiring food and fuel. All other goods drop in value relative to these as people swap them in desperation to stay alive.

A bumper sticker gave me the best understanding of what to expect:

Paper money-->Bubble-->Recession-->
Stimulus-->Inflation-->Price Controls-->
Shortages-->Riots-->Troops on Your Streets.

Precious metals are good choices to become reestablished as money--the most easily traded good--but only after enough trust exists amongst market players that people will risk swapping anything they consider of value for an abstract object.

I haven't been to Chile since

I haven't been to Chile since 1974 and at that time my main interest was toys, but I briefly visited Buenos Aires during the eighties hyperinflation. At that time we did as apparently the locals did: we kept our money in dollars and exchanged dollars for pesos for no more than a few days' worth of purchases. I remember the prices perceptibly rising either from day to day or after a few days, definitely from week to week. There was a gray market in currency exchange. Apparently it was not entirely legal, but at various street kiosks pesos could be had in exchange for dollars, and the exchange rate was reasonable. The bit of the economy that I encountered seemed to be functioning well enough - I don't remember there being empty shelves or anything like that. So as a long-term store of value the dollar was being used, and the peso was used for daily purchases.

From Wikipedia on the Argentine hyperinflation:

The overall impact of hyperinflation: 1 (1992) peso = 100,000,000,000 pre-1983 pesos.

So if you had worked hard all your life and retired in 1980 or so with the equivalent of a couple of million dollars in the bank, by 1992 your entire life savings was worth much, much less than a penny. If you were smart enough to convert your savings to dollars, you would have been fine.

Because of my brief experience, the first and easiest possible solution that comes to mind is to shift my money savings to some other more stable currency. However, a dollar hyperinflation would be a different thing from a peso hyperinflation, as the rest of the world's currencies are much more likely to be carried along.

The govt confiscated gold the last time

Why do you think it will not happen this time?

If serious social unrest sets in how will you protect and sell your gold?

Peter Schiff...

...says that sometime soon the price of gold will equal the DJIA.



It got close to that during the 30s crash, closer in 1980, and I think this time gold will equal DJIA or even exceed it.

Dollar deflation scenario: Gold $2500, DJIA 2500
Dollar hyperinflation scenario: Gold $15,000 DJIA $15,000

Either way, buy gold, sell stocks.