Wednesday, December 22, 2010

Scary Scenario

As much as I hate to write about scary things three days before Christmas, I was asked by a client to comment on this article, Hyperinflation Special Report, and so I thought that a blog post would be the best venue in which to do so.

In the article in question, the author claims that the US economy is headed for financial Armageddon; that the combination of excessive money creation by the Federal Reserve and unsustainable government deficits will result in the collapse of the US dollar and destruction of the US economy as we know it. The author goes on to claim that, in the wake of this economic collapse, we will be forced into a barter economy so that, ultimately, the world will reorganize around a new gold standard.

Do I agree with this doomsday scenario? No, I don't. The article is full of charts and graphs based on a variety of statistics. I won't counter those statistics, because we all know that there is plenty of data available which can be cited in such a way as to prove (or disprove) just about any argument. I am more interested in the underlying thesis of this article, which is fundamentally based on the belief that a fiat money system (one which is not based on a metal such as gold) is unsustainable and that the sooner we get back to the gold standard, the better we will all be. I believe, on the other hand, that the technological advancements of the last century ultimately make the gold standard a relic of the past.

Money is no longer a store of value. Instead, money is all about transactions. The economy of today is substantially more complex than ever. The gold standard broke down early in the last century, primarily because it couldn't handle the complexity of the 1920's global economy. For those of you who are interested in reading more about this topic, the book The Lords of Finance, which I've referred to in the past, explains how and why this occurred. I don't see how the gold standard could possibly function in an economy as complex as today's.

All that being said, I do agree with the author's suggestion that inflation is likely to return some time soon, and I have said so before. I just don't think that the likely scenario is a hyperinflation which will lay the economy to waste. Below are a few links to some alternate views about where the inflation monster may be headed:

There is certainly reason to be concerned about things like future inflation, government deficits, and high unemployment. However, I don't think the doomsday scenario is the likely outcome. I will refer you to one more book, Sonic Boom, which does an excellent job of discussing the complexity of today's world in which the rapid pace of change makes us all a bit uncomfortable. We live in a truly globalized world, and, like it or not, we are all in it together. I believe that unpredictable changes will shape our future and that, for the most part, these changes will be to our benefit in the long run.

I hope everyone has a very Merry Christmas and Happy New Year!