DISCLAIMER: I am not a registered investment, legal, or tax advisor, or a broker/dealer. All investment and financial opinions expressed in this blog are from my personal research and experience and are intended as educational material. Investing money is a personal decision that you should only make after doing your own thorough research and/or consulting with a financial professional.
As discussed in my blog Financial Freedom: Investing 101 local and world economies run on the economic cycle. This cycle, for the most part, follows a simple path where depression lies at the bottom, and inflation lies on top (see the image shown below).
Depression: Too little money in public circulation
Balanced: Neither too much or too little money in public circulation
Inflation: Too much money in public circulation
As per the economic cycle: All depressions are deflationary (less money = more value), and all inflations are inflationary (more money = less value). This pattern was a fact of life when the U.S. currency was backed by a gold standard.
The Value of Currency
On August 15, 1971, the United States abandoned the gold standard in favor of paper currency. This opened the door to a fourth economic possibility called inflationary depression. Inflationary depression occurs when a country’s output is decreased (depression) while the value of the currency drops as a result of having too much currency in public circulation (inflation). Be aware, however, that inflationary depression is not an organic event and is only created when currency without value is printed and circulated.
“But the GDP is the highest it has been in years,” you may say. Yes, the GDP is high. However, it is high as a result of false output. In other words, to fund efforts against Covid-19, the U.S. Government is printing and flooding the economy with currency (inflation).
According to Bruce Wilds of Seeking Alpha, “If you remove all the money spent on Covid-19 vaccinations, tests, and inefficient government spending, the GDP will fall like a stone.”
Now you may ask, “If the government is putting currency out on the streets, then that’s a good thing. Right?” Wrong. For paper currency to work, it must have value. A currency has value when the currency is backed by precious metals, precious stones, or work. If the currency is not backed by one of the aforementioned items, then it is worth no more than the paper on which it is printed. When the United States left the gold standard, the value of our currency became backed by work and future human resources (the work of people not yet born). These days, the large national debt, combined with the mass printing of paper money, has resulted in a devaluation of our currency that exceeds the worth of human resources for the next three thousand years.
Put simply, to avoid a depression caused by Covid-19, our political leaders created an artificial bubble by printing and flooding the economy with money (inflation). The Federal Reserve further exacerbates the problem by using the false economic boom to keep interest rates at zero. As a result, even more currency is pushed into public circulation – leading to even more inflation. The grand result: We are in the world’s first inflationary depression.
We are in the World's First Inflationary Depression
The concept of an inflationary depression is not my own, and it is nothing new. In fact, in 1981, Jerome Smith predicted such an economy in his book The Coming Currency Collapse. More recently, in 1999, Ravi Batra also published a book, The Crash of the Millennium, whereby he predicted inflationary depression.
You may be thinking that inflationary depression sounds similar to the hyperinflation faced by Germany in the 1920s, and you would be right. While different animals, the inflationary depression in the United States today and the hyperinflation of Germany in the 1920s are born of the same parents – a government falsely bolstering a depressed economy by flooding the streets with money.
The Road Ahead
Now that we know what inflationary depression is and that it is among us, what does the future hold? The way I see it, there are two paths and neither is particularly pleasant.
1. A Currency Crash: The government will continue the false economic boom until hyperinflation hits and the currency crashes. Then the partisans on each side with take cover by blaming the other party because they know the people will not hold them accountable for as long as we allow them to divert and divide us.
2. A Deflationary Recession/Depression: The government will pull back on the circulation of valueless paper money and the Fed will increase interest rates. This is likely to lead to a deflationary recession or deflationary depression, which will eventually balance the economy by adding value to the worthless currency created during the inflationary depression. Again, the partisans on each side with take cover by blaming the other party because they know the people will not hold them accountable for as long as we allow them to divert and divide us.
What Can We Do About It?
This is where personal opinion comes into play. Each of us must do his or her own research. That being said, my personal opinion is as follows:
Short Term Investment: Gold Bullion, Gold Mutual Funds, Gold ETFs.
Gold will both edge against hyperinflation if the government chooses path 1 (above) and appreciate in value if the government chooses path 2 (above). Gold has appreciated in deflationary periods for the past 100 years (see the chart shown below).
Long Term Investment: Proven Mutual Funds.
If, and when, the government chooses path 2, then I will invest in proven mutual funds when the deflationary depression is in full force. This will allow me to buy low and have the funds appreciate in value in the next economic cycle.
Keeping an Eye on the Wildcard.
The wildcard being our government doing something even more desperate to artificially manipulate the economy, which will continue to falsely manipulate indicators and turn the suggestions shown above on their heads.
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