U.S. is in imminent danger of Banana Republic style hyperinflation


"Highly placed sources in banking and business circles in Europe and South America warn that unless the U.S. government moves quickly to control the spending which is ballooning its deficit, America is in imminent danger of South American Banana Republic style hyperinflation." ---Jack Anderson


Foreword: The many parallels between 1924 Germany and present-day United States are cause for concern. We have not yet reached the depths to which Germany descended in that era, but few can look at the constant depreciation of the dollar since the early 1970's and fail to be alarmed. It seems we differ from 1924 Germany only in the duration between cause and effect. While the German experience was compressed over a few short years, ours has been more protracted. I think this has occurred for two good reasons: First, American central bankers have learned enough from the German experience to delay and extend the consequences of printing too much fiat money. Second, Germany was a small state isolated from the rest of the world --- a pariah nation of sorts --- and, as a result, it had a difficult time finding a market for its government bonds. German deficits had to be financed internally --- an impossibility which greatly accelerated the printing of fiat currency.


Up until recently, the United States enjoyed a strong world-wide demand for its government bonds, so the negative affects of government deficits were subdued. But now low interest rates, and a growing fear among G-7 nations that U.S. deficits are out of control, has greatly curtailed foreign bond purchases. The Fed has been forced to monetize an ever larger portion of the debt as a result. This is the modern equivalent of "printing money". Whether or not we are out of control seems to be a matter for debate. The trend, however, is alarming. The largest deficit during the Nixon years was $ 23.4 billion; Ford --- $ 73.7 billion; Reagan --- $221.2 billion; Bush --- $290 billion; Clinton --- $350 billion. This, to say the least, is a frightening progression.


As this report points out, the correlation between deficits and inflation is sacrosanct ---deficits lead to inflation and uncontrolled deficits lead to uncontrolled inflation. Whether or not there will be a Nightmare American Inflation remains to be seen. Let it be said though that the trend is not favorable. The survivors of the German debacle did so by purchasing gold and rare coins early in the process. As a citizen and an investor, the best you can do is prepare, and then hope against hope that it doesn't happen here. This report of Germany's hyperinflation, originally published in 1970 by Scientific Market Analysis, could play an important part in that preparation process. There is little doubt it will affect your thinking. ---MK


Introduction


If history teaches anything, it is that government cannot be trusted to manage money. When currency is not redeemable in gold, its value depends entirely on the judgment and the conscience of the politicians. (That is the situation in this country today.)


Especially in an economic crisis or a war, the pressure to inflate becomes overwhelming. Any alternative may seem politically disastrous. Whether it be the Roman emperors repeatedly debasing their coinage, the French revolutionary government printing a flood of assignats, John Law flooding France with debased money, or the Continental Congress issuing money until it was literally "not worth a Continental," the story is similar. A government in financial straits finds its easiest recourse is to issue more and more money until the money loses its value. The entire process is accompanied by a barrage of explanations, propaganda and new regulations which hide the true situation from the eyes of most people until they have lost all their savings. In World War I, Germany--like other governments--borrowed heavily to pay its war costs. This led to inflation, but not much more than in the U.S. during the same period. After the war there was a period of stability, but then the inflation resumed. By 1923, the wildest inflation in history was raging. Often prices doubled in a few hours. A wild stampede developed to buy goods and get rid of money. By late 1923 it took 200 billion marks to buy a loaf of bread.


Millions of the hard-working, thrifty German people found that their life's savings would not buy a postage stamp. They were penniless. How could this happen in a highly civilized nation run at the time by intelligent, democratically chosen leaders? What happened to business, to wages and employment? How did some people manage to save their capital while a few speculators made fortunes?


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