Most people simply cannot conceive of a US dollar hyperinflation any more than a current resident of San Francisco could imagine a 1906 or 1989 earthquake. Many simply choose to not dwell on these potentialities, often rationalizing them against other existential if not abstract inevitabilities.(And of course, very very few are truly prepared)
Dollar Confidence and Money Velocity
Money velocity can be defined simply as GDP divided by money supply.
Since the financial crisis, the M2 money supply has grown by over 45 percent. During the same time GDP grew by only 13 to 14%. So, velocity had to decrease substantially - and it did. Even though more dollars were spent and our GDP went up, the GDP growth wasn’t anywhere near the growth in the money supply.
Right now, more dollars exist than ever before and dollars are still being created faster than growth. Therefore, V has to be at it lowest point since the start of their creation. It is. And V will continue to fall until that fact changes.
Again though, the dollar can fall rapidly if we have a loss of confidence, even with falling velocity. In fact, historically that’s what does happen. A hundred things could trigger it.
The million dollar question is - When?
Triggers for the Nonlinear
In much the same way that a small business is somewhat like a microcosm for a large corporation, the collective is nothing at all like the individual or local community when it comes to complexity.
Excess dollars are sitting in the banks as reserves. The banks are keeping these reserves in order to meet demands that can arise from their uncovered derivative bets.
The Federal Reserve member banks are using some of the money that the Federal Reserve is making available to them to speculate on stock market futures; thus, pushing stock prices to unrealistic levels.
The other way through which the dollar can lose value is via its exchange rate to other currencies. Foreign holders of dollars may watch five years of dollar creation in order to finance federal budget deficits - and see no end. Thus, they can come to the conclusion that their dollar holdings are being debased.
If they make this decision, (or rather act on it) they will decide to get out of dollars or to reduce their exposure to the US dollar.
Tectonic movement is a constant reality. Significant earthquakes are happening always around the world. Although tracking the aftershocks is possible, and seismic science has grown immensely, there remains no reliable way of forecasting initial large events to this day.
All that can be said is that within a fairly wide time span there will be a significant quake over some period of time. There is very little argument. It is well known that while the infrastructure on new construction is constantly subjected to upgrades, it is an impossible task to keep up with the changing requirements.
On an individual level, it is much worse. Most people have short memories for disasters or events that involve intense fear, pain, or discomfort. It is the mystery of enduring multiple childbirths, though most are quick to point out that it is quite natural to block out events that might otherwise cloud forward growth or production. Unfortunately, when taken over the collective, the short memories become an additional burden to already fragile systems.
Much of what we learn will come in retrospect.
In finance, no doubt there will remain a furious coverage of the unfolding. Mainstream media complex will profit from the collapse. As such, we can be sure that the unfolding events will be covered widely (if not erroneously) in their conclusions or the determination of the causes.
100 Years of the Fed - 42 for Fiat
It is relatively easy to blame our captured central banks for the multitude of risk they have created over the millennia.
Monetary policy has effectively allowed the movement of capital and wealth from the backs of ordinary people to the financial elite.
In essence, they have robbed the population of its purchasing power by debasing the currency over a long period. At the same time, they have produced an elaborate public relations machine capable of charming its victims.
They have kept true to their original (unspoken) intention to protect their own. They have also facilitated the socialization of risk by encouraging moral hazard and allowed for the emergence of the too big to fail.
Nothing epitomizes the US Central Bank's public relations and propaganda sensation more than the fact that the majority of educated individuals cannot name the Federal Reserve Chairman before Paul Volker. Additionally, Volker’s name is still on the forefront of the collective psyche - and a symbol for the last vestiges of responsibility and prudence.
It is perhaps by this measure alone that the future will judge the eminent risk we face at this moment in time and the need for the minimum of personal and financial protection. In this way, at the very least, the history of tomorrow will be written by those who recognized the unfolding of today's events and took action.