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An End To Inflation – Three Possibilities

Analyst, Author, and Owner of Kelsey's Gold Facts
March 4, 2023

END OF INFLATION IS INEVITABLE

At first, the statement above may seem counterintuitive; especially in light of the ongoing increase in the cost of goods and services experienced recently that seem to have no limit.

Besides, inflation never stops. All governments, with the help of central banks, intentionally inflate and destroy their own currencies. There are changes in momentum, of course, but an ever-expanding supply of money and credit leads to continual loss in purchasing power of the  currency (i.e., U.S. dollar).

Since the inception of the Federal Reserve the U.S. dollar has lost ninety-nine percent of its purchasing power. In other words, one dollar today is worth only about one penny compared to a century ago.

Nevertheless, the end will come. We may not know exactly how it will come about, but we can at least examine three possibilities: 1) hyperinflation; 2) recovery and relative stability; 3) deflation and depression.

HYPERINFLATION

Some people think that we are at a point where hyperinflation/runaway inflation is the only possible end result. That is not necessarily so, and the odds do not favor this particular outcome.

In 1980, the effects of inflation were exacting a toll on the economy that seem almost unimaginable today. Increases in various indexes, such as CPI, were twice as large as what has occurred in the past two years.

Gold was near the end of a decade-long increase that saw its price go up twenty-five fold from $35 oz. to $850 oz.  And the verbiage used in reference to a much-maligned U.S. dollar was every bit as derogatory as anything heard today.

Predictions for a currency collapse were common in the 1970s; and runaway inflation was commonly expected as the only possible outcome.

Four inflationary decades have passed and the U.S. dollar has lost nearly all of its original purchasing power; but we have not experienced hyperinflation, nor have we come close.

If the U.S. dollar were to lose ninety-nine percent of its current purchasing power, there is no way to know how long it would take. If the U.S. dollar decline is precipitous and accelerates rapidly, the possibility of hyperinflation becomes a more likely possibility.

Even if that were to happen, there are historic examples of dramatic reversals in the inflation rate. For example…

  1. In 1922, Austrian inflation had reached an annualized rate of almost 2500%. The very next year it had declined to 16.4%. (Bresciani-Turroni, The Economics of Inflation)
  2. The U.S. inflation rate had peaked at 30% in 1864. The end of the Civil War followed and the U.S. government said it would not resume convertibility of U.S. dollars into gold. Nevertheless, inflation was stopped and prices began dropping. By 1879 prices had dropped by 38%. (Bureau of Labor Statistics)

There are other less extreme examples, too. To date, the U.S. has not experienced anything nearly as bad as other situations where inflation was stopped and reversed.

The end of inflation IS inevitable.  Hyperinflation is a possible end result of inflation, but hyperinflation is NOT inevitable. (see Two Reasons Hyperinflation Is Unlikely)

RECOVERY AND STABILITY

Can the Federal Reserve pull a rabbit out of the hat again!?

The degree of volatility and frequency of monetary crises continue to cause problems for the economy. These crises are the effects of more than a century of inflation created by the Federal Reserve.

Rather than managing the stages of the economic/business cycle, the Fed spends its time now battling the effects of its own mismanagement.

Time and again, however, the Fed seems able to stave off financial disaster. Can they do so again? Repeatedly?

Time will tell; but, again, the hoped-for end result is just another possibility – not a likelihood.

DEFLATION AND DEPRESSION 

Of the three possibilities discussed in this article, deflation and depression is the most likely.

There is a single specific reason why deflation is the more likely outcome at this particular time, too, after more than a century of inflation: the continuous expansion of the supply of money and credit is credit-based and digital in nature.

The world economy functions on credit. Fractional-reserve banking is the sleeping dragon at the core of financial and economic activity. (see Fractional-Reserve Banking – Elephant In The Room)

An implosion of the debt pyramid and destruction of credit would cause a settling of prices for everything (stocks, real estate, commodities, etc.) worldwide at anywhere from 50-90 percent less than current levels.

The effects of a credit collapse would wipe out trillions of dollars of financial wealth and usher in bankruptcies, bank failures, and a full-scale depression.

The ‘bright’ spot in all of this financial destruction would be an end to inflation. Rather than inflation, we would experience deflation, which is the opposite of inflation and results fewer dollars which buy more. Instead of too much money, there would be a scarcity.

In 2008, we came dangerously close to experiencing deflation and depression. The Federal reserve managed to stave off the cataclysm by stepping into the void and purchasing huge amounts of Treasury bonds and mortgage-backed securities.

In its current attempt to avoid a complete and total rejection of the U.S. dollar, the Fed sis trying to raise interest rates. Recent strength in the U.S. dollar indicates a measure of success thus far. Unfortunately, the Fed’s efforts might backfire and trigger another credit collapse.

It is very unlikely the Fed would be successful if that happens again.

CONCLUSION 

None of the possibilities above are inevitable. There are also variations of those possibilities. For example…

In the 1970s/80s, the inflation rate continued for several years at low double digit rates (10-20%). Inflation could get a lot worse than that without leading to hyperinflation or without the Fed triggering a credit collapse.

In you are betting on one particular outcome and you have ‘invested” accordingly, you might want to reconsider your strategy.

The end of inflation is inevitable, but HOW it happens and WHEN are unanswered questions. Stay alert! (also see Inflation or Deflation – End Result Is Still Depression and  Default – Deflation – Depression) 

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!

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Kelsey Williams has more than forty years experience in the financial services industry, including fourteen years as a full-service financial planner. His website, Kelsey's Gold Facts, contains self-authored articles written for the purpose of educating and informing others about gold within a historical context. In addition to gold, he writes about inflation and the Federal Reserve.

Kelsey is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN'T, AND WHO'S RESPONSIBLE FOR IT and ALL HAIL THE FED! 

Kelsey Williams is available for private consultations, public speaking, and interviews at [email protected]


The average human body contains 0.2 mg of gold with the bone containing .016 ppm and the liver .0004 ppm.
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