UBS: Hyperinflation Nears; Gold, the Canary in the Coalmine

By Dominique de Kevelioc de Bailleul

Swiss-based UBS AG issued a warning to clients Wednesday that the U.S. is on the path of a hyper-inflationary depression.  Forty years of a nation’s currency not redeemable for a physical asset has just about reached its limit of usefulness, according to the world’s 17th largest bank (ranked by assets) and its economist Caesar Lack, Ph.D. economist.

In Lack’s note to investors, titled, Global Risk Watch: Hyperinflation Revisited, he states:

Hyperinflation: Paper money only has a value because of the confidence that the money can be exchanged for a certain quantity of goods or services in the future. If this confidence is eroded, hyperinflation becomes a threat. If holders of cash start to question the future purchasing power of the currency and switch into real assets, asset prices start to rise and the purchasing power of money starts to fall. Other cash holders may realize the falling purchasing power of their money and join the exit from paper into real assets. When this self-reinforcing cycle turns into a panic, we have hyperinflation. The classic examples of hyperinflation are Germany in the 1920s, Hungary after the Second World War, and Zimbabwe, where hyperinflation ended in 2009. Indeed, hyperinflation is not that rare at all. Economist Peter Bernholz has identified no fewer than 28 cases of hyperinflation in the 20th century. [emphasis added]

Lack’s overview of the events which lead up to a currency collapse comes straight from the work of Austrian economist Ludwig von Mises (1881-1973), an economist shunned by the establishment’s money masters for his heretical economic viewpoints, and scoffed by today’s confused legion of ‘expert’ economists, media personalities and political figures such as deficits-don’t-matter Dick Cheney.

Americans will soon find out that deficits, indeed, do matter, says UBS.

Just as a student pilot is told to trust his flight indicators and not the sensations brought about by his inner ear, the readings of hyperinflation stare each investor in the face—if he’s trained to ignore the likes of the establishment’s head cheerleader Paul Krugman, and, instead, interpret what the economic indicators tell him from the standpoint of the obscured von Mises.

As von Mises pointed out, hyperinflation is not a result of a money supply gone wild through the excessive printing of paper notes, per se; it’s the result of a marketplace of participants suddenly rushing out of a monetary system which they perceive no longer works or can be trusted.  MF Global, PFG, LIBORgate and, now, hints of fraudulently managed ‘allocated’ gold accounts surfacing, all contribute to that cumulative, then sudden drop in confidence in the U.S. dollar.

As repeated attempts to audit the Fed regain renewed support in Congress, policymakers are under pressure by a public—a public that now questions the once-sacred, enigmatic and arcane central bank’s role as the steward of the nation’s money.  As congressman Ron Paul stated in an interview with GoldSeek radio during the weekend, another bill to audit the Fed makes its way through committee.  The issue has mushroomed in popularity with constituents, therefore their representatives, and can no longer be ignored, according to Paul.  The issue of the Fed won’t go away.

And the last step toward hyperinflation comes from a public that comes to realize that, in fact, deficits do matter and that four decades of deficit spending has reached its limit in the U.S.  The realization of American exceptionalism, as it relates to matters of fiscal responsibility, was just another propagated myth could come as early as next year, according to many students of the Austrian-school, such as Jim Rogers, Marc Faber, John Williams, Peter Schiff, Max Keiser, James Turk, Eric Sprott, among others.  As the U.S. economy rolls over, federal tax receipts will drop further, gaping an already monstrous $1.5 trillion deficit ($5.3 trillion, including unfunded liabilities) into a Greece-like death spiral.

“Ultimately, hyperinflation is a fiscal phenomenon; that is, hyperinflation results from unsustainable fiscal deficits,” states UBS.  “Peter Bernholz [author of Monetary Regimes and Inflation: History, Economic and Political Relationships]

notes that historically, cases of hyperinflation have been preceded by the central bank monetizing a significant proportion of the government deficit.

“After investigating 29 hyperinflationary episodes, 28 of which happened in the 20th century, Bernholz writes: ‘We draw the conclusion that the creation of money to finance a public budget deficit has been the reason for hyperinflation.’”

Reruns of Cheney video clips will be used by some as a reminder of how fiscally, politically and morally bankrupt American culture has become.  It will dawn on a larger and more meaningful portion of Americans that the promise of a trip on the train to the American dream was really the boxcar to the slaughterhouse.

That flashpoint worries the Fed and the oligarchy (witness the Warren Buffett, Charlie Munger and Bill Gates interviews with CNBC’s Becky Quick), as confidence in American institutions will be irredeemably lost, leading eventually to that fateful day of hyperinflation.  Just as 28 other currencies before, another currency, the dollar, will end up as the next worthless fiat.

The bizarre series of Executive Orders and other unconstitutional steps taken by all branches of government since 9-11 tip the hand that central planners have  been preparing for that day of awakening.  The anger generated by a public armed to the teeth most likely will trigger panic and another American Revolution.

UBS ends with:

Gold – the canary in the coalmine

Due to its long standing as the foremost, non-inflatable, liquid alternative currency, gold is the first destination for wealth fleeing from paper money into real assets. Gold can be considered a hyperinflation hedge, and its price can be considered an indicator for the probability of hyperinflation. A sudden rise in the price of gold would be a warning sign that the risk of hyperinflation is increasing, in particular if it went along with a worsening of the fiscal situation in the deficit countries and an easing of monetary policy. Not only gold, but also other commodities, as well as the stock market, would profit from investors fleeing from money and from government debt. Thus a strong rise of gold, commodities, and stock markets, accompanied by a fall in the currency and in government bond prices (i.e. a rise in yields) could signal the approach of hyperinflation. We will continue to monitor global inflation developments and change our risk assessment in the global inflation monitor according to current events.