For example, if the banks decided to rapidly move their reserves down the liquidity pyramid from FRN$ illusions into physical gold then ‘hyperinflation’ would likely be the result as the FRN$ evaporates just like when banks moved capital down the liquidity pyramid from Auction-Rate Securities into T-Bills; the Auction-Rate Securities ‘hyperinflated’ or in other words rapidly evaporated. I do not see why capital has to go up the liquidity pyramid into less safe and more risky loans in order to cause the evaporation of a lower layer in the liquidity pyramid. Consequently, ‘hyperinflation’ is actually a very deflationary phenomena because it evaporates the value when measured in gold of a large layer in the liquidity pyramid. I am probably a bigger deflationist than Mish! Michael Mross, one of the leading German financial commentators on MM News (their CNBC equivalent; Google Translator does a decent job), picked up on this.

See why I think this is an ‘epic deflationary credit contraction’? Because digital commodity currencies remove two giant layers of the liquidity pyramid by allowing holdings of cash to remove two giant risks to their cash balances: payment risk and counter-party risk by using a commodity currency without fractional reserve banking.

Anyway, I already wrote a persuasive article (not even sure if I even convince myself) that the FRN$ Is In Hyperinflation. It ties in directly with this article about Dr. North and Mish.

Thanks for the excellent article. I’ve recently discovered your free “runtogold” podcasts on i-tunes, and I enjoy listening to your well-spoken perspectives on economic and monetary reality. Yes, the timing of the strange phone interference was quite, er, coincidental.

Mish says hyperinflation is unlikely because the banks cannot be forced or coaxed into lending. But since when does fractional reserve lending (legalized counterfeiting) cause hyperinflation? It surely causes an inflation of currency supply leading to distortions, malinvestments, and the Business Cycle, but isn’t hyperinflation distinctly different from credit expansion? I thought hyperinflations were caused only by Central Banks and Government Treasuries printing money to pay for Government deficits.

Is Mish attacking a straw-man, or am I wrong about the cause of hyperinflation? Are you aware of any hyperinflations caused by banks creating credit as opposed to government printing presses?

Confused in Baraboo,

-Pete

Very interesting discussion. Personally speaking, I fall in the Stagflation camp. You comment that when political currencies fail, the result is either a deflationary depression or a hyperinflationary explosion. This brings to mind a couple of questions: in the course of history, I’m trying to recall an example when a country’s currency collapse resulted in a deflationary depression (I don’t doubt the validity of this point; I’m just trying to think of an example). The other question is this: would it be possible for a currency collapse to lead to a hyperinflationary explosion followed by a deflationary depression?

Thanks for your help,

Tom

i guess i’ve been using the dow v. gold ratio rather than the s&p when trying to analyze when hard assets are better to hold than paper assets and vice versa so your chart brings additional perspective to how i’ve been looking to position myself

again, your work here is greatly appreciated

imkeithhernandez, The issue of whether to buy or own gold is completely different from whether to use gold to perform mental calculations of value.

Yes, gold is getting more expensive. I bought it while it was cheap and intend to sell it when it gets expensive and buy other assets that are cheap. I think there may be a few more years to go for both stocks and real estate to get cheaper when priced in gold or silver.

While I am always alert for deals my ears are going to perk up when the DOW gets close to 3 ounces of gold and when an average American house gets around 85 ounces of gold or 500-1,000 ounces of silver. I want to really increase my portfolio of cashflowing real estate.

my only question is this (for you or for any other readers who could provide insight)- if i’m reading the s&p priced in gold chart correctly, aren’t we at a stage where we should be moving out of gold and into stocks or at least where stocks are cheap vs. gold?

:-)