If you read or watch any mainstream financial media you will be inundated with central bankers, economists and those "investment experts" claiming that hyperinflation is an impossibility. In itself this is enough to excite my contrarian juices, but there is a much more significant reason to believe the mainstream "gurus" will be proven wrong yet again.

Mainstream financial experts point to spare productive capacity in the economy. In simple terms the argument is that if an economy has low productivity and spare capacity there can be no inflation. Then how do we explain Zimbabwe? This economy collapsed. It had 95% spare productive capacity yet they experienced hyperinflation.

Hyperinflation is a psychological, not an economic event!

The misinformation of Keynesian economics tries to tell us that inflation is caused by rising prices. It is not. Rising prices are a symptom of the real cause of inflation.......increasing money supply. As more and more dollars are created each one in existence becomes worth less and less. More dollars chasing limited supply of goods and services means prices rises are consequential. It is the value of the dollars that is really changing not the goods and services.

As such inflation has always been and will always be a monetary event created by governments and central banks.

When you understand this simple yet critical distinction you start to realise that FIAT paper money (which is backed by nothing other than a government promise) becomes worth less when trust is abused. As more and more money is printed citizens begin to realise what is being done to them. The velocity of money increases as holders of cash are punished.

Jens O Parssons in the Dying of Money: Lessons of the Great German & American Inflations (Wellspring Press, 1974, p.71) best describes the initial ignorance, early warning signs and final consequences of inflation.

"Everyone loves an early inflation. The effects at the beginning of inflation are all good. There is steepened money expansion, rising government spending, increased government budget deficits, booming stock markets, and spectacular general prosperity, all in the midst of temporarily stable prices. Everyone benefits, and no one pays. That is the early part of the cycle. In the later inflation, on the other hand, the effects are all bad. The government may steadily increase the money inflation in order to stave off the latter effects, but the latter effects patiently wait. In the terminal inflation, there is faltering prosperity, tightness of money, falling stock markets, rising taxes, still larger government deficits, and still roaring money expansion, now accompanied by soaring prices and ineffectiveness of all traditional remedies. Everyone pays and no one benefits. That is the full cycle of every inflation"

As we move in to the latter stages of inflation (which central bankers, ecomomists and government officials seem hellbent as masking as deflation) it is clear to see that economic conditions, prosperity and therefore productivity have collapsed. Money supply cannot slow down because government obligations actually increase to offset the private sector collapse. As citizens see jobs disappear, roaring food prices and general scarcity of basic necessity panic sets in. Zimbabweans know the cause. No amount of government legislation, rhetoric or military pressure will restore the trust of paper money. The will look for alternatives: gold, silver, barter, foreign currencies.

This is hyperinflation. When the citizens lose faith in the promise of their irresponsible government. Think of paper money like the government's stock certificate. For example if BHP has 100 shares outstanding and issues a further 100 without adding any assets to the business, what happens? The stock price declines by half. More BHP shares claiming ownership over the same asset base. Money printing by governments is no different. If BHP issued shares like the western governments print money the company share price would have reached zero long ago. Most people understand the stock analogy, please understand this is being done to you by your government right now. Sell your shares in your government and bet on the one form of money that cannot be created out of thin air.....GOLD.