How Central Banks Control Zimbabwean Style Hyperinflation from Happening Yet

Posted July 6th, 2011 by Keira Browne No Comments »

So now we have heard millions of times on how the US and the whole world in general is at high danger of hyperinflation. We have seen how the US dollar is continuing to decrease in value and how economists keep warning that the US dollar is going to disappear in value and will be worth only the paper it is written on if the Federal Reserve keep printing money as they have been doing so far. Almost 50 percent of Americans asked in a recent CNN poll believe that the US is heading towards another Great Depression, probably even worse than the one in the 1930s. However, it has been years since the first warning was covered by news media but the lurking danger of hyperinflation has not hit the western world as it has in Zimbabwe or Weimar Germany. How is this possible?

A very interestin article by Money Morning Australia explains why the world seems to still stand strong and has not been hit by a major hyperinflation like in Zimbabwe as some people have worried.

There are a few things that central banks can do in order to hold hyperinflation to hit the economy. Hyperinflation can only happen if one nation pumps paper money into their economy much faster than other nations. Additionally, hyperinflation can happen only if other nations have real alternatives to the inflated money. Both of the circumstances can be found in both Zimbabwe and also Weimar Germany. Money Morning Australia writes about Weimar Germany:

Following World War I, Germany had to pay compensation to the victors in gold or foreign currency.

But because Germany didn’t hold enough gold or foreign currency, it had to print new money to swap it for gold and foreign currency.

Clearly when your intention is to devalue the currency, working fast is critical.

Because as soon as the market gets wind of the plan, holders of the money will look to get rid of it as quickly as possible in exchange for something else.

That explains the speed of Weimar Germany’s inflation.

In the case with Zimbabwe, it is very similar. As soon as the central bank of Zimbabwe printed out money too fast, creditors refused receiving the Zimbabwean dollar because they knew it was being devalued. They chose another currency as alternative to the Zimbabwe dollar the US dollar.

What happens today is that central banks are hinting each other the speed of their money printing by publishing a number to indicate how much inflation they are targeting, called the inflation target. When you go to the websites of central banks, you will be able to find how much their inflation target is and other central banks will catch that information and control their own money printing so as not to exceed the targets of other banks.

Money Morning Australia explains:

As long as every central bank knows the limits, they can engineer a globally co-ordinated period of inflation without fear of causing hyperinflation.

The problem with this is that it will cause an even more catastrophic result for the world economy. While hyperinflation is bad for the nations that are printing money, what the central banks are currently engineering is punishing the whole world and not just that one nation.

The only way to protect oneself from the global inflation (if not hyperinflation) is by protecting your hard-earned money from the slow-burn effect of the postponed hyperinflation by central banks. According to Marc Faber, there is much more you can do than to just sit there and watching your wealth be destroyed by the slow burn, which is investing in real money, real assets.

Not to own gold is to trust the value of paper money and the governments integrity, says Marc Faber. Faber believes that the world is actually grossly underweight gold but flooded with US dollar.

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