Inflation, asset and consumer prices, by Alasdair Macleod

Inflationary dollar collapse or deflationary depression? That’s the choice facing the Fed. From Alasdair Macleod at goldmoney.com:

“The Fed finds itself between a rock and a hard place: either it keeps inflating or the whole confidence-based valuation of financial assets collapses. Either it raises interest rates or the dollar collapses.”

There has been occasional speculation about what happens to asset values in a hyperinflationary collapse. The basis of the question has recently become suddenly relevant, because consumption in America and Britain has been stimulated with unprecedented monetary inflation aimed at consumers, and been met with limited supply, leading to strongly rising prices across the board.

In short, unless urgent action is taken, the possibility of a hyperinflationary outcome has become a possibility. The only alternative is to stop monetary inflation and thereby deliberately crash the global economy.

Along with other central banks, the Fed is trapped. We will assume that rather than face this reality, governments and central banks will continue with their money printing until both their fiat currencies and financial systems face collapse. All precedent points to this choice.

That being the case, an examination of how a collapse in the purchasing powers of fiat currencies is likely to affect asset and consumer prices is timely. This article draws on theories of money as well as empirical evidence in search of some answers. The answers will surprise and discomfort many of its readers.

Introduction

It is a common perception that in inflationary times financial and tangible assets afford protection from monetary debasement. Instead of rapidly escalating, so long as the consequences of inflation are contained as they have been since the early 1980s, non-fixed interest investments have been good inflation hedges. But what happens to asset prices if inflation is not contained and escalates?

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