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Is there hyperinflation risk for the Euro and US Dollar?

With the currency crises being faced in the world today, investors are compelled to look for alternative assets that preserve their market value no matter what happens, for which gold and silver are demanded.

Published: 12-03-2013 00:00

Is there hyperinflation risk for the Euro and US Dollar?

The current situation

Recently, there has been growing concern about the value of the US Dollar and the Euro, and other major currencies like the British Pound. In contrast, Asian currencies in general appear stable. There are some currencies such as the Japanese Yen that are cause for worry, but overall, it is the Western currencies that have been depreciating relative to the Singapore Dollar and other currencies in the Asian region.

This does not mean that we have nothing to fear of a currency crisis. Because so many reserves are denominated in US dollars or euros, and the US Dollar remains the reserve currency of the world, what happens in the West is soon felt in other places.

Hyperinflation

If hyperinflation occurs, the risk is to the entire world. Hyperinflation is where the rate of printing money in a certain currency continues to accelerate so as to no longer allow for any saving. The most obvious symptom of hyperinflation is prices rising at an increasing rate, at hundreds or even thousands percent in a short time.

The seeds of hyperinflation are planted when a country’s policy shifts to one that is debt-oriented, where growth is hoped to be achieved not by increasing savings but by increased credit without corresponding savings.

The constant printing of money to meet obligations to bondholders makes the value of a currency questionable. And a government would have to offer higher and higher interest rates to keep bondholders interested. This makes for more debt, the full payment of which is delayed by yet more money printing. This is the case in all recorded hyperinflation incidents.

Will it happen to the USD or Euro?

The real question is if this is a possibility in the near future, for the US Dollar and/or Euro. The thing with hyperinflation is, you can never really tell when it is going to happen, until just before it happens. In a case where too much debt is accumulated, there are two options available to a government: hyperinflation, or a default on debts, where the debt issuer gives up paying its bondholders. Either scenario leaves a currency undesirable to hold.

If hyperinflation occurs, the value of each unit of currency will be dissipated so quickly that it is better to immediately buy consumer goods rather than save in the doomed currency. And if a default occurs, it will render the currency issuer as much less creditworthy, and the value of each unit questionable as well.

Conclusion

Hyperinflation may not be an imminent possibility, but considering the choices available for debt-heavy countries — where devaluation becomes inevitable — investors should consider the best assets in which to put one’s money. Precious metals, gold and silver in particular, are demanded by investors who are assured that supply of these could not be increased so arbitrarily.