Is It By Fire or Ice?

No, not climate change.  Does the economy get destroyed in inflationary fire or deflationary freeze?   This is probably the one aspect of the coming nastiness that the fewest people agree on.  There are strong, vocal advocates for both hyperinflation and complete deflation.  I've been studying this for a decade and writing on it for the 3 years I've been here, and I'm not convinced one way or another. 

In comments to last night's post, a comment by Taylor proposed the idea that it's by deflationary collapse.  It's worth reading the whole thing.  Grabbing a few key points:

The inflation that people fear is coming due to The Bernank's actions is a one step logical assumption. If things are denominated in dollars and dollars become more available, it will take more dollars to buy something. And this is true...to a point.

You have to go a step further and think how logical people will react in that environment.

See, as people we learn over time and react to our surroundings. Over time people will see prices ever increasing as more and more money works its way into the system. Eventually a point is reached where people will not take any amount of dollars for a thing of real value. Instead they will demand something of equal or greater value in exchange.

I would start by saying inflation is here now.  The collapse is going on right now, albeit in slow motion.  Both smaller packages of products at slightly higher price, and same sizes at much higher prices, too.  Here's something I wrote on this back in 2010.  Shadowstats estimates current inflation at close to 10% per year.   But hyperinflation isn't just bad inflation.  As Gonzalo Lira put it, also in 2010:

If we think that hyperinflation is simply inflation on steroids—inflation-plus—inflation with balls—then it would seem to be the case that, in our current deflationary economic environment, hyperinflation is not simply a long way off, but flat-out ridiculous.

But hyperinflation is not an extension or amplification of inflation. Inflation and hyperinflation are two very distinct animals. They look the same—because in both cases, the currency loses its purchasing power—but they are not the same. 

In fact, hyperinflation is just another flavor of collapse. 

Taylor is absolutely right in this statement, too:

The sudden loss of faith in the currency has a hyper-deflationary effect as the market tries to find a new medium of exchange and barter markets emerge...both of which cause transitional illiquidity of the market.

It's worth noting, though, in the latest hyperinflationary disaster, Zimbabwe, they switched over to US dollars, as the one thing they could trust.  If I'm recalling correctly (lazy!) the same was the case in the Weimar Republic of Germany.  There probably won't be a dependable currency for us to fall back on.  I don't think of gold as a reserve of wealth in this case, just a very dependable barter medium - as will also be silver coins, beans, bullets, band-aids and, yes, skills.  There's a historical number that I wrote about right after Christmas 2011, on whether the US could go back to a gold standard,

It has been said that an ounce of gold buys today about what it did at any point in the past.  Stephen Harmston, former economist at Bannock Consulting, wrote that “across 2,500 years, gold has retained its purchasing power, relative to bread at least” which is seemingly proved when one considers that “It is said that an ounce of gold bought 350 loaves of bread in the time of Nebuchadnezzar, king of Babylon, who died in 562 BC” which is roughly what it buys today, a stretch of 2,500 years.  With some judicious selection of the exact brand of bread, you get remarkably close to 350 loaves (and I'm sure there was some variation in what a loaf of bread cost even in King N's day).  Likewise, you'll hear that an ounce of gold would buy a good toga and sandals in pre-Christian Rome, and buys a well-tailored suit and shoes today, or you'll hear that a $20 gold piece bought an 1851 Colt Single Action Army revolver, and today buys a good grade 1911.

In 2009, they said that in Zimbabwe 1 gram of gold would buy 10 loaves of bread.  There's 31.1 grams in a Troy ounce or 311 loaves of bread.  When something has been a dependable trend for 2500 years, it's not crazy to think it will continue, so I think gold will still make good barter material.  It's more crazy to think you know better than 2500 years of history, Dr. Bernanke.   The problem with gold will be how dense in value it is.  A 1oz gold coin will likely be the kind of thing you'd buy a car with.  My good handguns or rifles will not be for sale at any price. 

I think in today's fiat currency, that's a pile of 90% silver, $2 bills.