Hyperinflation In America 2016: Is It The Next Zimbabwe?

[Sydney]

HE PREDICTED the tech bubble bursting in 2000. He predicted the 2007 GFC. And now he’s predicting a global financial collapse in 2016 that he says will make GFC look like a teddy bear’s picnic.

American author and entrepreneur Robert Kiyosaki made his name over a decade ago as the writer of Rich Dad, Poor Dad — a personal finance bestseller. This week, he’s in Australia for the Masters of Wealth seminars, dispensing money advice on how to survive the next collapse.

Mr Kiyosaki told news.com.au the forthcoming economic apocalypse will be driven by what he believes is the US’ biggest problem — that it’s “printing” too much money.

“My concern has always been when you print money, two people get hurt — the middle class and the poor,” he said.

Mr Kiyosaki’s argument is that because the US is “printing” too much money, the world’s biggest economy will enter into hyperinflation, where the value of a dollar is considerably less than it used to be.

If the US collapses under hyperinflation, then the rest of world’s economies would tumble down with it as most currencies are pegged against the US dollar rather than gold.

He said that America will become the next Zimbabwe.

 

Author Robert Kiyosaki wrote the popular Rich Dad, Poor Dad book. Source: News Limited

 

If you’re confused about hyperinflation, just think about those pictures of post-World War I Germany when peasants could push around barrels teeming with cash but couldn’t pay for toilet paper with it. Or more recently in Zimbabwe with its half a billion dollar notes that aren’t enough to buy bread.

That’s hyperinflation. It means that money has basically become worthless. We’ll all be gazillionaires who can’t afford dinner.

But does that mean we should all panic and stock up on water and canned food, waiting for the end of days with the folks on Doomsday Preppers?

Maybe not just yet.

When Mr Kiyosaki and others like him (Marc Faber is a prominent proponent of this same theory) talk about “printing money”, the US isn’t actually printing money. What they’re talking primarily about is quantitative easing.

Quantitative easing is a policy the American Federal Reserve pursued during and following the global financial crisis. In essence, it is about pumping money into a fragile economy to ensure its survival. In this case, the US Federal Reserve pumped more than $US3.5 trillion. When interest rates are already low, quantitative easing is one way to create economic stimulus.

But this money didn’t come from anywhere. In the past, under the 1944 Bretton Woods agreement, the value of the US dollar was tied directly to how much the US had in physical gold reserve. But Richard Nixon severed ties with the agreement in 1971.

So the $US3.5 trillion the government pumped into the economy was ‘created’ from nowhere. But that money didn’t just go into the pockets of everyday consumers. It was used to buy the banking industry’s debts. The money went into the banks’ reserves which strengthened banks and gave them the confidence to loan money, which allows the economy to chug on. The alternative was to let the banks crash which could set off deflation, which is essentially a contraction of the economy.

 

Fed chair Janet Yellen stopped quantitative easing when the US economy became stronger. Source: AFP

 

But most of that ‘extra’ money didn’t actually get loaned out, so it hasn’t actually been ‘pumped’ into the economy in terms of consumer spending. The money is just sitting there on banks’ balance sheets. Which is why the US hasn’t actually had an inflation problem, let alone a hyperinflation problem.

AMP economist Shane Oliver said: “The story that America will collapse as a result of quantitative easing has been ruled out numerous times.

“The concept relates to the theory that if you increase your money supply then inflation will rise. The problem with that theory is that broad money hasn’t increased — the banks haven’t lent it out. There’s no sign of inflation in the US and quantitative easing has stopped.”

Federal Reserve chair Janet Yellen announced some months ago that quantitative easing would stop in October, a sign that the US economy had recovered enough that it no longer needed the government to prop it up. Which makes the threat of hyperinflation less likely.

One of the surest signs yet that the US is unlikely to suffer from hyperinflation by 2016 is the price of gold. Mr Oliver said that gold prices surged during the GFC when punters were concerned about hyperinflation and the value of the dollar. But recently, the price of gold has tanked, along with other commodities, as people pulled out their investments in the face of a stronger dollar.

Historically, hyperinflation has been associated with economies that have struggled after a war — this includes Weimar Germany which was burdened with punishing war reparations after World War I, or Hungary after World War II where the prices of everyday goods doubled every 15 hours.

 

Worth a lot less than you think. Source: Getty Images

 

Most recently, Zimbabwe’s hyperinflation problem was caused by a very specific set of circumstances that resulted in foreign capital leaving the country, a significant decline in economic output and unemployment around 80 per cent. In other words, in a country that was still primarily about making things, people stopped making things.

When you’re not producing more goods and other countries have stopped trading with you, there aren’t enough products for people to buy. And the price of what is available skyrockets.

Mr Oliver said the US couldn’t be more different from Zimbabwe as it still has massive productive capability. He again stressed that US banks didn’t actually lend out the ‘printed money’ but that even if they had, there was still plenty of things for people to spend it on.

Mr Kiyosaki warned that the US’ problems would spread to the likes of Australia, Japan and the European Union if the US dollar were to collapse.

He is right in that Japan and the European Union have significant economic troubles but those problems, for now, stem from deflation.

As for Australia? University of Technology associate professor Harald Scheule said Australian economists are more concerned about what’s happening in Asia than the US.

“Most of our commercial trade is with Asia while our financial integration is with Europe and the US. The new world is China and Asia,” he said

“What that means is if there’s another economic crisis in the US, there may be an impact on the exchange rate but that’s not what Australian economists are worried about. They’re worried about commercial relationships and an economic downturn in China. Low demand and low commodity prices on iron and coal is what will likely impact the Australian economy. It’s very difficult to say how Australia will go in 2015 or 2016.”

[Novak_Djokovic]