Making sense of inflation, silver and the US dollar

When I first got into silver as an investment, I made an effort to try and learn about the global financial system, I suppose what you might call macroeconomics, on the basis that before it’s possible to come to terms with the details of a problem you’re interested in solving ( the ups and downs of the silver price ), it’s very important to get a handle on the context of that problem – where it sits in the big picture, you know, so you might have a chance of making informed decisions!

Gold, silver and fiat

Silver is an interesting commodity – its characteristics mean that it includes elements of being an industrial metal as well as a precious metal or financial investment.

That’s a point of difference with gold – it’s generally agreed that gold’s behaviour is primarily in response to financial and economic factors because its industrial uses are largely limited, whereas silver responds to manufacturing related pressures since it has much wider commercial application.

It can get confusing and murky, there are so many ‘experts’ making a lot of competing claims; still at least one thing is clear here – all the gold that has ever been produced is pretty much still in existence somewhere; not so silver, which is consumed when things are made with it, and so applying the idea of supply and demand to each metal leads to different conclusions, since, at any time, ‘total available gold’ is an ever increasing and generally readily accessible pile but ‘total available silver’ is a much more variable amount.

You can easily get lost when conducting this type of analysis but thankfully it’s not necessary for this post.

Significance of fiat

Although they act in different ways, these days, both precious metals exist within a world wide financial system that is underpinned by state issued tokens acting as money – fiat currency.

I think it’s critical to truly realise what ‘fiat’ actually is – the word itself is latin – here’s what investopedia.com says:

The term “fiat” is a Latin word that is often translated as “it shall be” or “let it be done.” Thus fiat currencies only have value because the government maintains that value; there is no utility to fiat money in itself.

investopedia.com

Fiat money is a government-issued currency that is not backed by a commodity such as gold.

Fiat money gives central banks greater control over the economy because they can control how much money is printed.

Most modern paper currencies, such as the U.S. dollar, are fiat currencies.

One danger of fiat money is that governments will print too much of it, resulting in hyperinflation.

investopedia.com

Silver and the US dollar

Getting back to silver, its fiat value is expressed in terms of US dollars, from which the amount in any other fiat currency such as Australian dollars is derived.

It is the US dollar value per se which is of utmost importance and significance.

What is happening or will happen to the buying power/value of the greenback becomes the key point in understanding whether or not silver is a worthwhile investment.

Inflation and the US dollar

And inflation is a major consideration when it comes to tracking the ups and downs of the US dollar. Just to be clear, here’s investopedia.com again, this time on inflation:

Inflation is the decline of purchasing power of a given currency over time […] The rise in the general level of prices, often expressed as a percentage, means that a unit of currency effectively buys less than it did in prior periods.

investopedia.com

Although the word inflation sounds like something becoming larger, in finance the practical effect is in fact a reduction ( this is typical of the way economists in general and macroeconomists in particular like to express themselves – like all cliques and elites they have a vested interest in making their subject impenetrable to the ordinary person ).

Making it crystal clear, inflation is most definitely not a good thing for your money because when your dollars are being inflated they lose their power to buy stuff.

It all happens rather quickly, too, thanks to the exponential decay associated with compound rates: roughly speaking, at an annual rate of 10% you’d be left with half of what you started with after 7 years.

US inflation since Lehman went bust

Now here’s the scary bit…it turns out that since the global financial crisis, inflation in the US has been running at rates much higher than the officially reported figures – we know this is the case because of the work done at shadowstats.com, which is the ongoing work of a well respected ex-government statistician.

Without going into the gritty detail, the US government over a long period of time directed its statisticians to make subtle changes to the way the official inflation number is calculated.

The net effect of the ongoing changes is to ensure the official inflation rate is lower than it would be if it was worked out using the original method, a method which nobody had any issues with for a very long time.

The inflation rate resulting from the original method is published on shadowstats, amongst other economic indicators.

Naturally the changes are all justified as improvements of one kind or another by the US central bankers, a prime example of the economists over complicating the issue – shrouding the information in technicalities that make it difficult to follow the changes; alterations designed to assist politicians in achieving their agenda and occurring at the expense of everyday people, that last bit perhaps an unfortunate coincidence…

Cloud Cuckoo Land

I’m not a macroeconomist and don’t pretend to know the ins and outs, however my broad understanding is that a low inflation number effectively translates into lower borrowing costs for governments and that a low CPI ( strongly related to the inflation rate ) means lower welfare costs…but if the inflation number used to establish these liabilities is, let’s say inaccurate, then we’re all living in denial as far as I can see…and government forecasts and estimates are, well, just what they would like them to be…

The bad news…

What’s worrying is firstly, since the global financial crisis, the real inflation rate ( as presented on shadowstats ) has been consistently approximately twice what the US government claimed it was and that recently, I think March this year, it jumped quite dramatically – the official rate was declared at over 5% and shadowstats, an independent viewpoint shorn of any political considerations, produced by an economist lacking the vested interests of central bankers, reckoned the rate to be in excess of 12%.

12% – that’s a lot…I mean if it stays above 10% for the next 7 years then in 2028 you will have to have $100 in order to buy something worth $50 today.

Or to put it another way, the $10,000 you have saved at the moment will decline by half – you’ll still have the number $10,000 in your account in 2028, however it will only buy 50% of what it buys today ( assuming it doesn’t suffer from government imposed negative interest rates! ).

Also, I would not be in the least surprised if your income did not increase anything like enough to compensate, even if you do get promoted and government approved salary rises take place…

The worse news…

Not for nothing is economics known as the dismal science – I haven’t addressed the fact that the US government is adding a historically unheard of and absolutely obscene amount of money to its economy every month.

QE, which simply means money printing, has been running at $120 billion per month since March 2020. It does not take a rocket scientist to figure out that with that amount of fiat being called into existence the consequence is going to be inflationary, whatever number is quoted by whoever.

The future looks bleak…

So now comes the really bad news – yes it just gets worse! We now have to consider the distinct probability that the US dollar is not only going to steadily lose all purchasing power, but also the possibility that it could do so in a very sudden and dramatic fashion with attendant financial chaos for, well basically everyone and everything.

Is there any upside…

In times like these, it’s no surprise that people are looking for alternatives to state backed fiat such as cryptocurrency…I mean it may well be absolutely no use at all thinking that you can hoard silver and simply turn it back into fiat when the price rises… because the fiat itself will be worthless and able to buy pretty much nothing ( that applies to crypto, too ).

Quite a sobering thought, really, and you know it has actually happened before too – I only know this through my reading and in an attempt to end this rather dreary post on a positive note, bear in mind that what you can do in the face of this seemingly inevitable disaster is educate yourself and learn about what others did when faced with the same.

So here are a couple of free resources I’ve found instructive – maybe you’ll be able to find stuff in them that helps you determine if there is light at the end of the tunnel that is not actually an oncoming train…

‘Fiat Money Inflation in France’, by A D White – free Kindle ebook

‘Insights and Market Updates’, published regularly on goldmoney.com by Alasdair MacLeod

‘Memoirs of Extraordinary Popular Delusions and The Madness of Crowds’, by C Mackay – free Kindle ebook

[The authors of the ebooks are long in their graves, so they have no barrow to push today.

Mr MacLeod comes across clearly to me as someone who genuinely knows a lot more about the economics than I do – that doesn’t mean he’s right, of course, and his work is sometimes a bit convoluted and tough going…still, it’s been helpful to me and hopefully will be for you, too!]

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