Since the worldwide economic downturn of 2008 (comparable only to the Great Depression), the global recovery has been at the forefront of all of the world’s government policies.
Governments bailed out banks and attempted to stimulate economic growth by slashing interest rates to record lows and injecting huge sums of money into the economy through a process known as quantitative easing.
The main issue with effectively printing more money and injecting it into the economy is that you run the risk of causing hyperinflation.
Most governments hate deflation and that is why they injected so much money into the economy, despite the inflation risks. Many prominent investors and economists believe that despite all this spending, deflation is still a big risk.
However, on the flip side many experts are warning that this will cause hyperinflation.
In Zimbabwe, a single Coca-Cola can cost as much as five million Zimbabwean dollars (US$133). This is not a result of some Coke shortage within the country, but rather is an effect of what is called hyperinflation, which is commonly defined as inflation that is very high or out of control, in which prices increase rapidly as a currency loses its value.
In the early 1990s, Zimbabwe's economy essentially collapsed and their national currency, once valued at about 1.59 U.S. dollars per Zimbabwean dollar, became essentially worthless. The bank of Zimbabwe eventually released notes in denominations of 100 million Zimbabwean dollars, and toyed with the idea of a 200 million dollar note.
While this seems unlikely to occur domestically, top analysts in the finance industry speculate that the government's solution to our deflation problem, pumping money into the economy, is leading the country down the same road Zimbabwe took.
Marc Faber, who has been right numerous times in his macroeconomic calls, speculated that the quantitative easing will eventually cause hyperinflation. "I am 100 percent sure that the U.S. will go into hyperinflation,” Faber stated.
In the same interview, he speculated that the country will likely reach rates similar to those of Zimbabwe, and remained steadfast in his claim that the only method to prevent this would be to manipulate interest rates.
Warren Buffett, the greatest investor of our time, recently shortened the holding time of Berkshire Hathaway’s bonds. The reason he is selling longer-term bonds is almost surely because he expects higher interest rates and inflation down the road.
In fact, in 2009, Buffett warned that government actions will cause inflation. Many experts speculate that Buffett’s recent purchase of Burlington North Santa Fe was a pure inflation play.
The reasoning is simple: as prices rise (including oil prices), companies will transport more goods by rail since it will be cheaper than using freight or air, which uses oil as their energy source.
While deflation might be a near term risk, watch out for massive inflation during the next few years.
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