The Federal Reserve and the Risk of Hyperinflation

The Federal Reserve is currently embarking on a cycle of monetary easing and rate cutting, despite the presence of elevated inflation. The last time this occurred was in the 1970s, a decade that saw inflation spiral out of control.

The 1970s: A Period of High Inflation

In the early 1970s, the Federal Reserve, under the leadership of Chairman Arthur Burns, was faced with rising inflation and concerns about economic growth and unemployment. Despite high inflation, the Fed proceeded to cut interest rates multiple times until 1972 in an attempt to stimulate economic growth. This led to inflation soaring to over 12% in the months that followed. In response to the rising inflation, the Fed aggressively raised rates in 1974, pushing the federal funds rate from around 5.75% to 13%. However, as the economy entered a deeper recession, the Fed began cutting rates again in 1975, despite inflation remaining high at around 9%. By the end of the decade, inflation had reached double digits again, peaking at 13.5% in 1980. The high inflation of the 1970s and early 1980s serves as a stark reminder of the dangers of cutting interest rates in an environment of elevated inflation, a situation that we find ourselves in today.

Comparing the Present to the Past

While the 1970s inflation was severe, it is considered an optimistic scenario. This is because the high inflation of that period was only brought under control when Paul Volcker hiked rates above 17%, an option that is not currently available to the Fed due to the skyrocketing federal interest expense. In fact, the Fed could only raise rates to about 5.25% before capitulating recently. This suggests that the higher the debt load, the less room the Fed has to raise rates due to the interest expense. As the debt pile and accompanying interest expense grow exponentially, there is skepticism about their ability to hike rates to even 5.25% again.

International Examples of Hyperinflation

If the 1970s in the US is considered the optimistic scenario, Brazil and Argentina in the 1980s offer other possibilities. Both countries were cutting interest rates amid high inflation, resulting in eventual hyperinflation. Similar scenarios occurred in Zimbabwe in the 2000s and Venezuela in the 2010s, where central banks cut interest rates amid high inflation, culminating in hyperinflation. These examples highlight the dangers of cutting interest rates or maintaining low rates in an environment of high inflation. In each case, the actions of the central banks, often influenced by political pressures, exacerbated inflation and led to severe economic crises.

The US and Hyperinflation

While these examples are insightful, the US is not in the same category as Argentina, Brazil, or Zimbabwe. It is the most powerful country in the world, leader of the current world order, and issuer of the world's premier reserve currency. Therefore, it would take a lot more to push the US into hyperinflation. However, the possibility of hyperinflation in the US, while not inevitable or imminent, remains a growing possibility. This is especially true as geopolitical tensions escalate and a multipolar world order potentially emerges.

Gold as a Safe Haven

In the meantime, ever-increasing currency debasement, potentially worse than what the US experienced in the 1970s, is considered an unstoppable trend. This is why many believe the price of gold is set to skyrocket. The last time the US experienced runaway inflation was in the 1970s, during which gold exploded from $35 per ounce to $850 in 1980. Many expect a similar or even more significant rise in the price of gold.

Bottom Line

While this trend is already well underway, many believe the most significant gains are still ahead. Holding physical gold bullion in a private non-bank vault in a wealth-friendly jurisdiction like Singapore, Switzerland, or the Cayman Islands is a good idea. What are your thoughts on this matter? Do you believe the US is on the brink of hyperinflation, or is this an overblown concern? Share this article with your friends and engage in a discussion. Don't forget to sign up for the Daily Briefing, which is delivered every day at 6pm.