Friday, August 19, 2011

Hoarders, Gold and Negativity

Here is a sequel to the discussion on inflation from yesterday.

One of the many negative effects of inflation is it can cause an increase in the velocity of money. The velocity of money is the rate at which money flows around the economic system. If the velocity of money gets to a critical point it can cause hyperinflation.

This is how it goes. The consumer or investor notices prices going up steadily. The reaction to this is to buy goods and services now before the prices go up again. Hoarding eventuates as people buy 'things' that they need and store them instead of putting money in the bank or other investments. This can draw massive amounts of money out of the banking system and set in motion a snowball effect of increasing money supply.

The cycle can take on a life of its own. Prices go up, we buy more now, demand increases and supply decreases, we buy more now urgently, prices go up and so on until hyperinflation occurs.

Hyperinflation then is not only a total loss of confidence in money and those Governments behind it, but a self-sustaining exponential increase in money supply.

Could hyperinflation occur again like it did in Weimar Germany after WW1? More than possibly.

Inflation can also affect the psychology of people and Governments; negatively. If you are prudent and get in soon enough, you can store up 'things' before anyone else, as you perceive there to be shortages in the future as supply becomes tight.

There may be a couple of unfortunate scenarios for the prudent early-birds though. If people who desperately need resources know you have some, then it could lead to conflict. For countries, it could lead to war. One other scenario is Goverments could confiscate your wealth. This was tried by the Roosevelt administration in the 1930s when they tried to confiscate all the gold in private hands in the USA. It has been used by many other Goverments in history as well. Mostly ending badly for both parties.

The other negative to hoarding, because of rising prices, is that it ties up capital. Capital that would be available for investment is now tied up in gold and commodities. No doubt this will be reported on in the media in a negative way. For example:

"Those 'hoarders' are not keeping up their end of the capitalist bargain. We must regulate them to release their capital, or even confiscate it so that it can be put to work for the good of all."

This has already been mentioned in a recent business article in the largest daily newspaper here in New Zealand. Hmm.

However, all these negatives shouldn't freeze us out from making the right decisions for ourselves and our loved ones. After all, in the future, there is no need to be selfish with the resources you may own, only wise.

Gold in New Zealand dollars: $2224.89 per oz
Previous all time high: $2243.75 per oz

Silver in New Zealand dollars: $49.49 per oz
Previous all time high: $59.19
per oz

The Anglo-Far East Company
The Original Private Gold and Silver Bullion Custodiann
Your reference: an-001

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