Hyperinflation and the Permanent Portfolio

[Tortoise]

Whilst the USD is the current no. 1 reserve currency, that is in decline. The world is in effect looking to diversify out of any one single reserve currency and into a basket of reserve currencies/assets.

There's no one clear single alternative (not enough gold etc.), so a basket is about the only viable option.

Can you explain what you mean by "not enough gold"?

The exact amount of gold used as the base for a gold-backed currency does not matter. If less gold is used, it simply means that each unit of the currency is worth more in terms of goods and services. And if more gold is used, each unit of currency is worth less in terms of goods and services. The economy will adapt to whatever amount of gold is used, according to the law of supply and demand. The "price" of money in terms of goods and services will automatically adjust such that supply will match demand.

[Tortoise]

Bernanke, who has studied the issue, said a return to the gold standard wouldn't work.

[...]

"It did deliver price stability over very long periods of time, but over shorter periods of time it caused wide swings in prices related to changes in demand or supply of gold. So I don't think it's a panacea," Bernanke told DeMint.

Additionally, Bernanke said there were a number of practical issues that would prevent the return of gold as the world standard. Namely, there's not enough gold in the world to effectively support the U.S. money supply.

"This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the 'hidden' confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard." -- Alan Greenspan (former Fed Chairman, 1987-2006), "Gold and Economic Freedom"

"Money, in short, is not a 'fixed yardstick.' It is a commodity serving as a medium for exchanges. Flexibility in its value in response to consumer demands is just as important and just as beneficial as any other free pricing on the market." -- Murray Rothbard, What Has the Government Done to Our Money?

[AgAuMoney]

Whilst the USD is the current no. 1 reserve currency, that is in decline. The world is in effect looking to diversify out of any one single reserve currency and into a basket of reserve currencies/assets.
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My guess is that might accelerate, perhaps with the USD declining to 33% reserve currency weighting over that period (or sooner).
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Most unlikely to hyperinflate IMO, excepting some black swan event - perhaps if a run on the USD occurs from a race to the exit to avoid obvious forward looking losses.

Exactly.  I expect instead of the nice chart trending down to an easy landing, there will be a sharp downturn in the U.S. dollar holdings.  That sharp decline will be the end of the dollar as the reserve currency and might be the end of it as "a" reserve currency.  Hopefully that sharp downturn will be after the gradual decline has taken it very low rather than happening tomorrow when it still has a long way to fall.

One scenario is that the Chinese simply decide they are done and don't care any more and start significant selling of their dollar reserves (in exchange for commodities, other currencies, businesses, land, etc).  This could cause a sharp decline apparent to other countries and likely they would start selling as well, before the value of the dollar dropped too far.

As we have been exporting inflation for approximately 50 years now, when all those dollars are repatriated it will cause severe inflation in the U.S. in whatever assets they are purchasing.  Right now we see minor inflation in all sorts of commodities and in the stock market with a trivial amount of dollars coming home because the Chinese have essentially stopped buying new treasuries.  If they turn around and start selling, it could get 10's or 100's of times worse.

Or the dollar might slow its rate of depreciation and we might get another 100 years to drop the next 95% of value as occurred over the past 100 years (but it was mostly in the past 40).

[Wonk]

Additionally, Bernanke said there were a number of practical issues that would prevent the return of gold as the world standard. Namely, there's not enough gold in the world to effectively support the U.S. money supply.

As Tortoise mentioned earlier, this is a specious argument.  You hear this frequently from many talking heads in the financial media.  "Not enough gold" assumes the price must be immovable, which is false.  Starting any time it wishes, The Fed can conduct open market operations and purchase gold until the price matches the money supply.  Nearly overnight, you have a gold-backed currency.  On two occasions in the last 100 years, the US had a gold-backed currency, albeit with different prices (one set by government decree, one by the market):



Furthermore, gold can maintain a relatively stable price as long as the increasing quantity of money per annum matches productivity & real gains in GDP.  Historically, "stable" has been about 2% annually, so a rough estimation is that if the money supply increases at a steady 2% annually, you can expect 0% inflation and stable prices.

The biggest problem with a gold standard stems from politics.  "Bread and circuses" win elections.  The "right" decisions often give way to political expediency because 51%+ of the electorate does not understand that the good times don't last forever.  It's just human nature and I don't see any evidence that it will change in the future.