48 THE BiG DROP
or the turnover of money. If central banks print money and that
money is left in banks and not used by consumers, then actual
inflation can be low.
This is the situation in the U.S. today. The Federal Reserve
has expanded the base money supply by over $3 trillion since- But very little actual inflation has resulted. This is because
the velocity of money has been dropping at the same time. Banks
are not lending much, and consumers are not spending much of
the new money; it’s just sitting in the banks.
Money printing first turns into inflation, and then hyper-
inflation, when consumers and businesses lose confidence in
price stability and see more inflation on the horizon. At that
point, money is dumped in exchange for current consumption
or hard assets, and velocity increases.
As inflation spikes up, expectations of more inflation grow,
and the process accelerates and feeds on itself. In extreme cases,
consumers will spend their entire paycheck on groceries, gaso-
line and gold the minute they receive it. They know holding
their money in the bank will result in their hard-earned pay
being wiped out. The important point is that hyperinflation is
not just a monetary phenomenon — it is first and foremost a
psychological or behavioral phenomenon.
As you’ll see below, hyperinflation does not affect everyone
in a society equally. There are distinct sets of winners and los-
ers. The winners are those with gold, foreign currency, land
and other hard assets including factories, natural resources
and transportation equipment. The losers are those with fixed
income claims such as savings, pensions, insurance policies
and annuities. Debtors win in hyperinflation because they pay
off debt with debased currency. Creditors lose because their
claims are devalued.
Hyperinflation doesn’t emerge instantaneously. It begins
slowly with normal inflation and then accelerates violently at
an increasing rate until it becomes hyperinflation. This is critical