By “hyperinflation”, I assume that you mean inflation of the order of 50% per year or even much worse.
History of the Fed: The Fed has been in existence since 1913 and the US went off the gold standard somewhere around 1935, but retained some form of it in allowing gold-covertibility to foreign banks. This too was ended in 1971.
History of the gold price: In 1935, $35/ounce. In 1971, $44/ounce. Today (2005), $445 an ounce.
Inflation: If one takes the “price of a dollar”, in terms of gold, one would find that it has lost value at less than 8% per year between 1971 and 2005. However, in 1980, gold almost hit $900 an ounce. So, if one takes the period 1971-80, one finds the dollar declining @ about 35% per annum in terms of gold. Ofcourse, one then has the value of the dollar rising, not falling, between 1980 and today.
Recent History: If you take more recent history, you will see that the price of the dollar has been virtually steady (in gold terms) since about 1990, with a slight rise in the late 1990’s/early 2000’s.
Relevance of the Gold Price: The price of gold does not reflect the contemporaneous value of the dollar in terms of other commodities. It is predictive of the long-term value of the dollar. So, for instance, in 1980, the huge decline in the dollar’s value in terms of gold, did not reflect a similar decline in the dollar’s value in terms of other goods (CPI for 1979 was 11%, for 1980 it was 13.5%). The relatively higher jump in the price of gold reflected deteriorating inflation expectations for the future.
Gold thus acts as an indicator of “the market’s” longer-term inflation expectations and therefore will react sharply if the market perceives a substantially changed future. Ofcourse, in the 1980’s case, the market was wrong. The US corrected many of its prior economic misdeeds in the area of money-supply, and gold came back to under $500 an ounce. Similarly, the strong dollar of the late 1990’s/early 2000’s reflected the market’s unrealistic expectations that economic nivana was around the corner: that the stock market would go sky high, and inflation had been wiped off the face of the earth!
Money Supply: What if one uses money supply as an indicator of inflation? After all “inflation” originally simply meant that: inflation of the money-supply. In 1971, M1 was $215, and M3 was $685 (billions). Today (2005), M1 is 1360 and M3 is 9570. So, M1 grew at 6% per year, while M3 grew at a little over 8%. However, if you look at the past 10 years, you find that M1 grew at under 2% per annum while M3 grew at 8%.
From all this historical data, I cannot find any evidence that the dollar is heading significantly lower. Also, the Fed is not doing anything significantly differewnt from the past. It does do some things better: for one, it places a higher importance on price level control than it used to in the 60’s and 70’s and it keeps the market informed about its next few moves, so that there are few surprises.
If you have any reason to believe that the US is heading toward hyperinflation, I’d be curious to understand what it is.
