Great Expectations for Silver in an Inflationary World

Many observers currently expect the Chinese economy to land softly, perhaps relying on domestic stimulus measures alone. Nevertheless, while the inflationary bias in the developed world made it easier to accept more economic stimulus plans in 2008, the situation is now different.

This means that China and other developing Asian countries are now being faced with increased de-leveraging and other fear-based financial concerns, much like Western countries have experienced in recent years.

Furthermore, both the economic trend and investor psychology is now moving against these nations. This means that either much more stimulus will be needed than anticipated or these emerging economies will collapse, thereby creating massive ripples throughout the global economic system.

Similarly, the Western return on investment bias underlies the assumption that investors will re-enter equities and other assets this time around. That bias is changing, although it may not appear that way from the news published by mainstream media.

Enter the Swan: Inflation in Response to Collapse

In an economic collapse scenario, financial systems fail and cause often irreparable damage that occurs when complexity depends on a limited redundancy. The more damage that is sustained, the less of a positive effect is typically seen from policy shifts.

For example, if a restaurant goes out of business during an extended ‘bank holiday’, it is probably not coming back to spend and hire anew once the financial system is up and running again.

Despite all of this, those running the relatively flimsy modern economies will ‘push on the string’ in their desperate attempts to avoid economic collapse at all costs. This group includes not just Fed Chairman Ben Bernanke, but the entire U.S. political and financial establishment and the vast majority of "mainstream" U.S. politicians in both parties.

They are desperate because most of them know two things:

(1) Pushing on a string will not work and

(2) They have run out of ways to perpetuate a credit expansion in the United States, and in the absence of a credit expansion, the long-delayed economic collapse is inevitable.

It may be easier to view the inflationary scenario as possible in an economic collapse because pumping more money into an economic system tends to “float all boats”. Keeping these metaphorical boats afloat has been the driving force behind monetary policy for at least two generations.

Although there could very well be a period of money supply contraction, it will likely be short term since the central banks around the world will supply their Treasuries — and whatever other "important" foreign entities require funding — with whatever amount of readily printed cash that they need.

Currency Depreciation Yields Higher Silver Prices

This brings the focus back onto a currency depreciation event, not an economic event, which is triggered by the excessive expansion of the supply of un-backed paper money within a country.

Basically, consumers and businesses purchase fuel, copper, lumber, artwork, jewelry, guns, etc., and these items become more expensive in Dollars as other buyers do the same thing. This competitive demand process "bids" the price of such items upwards while their supply remains relatively constant.

In such an inflationary scenario, these goods are not produced to a higher quality standard to become more valuable and hence worth a higher price. Instead, the perceived or real value of the paper currency declines, and so more and more of that currency must be exchanged for the same product as the currency depreciates.

The easiest way to avoid such an inflationary spiral led by a depreciating paper currency is by investing in precious metals. Silver is currently more affordable than gold, and both precious metals are still legal to buy.

Basically, the best one can hope for when faced with an economic collapse is a return on and of your investment. In such a scenario, precious metals like silver should appreciate considerably, which can keep your invested capital safe from the ravages of paper currency depreciation and provide a handsome profit as well.

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