Robert Kiyosaki has once again ignited a heated debate surrounding the outlook of the American economy by expressing concerns about an upcoming hyperinflation. It is crucial to understand the concept of hyperinflation, understand its underlying causes, and evaluate Kiyosaki’s assertions to determine whether widespread panic is justified.
Hyperinflation can be defined as an extreme and rapid increase in prices within an economy. Unlike regular inflation, which represents a gradual rise in prices over time, hyperinflation is characterized by a destructive spiral where prices can double, triple, or even increase exponentially within a short span.
However, it is almost impossible for US dollar to experience hyperinflation.
Now here are 5 reasons you shouldn’t worry about hyperinflation.
1. US dollar is still the world’s reserve currency
Although there is significant discussion surrounding the BRICS nations’ rejection of the U.S. dollar as the global trade currency, the reality remains that nearly 60% of the world’s monetary reserves are still held in U.S. dollars. Transitioning from the U.S. dollar to an alternative currency would be an immense undertaking for about two-thirds of the world.
It is important to acknowledge that U.S. dollar dominance is indeed diminishing, but this decline is not occurring abruptly. Over a span of 23 years, the U.S. dollar’s share of the world’s reserves has decreased from approximately 70% to 59%. During the same period, the euro, the closest competitor, has experienced a slight increase in its share from roughly 18% to 21% of global reserves.
The fact that the majority of the world’s monetary reserves are still held in U.S. dollars signifies the strong position of the currency in the international financial system. It demonstrates the continued preference for the U.S. dollar as a reserve asset, driven by factors such as stability, liquidity, and the prominence of the United States in global trade and finance.
2. US dollar is backed by the world’s strongest military
Statista reports that the United States possesses the strongest military capabilities globally. Although the world has not experienced a full-scale global conflict in more than 75 years, the United States maintains a position of significant military power, which ultimately plays a role in safeguarding the U.S. dollar’s status.
It is worth noting that hyperinflation can emerge as a consequence of war, particularly when excessive borrowing or money printing occurs to finance the costs associated with military operations. During times of war, governments often resort to borrowing substantial amounts of money or increasing the money supply to meet the demands of funding.
This influx of currency into the economy, when not supported by corresponding increases in the production of goods and services, can disrupt the balance between supply and demand, leading to inflationary pressures.
3. US dollar is backed by very productive American workforce
Although the U.S. dollar is no longer backed by a gold standard, its value is underpinned by one of the most productive workforces globally. The United States possesses an economy with a substantial output, contributing approximately 15% to the world’s Gross Domestic Product (GDP). This places the U.S. economy just a few percentage points behind China, highlighting its significant role in global economic activity.
The productivity of the American workforce, coupled with the size and diversity of the U.S. economy, contributes to the stability and perceived security of the U.S. dollar as a currency. The United States has a well-established track record of innovation, technological advancement, and entrepreneurial spirit, which drives economic growth and productivity.
These factors enhance the confidence of investors, businesses, and individuals in the U.S. dollar, as they perceive it to be backed by the tangible output and economic potential generated by the country’s workforce.
4. USA owns a lot of assets
In recent years, the United States has engaged in significant money printing efforts. However, it is important to recognize that alongside this monetary expansion, the U.S. also possesses substantial assets that contribute to the stability and perceived safety of the U.S. dollar. Notably, the U.S. maintains its position as the largest holder of gold reserves worldwide, with a value exceeding $400 billion.
Gold has long been regarded as a valuable and tangible asset with intrinsic worth. The significant gold reserves held by the United States add to the strength and credibility of the U.S. dollar. These reserves act as a potential hedge against economic uncertainties and offer a measure of stability to the currency.
In addition to gold, the United States holds other reserves amounting to nearly $250 billion. These reserves include assets such as gold stocks and foreign currencies. The diverse nature of these reserves further bolsters the security of the U.S. dollar, providing a cushion in times of economic volatility or currency market fluctuations.
5. Inflation is decreasing
In 2022, inflation surged, reaching a peak of a 9% year-over-year increase. However, the impact of recent interest rate hikes is finally manifesting as intended, leading to a decline in inflationary pressures.
The Consumer Price Index (CPI) serves as the standard metric utilized by the United States to measure inflation levels. On average, the CPI registers an annual increase of around 3%. However, the recent CPI figures indicate a significant reduction in inflation, with a year-over-year increase of 4.9%. This represents a nearly 50% decrease compared to the levels observed a year ago.
Although the current inflation rate remains relatively elevated in comparison to historical standards, it is crucial to emphasize that it is still far from the levels that signify hyperinflation. Hyperinflation is typically defined as an astronomical increase in prices, often exceeding 10,000%. The current inflation rate, while noteworthy, does not approach this extreme threshold.
The decline in inflation can be attributed, at least in part, to the actions taken by central banks to raise interest rates. Increasing interest rates is a common tool employed by policymakers to control inflation. By making borrowing more expensive, it aims to curb excessive spending and decrease price increases.
