The Financial Times' Javier Blas has written two excellent articles examining the surging demand for gold amid a growing lack of supply ('Investors start fresh Gold Rush' and 'Wealthy investors hoard bullion') [see News section of homepage].

In them he outlines how "investors in gold are demanding"unprecedented" amounts of bullion bars and coins and moving them into their own vaults as fears about the health of the global financial system deepen."

He astutely notes Alan Greenspan's observations regarding fiat paper money and the value of gold as being the "ultimate form of payment in the world"

""Fiat money, in extremis, is accepted by nobody," Alan Greenspan, the former chairman of the US Federal Reserve, told lawmakers in Washington almost a decade ago."Gold is always accepted," he added.

The"in extremis" scenario was for years only a possibility in the mind of die-hard gold bugs, but the financial crisis is leading regular investors – from the ultra-rich to middle-class savers – to believe that the environment in which Mr Greenspan said fiat money would be worthless is now around the corner. ...

The investors’ response is a rush into physical gold not seen since the second oil crisis in 1979, bankers say. The shift into gold coins and bars is so extreme that it is causing shortages at refineries and mints around the world. "

With the Federal Reserve and global central banks injecting thousands of billions of dollars, euro, pounds, yen and Swiss francs (primarily dollars though) into the global financial system in order to prevent a systemic meltdown and contagion, a degree of monetary debasement is taking place that has not been seen in wealthy industrialised economies since Germany's Weimar Republic's money printing in order to pay off World War I debt reparations. This led to hyperinflation and destruction of the German mark and economy and the rise of the Nazis.

The scale of the money printing today is more akin to that seen in badly mismanaged less developed countries such as Argentina and other South American and African countries in the late 20th century. The fiscal ramifications of the money printing are massive and yet to be realised.

A more recent example of massive money printing is Zimbabwe, one of Africa’s most prosperous nations until recently, which is now suffering from a crushing hyperinflation, last reported to be at 11.2 million percent. The Zimbabwean central bank has unveiled a series of ever-larger notes since August, when it struck 10 zeros off the local currency that had become so weak that billions of dollars were required just to buy a loaf of bread.

Few are suggesting that America will go the way of Zimbabwe, but the present bout of "fiat money in extremis" risks a severe bout of stagflation that would make the stagflation of the 1970s look positively benign.

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-- Posted Wednesday, 1 October 2008 | Digg This Article