Belarus Hyperinflation: Money Abhors a Vacuum

I previously pointed out of the developing crack-up boom or hyperinflation in Belarus.

If money is being perverted by governments to the point where it triggers a total loss of confidence by the public, while gold and silver may be the best refuge, people will stampede to any real assets—when gold and silver are not available and on short notice.

Belarus Ruble: US dollar From XE.com

Simon Black of the Sovereign Man gives the evidence (bold emphasis mine)

More than two decades after the fall of the Soviet Union, the Iron Curtain is still alive and well in an often forgotten corner of Eastern Europe… albeit a kindler, gentler version.

Belarus has been ruled by the same person, Alexandr Lukashenko, practically since its independence in the early 1990s.

He has total control of every facet of the country, from media and information flow, to education, to the military and ‘State Security Agency’ (which is still called the KGB), to the centrally planned economy.

Perhaps nowhere is this more obvious than with respect to the nation’s currency, the Belarusian ruble.

In 2009, one US dollar bought roughly 2,200 Belarusian rubles. In 2010, that number rose to 2,800. A year later, over 3,000. And today, one US dollar is worth over 8,000 rubles. On the black market, it’s much, much higher.

(You can just imagine how much the ruble has lost against gold and silver over the same period.)

My friends here tell me that, last summer after another bout of devaluation, it became nearly impossible to purchase euros and dollars. The currency was falling too rapidly, and no trader was willing to take the risk. Even the central bank stopped exchanging its reserves.

Consequently, small businesses in Belarus couldn’t get their hands on the hard currency they needed to pay foreigners for imported goods. Store shelves, including groceries, emptied quickly.

And people took whatever savings they had and traded it for anything they could find– sugar, toilet paper, ironing boards… you name it. As I’ve been told, hand tools were especially popular as a store of value in some parts of the country.

This is the key difference between ‘inflation’ and ‘hyperinflation’. Inflation involves a lot of painful price increases that reduce the standard of living for most people in society.

Hyperinflation, on the other hand, is a complete loss of confidence in a currency.

Anyone here who has held on to the local currency has gotten completely screwed. The few people at the top making the decisions have held on to power and become very wealthy at the expense of everyone else.

Bottom line: Like nature, money abhors a vacuum. People will switch to any form of assets with real value.

This would represent the flight into real values as warned by the great Professor Ludwig von Mises,

with the progress of inflation more and more people become aware of the fall in purchasing power. For those not personally engaged in business and not familiar with the conditions of the stock market, the main vehicle of saving is the accumulation of savings deposits, the purchase of bonds and life insurance. All such savings are prejudiced by inflation. Thus saving is discouraged and extravagance seems to be indicated. The ultimate reaction of the public, the "flight into real values," is a desperate attempt to salvage some debris from the ruinous breakdown. It is, viewed from the angle of capital preservation, not a remedy, but merely a poor emergency measure. It can, at best, rescue a fraction of the saver's funds.

Flight to Gold: Japanese Pension Shifts into Gold

The flight to safety into gold by the average Japanese seem to be escalating.

From the Financial Times,

Okayama Metal & Machinery has become the first Japanese pension fund to make public purchases of gold, in a sign of dwindling faith in paper currencies.

Initially, the fund aims to keep about 1.5 per cent of its total assets of Y40bn ($500m) in bullion-backed exchange traded funds, according to chief investment officer Yoshisuke Kiguchi, who said he was diversifying into gold to “escape sovereign risk”.

The move into a non-yielding asset comes as funds in the world’s second-biggest pension market are under increasing pressure to meet promised payments, as domestic interest rates remain rooted near zero. This year, the first of Japan’s baby boomers turn 65, becoming eligible for payouts.

Mr Kiguchi said the lack of yield was a concern for the fund’s investment committee, but he persuaded them that “from a very long-term point of view, gold may be one of the safe currencies”. He added that he had sold Australian dollars this month to meet his initial target allocation for gold for the fund, which has 20,000 members.

Mizuho Trust & Banking, a unit of Mizuho Financial Group, has begun to offer investment schemes allowing smaller pension funds to invest in gold.

While few fund managers are counting on a crash in core assets such as Japanese government bonds, said Takahiro Morita, head of the Tokyo arm of the World Gold Council, a producers’ association, they were increasingly receptive to the idea that gold could act as a buffer against shocks. “Last year’s tsunami and the eurozone debt crisis shows that it was wise to expect the unexpected,” he said.

Historically, institutions in the $3.4tn Japanese pension market have clung to traditional assets. Bonds accounted for 59 per cent of industry assets in 2011, the highest share in the world, according to Towers Watson, a consultant. Just 6 per cent – the lowest share – was invested in alternatives such as property, private equity and hedge funds.

Here is what I wrote earlier

As the BoJ works to undermine her currency, the yen, the Japanese citizenry will continue to flock into gold and or may find refuge in ASEAN assets and currencies, whom has been inflating less.

So not only events are clearly moving on my expected path, but the mainstream now acknowledges the driving force “dwindling faith in paper currencies” behind it.

The current doldrums in gold prices is likely a temporary event that has been intertwined with actions of the general commodity markets and symptomatic of the ongoing concerns of China and the Eurozone.

The Increasing Role of Commodity Currencies as Forex Reserves

Here is more proof of the declining role of the US dollar as the de facto international currency reserve.

From BCA Research (bold emphasis mine)

In addition to the dollar, four currencies – the euro, British pound, Japanese yen and Swiss franc – have accounted for the vast majority of FX reserves. For most of the last decade, it was these currencies (especially the euro) that benefited from the dollar’s relative decline in global reserves. But there has been a new development to central banks’ diversification strategy; since early 2009, central banks have been looking to what the IMF simply classifies as “other currencies”. From 2% in early 2009, “other currencies” now account for almost 5% of total reserves; the holdings of these alternative currencies increased by $300 billion over a two year period. While the IMF does not provide any further information, we speculate that it largely consists of the commodity currencies: the CAD, AUD, NZD and perhaps the SEK and NOK. For these relatively small economies, $150 billion of annual capital inflows is an enormous amount to absorb. Bottom line: Central banks in emerging economies will continue to shift a portion of their new reserves into non-dollar currencies.

So diversification away from the US dollar continues to deepen.

But this time this has not been limited to currencies of other major economies, but more evidently to currencies which are backed by commodity production-exports.

With gold knocking at the recent highs and copper also within striking range to the recent highs (oil has been creeping higher while silver still consolidating after an explosive run), the likelihood is that given the persistent crisis in major economies, which are constantly being resolved by the printing press, we should see a more expansive role for commodity currencies as international foreign reserves.

The other way to view this is that the growing role of commodity currencies signifies a symptom known as “flight to real value” to a disease known as “inflationism”.