Published in 1989 to educate US businessmen on how to cope with hyperinflation, Gerald Swanson’s book “The Hyperinflation Survival Guide: Strategies for American Businesses” contains a wealth of lessons for non-business folks as well. If you run a business or have investments, do yourself a favor and read the book. For the rest of us, here is a concise adaptation (and updating) of Swanson’s business lessons for the individual / family.
Hyperinflation is defined as “rapid, debilitating inflation that leads to a major devaluation of a country’s currency”. Argentina, Bolivia, and Brazil in the 1980s were used as case studies to extract lessons for the US. In all cases government overspending, and paying for deficits with printed money is the underlying cause – sound familiar? The fiat money supply supply was grown exponentially, and the foreign exchange value of the currency plummeted. Foreign exchange, and wage / price controls followed.
Are We Facing Hyperinflation Now?
With almost a doubling of the adjusted monetary base since August 2008, serious inflation is already “baked in the cake” as those clever folks at Casey Research put it. The M1 has already spiked 10%.
With ongoing multi-trillion dollar deficits, hyperinflation is a distinct possibility. The prescient economist Dr. Gary North is of the opinion that the Fed will be smart enough to pull back and keep it confined to mass inflation. When push comes to shove, he thinks they will choose a full-blown depression over the horrors of hyperinflation. Of course this assumes no major mistakes from the Fed in a situation where past mistakes, and a rickety mal-investment economy make the path between hyperinflation and depression increasingly narrow. As government regulation, taxation and inflation has distorted the natural order of the economy more and more, the mal-investments made become more and more severe. The endgame is an economy so distorted and arthritic that it can only sink into depression to correct the mal-investment, or be stimulated into hyperinflation. We are a long way down that road – how much further we will go is a matter for debate. Bottom line, the lessons of this little book are worth internalizing, as we are going to have serious inflation – the only question is how much, and for how long. The following are lessons from Swanson’s book:
Time Eats Money
Lesson Numero Uno – keep repeating the mantra “time eats money” – over even short time periods. Ingrain this in your thinking. If you continue to act as you have in the past, your wealth and standard of living will be eaten… Cash in the bank, or currency in hand, is a rapidly depreciating asset – a “hot potato“.
A 1% per month inflation rate means the purchasing power of $100 in the bank or currency is reduced to $88 in one year. But at 10% per month inflation, $100 goes down to $31 in 12 months! At 20%, just 11 cents of purchasing power left.
As Rawles keeps repeating – get out of cash and into tangibles, Tangibles, TANGIBLES.
Get your income into another currency, precious metals, or tangibles EARLY and FAST to preserve purchasing power. (2009 update to the book – are there really any hard currencies left outside of gold and silver? Even the Swiss are inflating now.) Stockpile goods you are sure you will need before they zoom up in price – part of John Pugsley’s Alpha Strategy.
When, and what price you buy at, may become as important to your standard of living as how much money you make. Stockpiling is even more important as governments often resort to the economic snake oil of wage and price controls. This pushes legitimate transactions onto the black market, and cripples the economy with shortages. Don’t expect a normal availability of goods. Low profit margin goods are often the first to disappear, as price controls wipe out the small profit and make production uneconomic. Imported goods will become much more expensive with currency depreciation, and/or largely unavailable with foreign exchange controls. Having your own inventory will help cushion the shortages.
If you have cash you must shop around and negotiate hard to get a high rate of interest – to at least partially keep up with inflation. Diversifying your deposits over different banks is a good idea as some banks likely will go bankrupt. Even if you are fully reimbursed by the FDIC, you will have lost a lot of purchasing power by the time the bureaucrats cut you a check.
Think REPLACEMENT Cost
Forget historical costs, it’s not what you paid in the past – it’s the REPLACEMENT cost in the future. Example – unless your insurance specifies replacement cost it‘s worthless. Selling anything, you only make a real profit if you cover the replacement cost, plus an inflated profit margin. Budget for what it will cost, not what it costs now.
Once it is underway, inflation can accelerate frighteningly quickly. When money loses value by the day or week there is no time for procrastination. You have to make decisions fast to stay ahead of the curve. Do your research, and make plans NOW. You want to be one of the first to react – not caught in the herd‘s stampede.
You have to pay close attention to foreign exchange rates, and the price of gold and silver to get a handle on what is happening in real time in real markets. Relying on government statistics that only tell you what happened in the past is like driving using your rear view mirror. Even worse, government statistics on inflation are bald-faced lies understating the REAL inflation rate.
Relying on US government numbers is like driving looking backwards – using the side mirror with that little warning “Objects are CLOSER than they appear.”
Stay ahead on the information curve – read Survival Blog daily, and follow Austrian economists who foresaw this crisis, and have made consistently good predictions, e.g.: Gary North, Richard Maybury, and Casey Research. (They all offer a lot of valuable, free information to motivate you to become a subscriber.)
Your wages will probably NOT keep up with inflation:
You get a cost of living increase to catch up on last year’s inflation, so you are always playing catch-up
The actual inflation rate is accelerating so you never get a full catch-up on the rate.
You will probably not get a full cost of living raise from your employer due to the fact that they are being hurt financially as well.
Your cost of living will probably be based on government statistics which understate the true rate of inflation.
Combine all this with possible wage and price controls, and your job income will not maintain your standard of living
Get paid by your employer weekly or even daily so you can get your earnings into tangibles right away before more purchasing power is lost. When inflation really gets rolling, even a week or day’s delay can be significant. Keep contract periods short so you can renegotiate as needed.
Try to get your pay increases tied to something real in a free market – an interest rate, foreign exchange rate on the real (“black“) market, or the price of gold or silver. Be prepared to document the basis for your request with hard evidence.
Become more valuable to your employer now. Non-essential staff will often lose their jobs. Gary North, to his credit, hammers on this theme relentlessly – “Fireproof Your Job”
You will need to be constantly negotiating with your employer about pay raises, and payment schedules to try and keep up with inflation. Be a model employee if you want your employer to help you when they are under extreme stress. Imagine trying to get a raise of more than the official inflation rate the government admits to… – “not gonna happen” unless you are a vital part of the team. Similarly, if wage controls are slapped on – you will be asking your employer to get very creative about working around regulations to compensate you – you had better be worth it…
Credit – Forget It!
Even if available, the interest rate will be horrific. Who wants to lend money that is paid back with dollars depreciated at an unknown, but accelerating, inflation rate? You’re probably on your own to finance purchases. If you have any variable rate debt, e.g., credit cards, get rid of it now before the interest rate is jacked up. Your income will probably not keep up to make the payments. If you are owed any money, better collect it fast (and have a high interest rate to at least partially compensate for projected future inflation).
On the bright side, your pre-hyperinflation fixed-rate mortgage can be easily paid off with gold or depreciated dollars – if you still have an income that has even partially kept up with inflation. Who said hyperinflation wasn’t fun? It’s great to be a previously indebted homeowner – until the riots hit your neighborhood.
Seriously, the good news is that forewarned, and acting on the knowledge, you have a big head start to survive financially, when most folks are being wiped out. You must take big, speculative risks if you want to profit, but coming out the other side with most of what you have now is a good goal, and will put you far above average.
I‘m not so optimistic about the larger society, or world in general. Read FerFAL’s blog. [JWR Adds this Proviso: Be advised that there is some crude language at his site, and some anti-Semitic statements.]
FerFAL’s blog will give you an idea of what economic desperation did to the crime rate in Argentina. Being in a safer place, with good security, and a strong team is advisable.
The truly scary part of a hyperinflation is that wiping out the life savings of the middle class tends to erode their moral base and the foundations of society. This often results in scapegoat wars, and guys like Hitler becoming more popular. To get a feel for Weimar Germany, read When Money Dies
As they say, history doesn’t repeat exactly, but it often rhymes, and we aren’t starting off with an overabundant moral base…