HyperInflation

“The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists.” - Ernest Hemingway

We live in brave, new, perilous times for the US economy. Historically the US dollar has been the most trusted currency in the world. But that could change given the unprecedented level of debt that the current administration is creating. Here are some recent headlines:

• Profligate borrowing and spending puts America’s AAA credit rating at risk


• Fed cannot account for $9 trillion


• Nothing Suggests We're Anywhere Near the Bottom of this recession


• April Foreclosures Rise 32%


• Social security to run out of money...


• Medicare already in the red

And yet things could become even worse. Typically when governments print new money to cover overspending and debt, the result is inflation. Huge debt and a loss of faith in a nation’s ability to pay can lead to hyperinflation where rates of currency devaluation can exceed 50% a MONTH. Few people comprehend what a high compounding interest rate can do. At 50% monthly inflation, a loaf of bread that costs $1 in January will be $1.50 in Feb, $2.25 in March, $3.38 in April, $5.06 in May, and $86.50 by December. After two years the $1 loaf would sell for $11,223.

When hyperinflation occurs, normal cash is insufficient; who carries $11,000 in their wallet? The government starts printing larger denomination bills in response. Instead of $10, we start carrying $100 bills, then $1000, then $10,000 bills, etc. You may be thinking, where would I get $10,000? If you’re lucky your salary will be adjusted for inflation and your pay will skyrocket; though probably not as fast as prices are skyrocketing.

Some real world examples of Hyperinflation include:

• The 1923 Weimar Republic of Germany issued two-TRILLION Mark banknotes and a postage stamp worth 50 Billon Mark. Banknotes lost value so quickly that some were used as wallpaper.


• In 1946 the Hungarian National Back issued a banknote for 100 quintillion pengo (100,000,000,000,000,000,000). Hyperinflation in 1946 Hungary peaked with prices doubling every 13.5 hours. This record held until 2008…


• In July of 2008 in Zimbabwe, an egg cost ZW$50 billion yet ATM withdrawals were limited to ZW$100 billion to keep the machine computers from crashing due to numerical overflow. One British pound was worth ZW$1.2 trillion. With an estimated annual inflation rate of 90,000,000,000,000,000,000,000% many shops would only cash checks if the customer wrote double the amount, because the cost would go up by the time the check had cleared.

Bottom Line

Will the US experience extreme levels of inflation? No one knows. Normally a recession is an antidote to inflation since record levels of unemployed people have little money to spend and this drags prices downwards. The official US inflation rate for March 2009 was negative, a state of deflation. (US Prices Fall Most Since 1955) But despite economic theory – sometimes you get the worst of both – inflation and unemployment. This is called Stagflation and occurred in the US under President Carter in the 1970s.

How can you prepare for inflation and what can you do about it? SurvivalBlog.com has some answers:

1. Time Eats Money. Know the rate of inflation vs. your rate of return on investments. If inflation were 5% annual and your savings accounts pays 1% then you are losing 4% of you money every year. Look at your stocks and bonds also. What are they paying out vs. inflation? You may need to find an account that pays better or…


2. Convert your money to tradable goods, like silver and gold, that hold their value. Personally, I’m not a big fan of this. Who can I trust to buy my gold back? In college I sold an engagement diamond ring back to a jeweler and got just 1/10th of its value. And are you savvy enough to avoid being defrauded with diluted or false silver/gold?
   
3. Stockpile useful goods that you will use or can barter. The “sin” goods of alcohol and tobacco will always be wanted and often become “currency” in regions where money is lacking. Or you can keep your hands clean and store more honest goods like aspirin and other medicines, canned foods, soda drinks, grain, etc. Don’t stockpile anything that will spoil. And don’t boast about your stockpile least you become the target of thieves.


4. You might also convert your dollars to the currency of other nations that are not in a crisis. However with this global recession, who isn’t in trouble? And beware! Those offering the best rates on CDs are often the most desperate and on the verge of collapse. Iceland was the darling of Europe with amazing currency and bank rates until the bubble burst and the nation essentially went bankrupt overnight.


5. Think replacement cost. With hyperinflation you must always know the current and near-future value of goods. Yesterday’s prices or what you spent before is meaningless. Recall the stores in Zimbabwe asking for double the cost value in checks because of time it takes for checks to clear. Home insurance for the purchase price of your home is useless. You need to be insured for the replacement cost to rebuild in the future. Likewise you might buy something at $10 and sell for $15 and feel quite proud. But while you held the item its value increased 100% so you really sold $20 at a loss.