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“Hyperinflation,” our own Jim Rickards writes, “acts like a virus with no cure.
“It may be contained for long periods of time, but once it breaks out into a general population, there may be no stopping it without enormous losses.”
Since 2008, as you may well know, many worthy and intelligent U.S, market examiners have been pounding the table for hyperinflation.
“Perhaps you’ve been following their advice and wondering why the scenario hasn’t materialized yet,” says Jim.
Well, as Rickards reveals today, there’s a clear reason it hasn’t happened yet. And it has everything to do with the Fed. But it’s not what the Fed is doing: Actually, contrary to popular thought, it’s what they’re not doing that’s keeping hyperinflation at bay.
Before we get too ahead of ourselves. Here’s a quick rundown of what you’ll find in today’s episode…
In a moment, you’ll read a first-hand account of what really happens when hyperinflation hits a country.
At the age of 15, Martin Malchev lived through Bulgaria’s bout of hyperinflation in 1996-97. We’ve decided to share his story with you, courtesy of the Kung Fu Finance blog.
And after that, Rickards will take the mic to explain why… despite all the well-informed prognosticators beating the hyperinflation drums for years… hyperinflation hasn’t happened yet in the U.S.
And, more importantly, why it’s still more than possible (possibly even inevitable)… and how to prepare.
First, Malchev’s story illustrates perfectly just how rapidly a steady stream of low inflation can accelerate into a gusher of hyperinflation.
Case in point:
“If in 1989,” Malchev wrote, “somebody had said to a Bulgarian banker that he would be an eyewitness of a hyperinflation— that somebody would probably have been laughed at.
“Alas, most people were doing the opposite of laughing seven years later.”
In 1989, Malchev explains, the Bulgarian lev could’ve been exchanged one-for-one with the dollar.
By March 1997, 3,000 levs were exchanged for every dollar.
“But what was more shocking was that in December 1996,” says Malchev, “the exchange rate was $1 equals around 300 levs. The jump from 300-3,000 happened in less than three months.”
What happened in between is the subject of today’s cautionary tale.
We have lots to cover. So get comfy and let’s begin.
“I was fifteen when hyperinflation peaked,” says Malchev, “and I didn’t have much to lose, so I wasn’t as worried as my parents and the rest of the adults in the country.
“I remember that I was irritated when my parents were giving me 200 levs to buy a snack at school, but before the lunch break, the price of the snack was already 300 levs.
“The next day, I asked for 300 levs, only to find out that now the price was 400 levs.
“Prices were changing daily, sometimes two or three times a day.
“But one of the few things that was not changing daily, but monthly, was wages. When workers received their paychecks, they were so inflated they couldn’t buy much with them.
“People were practically working for nothing.
“At some point, the shops stopped changing their prices a couple of times a day and instead closed their doors entirely. It was no longer rational to trade in levs, but ordinary people didn’t have any currency.
“So the economy stopped. Or should I say, collapsed. And the riots began.
“Millions of angry and hungry people were protesting in all towns and cities all over the country. For good or for bad, Bulgarians are not very violent people, so nobody was killed during the protests. Nor were there any pillages like those in England that occurred some time ago.
“Some government buildings were seriously damaged, but given the scale of the protests — that was nothing.
“There were clashes between citizens and the police and the usual arrests, bleeding noses, missing teeth, et. cetera.
“Back then, I didn’t realized that 99% of the people protesting had just lost all of their money. They had no money… and if they did have money, there was nothing to buy, because all the shops were closed.
“On top of this, it was so very cold. It was winter when the riots took place, and it was so cold that people were often jumping at those protest meetings in order not to freeze.
“But while some were jumping and protesting, others were profiting by all of these events.
“A small part of them saw it coming and got prepared. A bigger part was informed that this was about to happen and also got prepared.”
What did these Bulgarians do to weather the storm and even thrive despite it? It’s actually quite simple. And with a few simple steps, you can be prepared for whatever comes too.
That’s where Jim can help today. We’ll let him take the floor.
Jim Rickards Presents…
Hyperinflation: It Can (Still) Happen Here
Six years and $4 trillion of Federal Reserve money printing after the 2008 crash, you may think to yourself, if hyperinflation were ever going to happen in the U.S., it would’ve already.
In fact when I write “hyperinflation,” you might only think of two images. One, a reckless third-world country like Zimbabwe or Argentina printing money to cover government expenses and worker salaries to the point where trillions of local “dollars” or pesos are needed to buy a loaf of bread.
The second image is of the same phenomenon in an advanced country such as Germany, but long ago. Perhaps you think of grainy, black-and-white photos from the 1920s.
The last thing you probably think of is hyperinflation in a 21st-century developed economy such as the United States.
Yet it can happen here. In fact, the United States flirted with hyperinflation in the late 1970s, and before that in the late 1910s. Other episodes arose after the Civil War and the American Revolution. Hyperinflation acts like a virus with no cure. It may be contained for long periods of time, but once it breaks out into a general population, there may be no stopping it without enormous losses.
Many investors assume that money printing by governments to cover deficits is the root cause of hyperinflation.
Money printing does contribute to hyperinflation, but it is not a complete explanation. The other essential ingredient is velocity or the turnover of money. If central banks print money and that money is left in banks and not used by consumers, then actual inflation can be low.
This is the situation in the U.S. today. The Federal Reserve has expanded the base money supply by over $3 trillion since 2008. But very little actual inflation has resulted. This is because the velocity of money has been dropping at the same time. Banks are not lending much, and consumers are not spending much of the new money; it’s just sitting in the banks.
Money printing first turns into inflation, and then hyperinflation, when consumers and businesses lose confidence in price stability and see more inflation on the horizon. At that point, money is dumped in exchange for current consumption or hard assets, and velocity increases.
As you’ll see below, hyperinflation does not affect everyone in a society equally.
There are distinct sets of winners and losers. The winners are those with gold, foreign currency, land and other hard assets including factories, natural resources and transportation equipment. The losers are those with fixed income claims such as savings, pensions, insurance policies and annuities. Debtors win in hyperinflation because they pay off debt with debased currency. Creditors lose because their claims are devalued.
Hyperinflation doesn’t emerge instantaneously.
It begins slowly with normal inflation and then accelerates violently at an increasing rate until it becomes hyperinflation. This is critical for investors to understand because much of the damage to your wealth actually occurs at the inflationary stage, not the hyperinflationary stage. The hyperinflation of Weimar Germany is a good case in point.
In January 1919, the exchange rate of German reichsmarks to U.S. dollars was 8.2 to 1. By January 1922, three years later, the exchange rate was 207.82 to 1. The reichsmark had lost 96% of its value in three years. By the standard definition, this is not hyperinflation, because it took place over 36 months and was never 50% in any single month.
By the end of 1922, hyperinflation had struck Germany with the reichsmark going from 3,180 to the dollar in October to 7,183 to the dollar in November. In that case, the reichsmark did lose half its value in a single month, thus meeting the definition of hyperinflation.
One year later, in November 1923, the exchange rate was 4.2 trillion reichsmarks to one dollar. History tends to focus on 1923 when the currency was debased 58 billion percent. But that extreme hyperinflation of 1923 was just a matter of destroying the remaining 4% of people’s wealth at an accelerating rate. The real damage was done from 1919–1922, before the hyperinflation, when the first 96% was lost.
If you think this can’t happen here or now, think again. Something like this started in the late 1970s. The U.S. dollar suffered 50% inflation in the five years from 1977 –1981. We were at the takeoff stage to hyperinflation, exactly where Germany was in 1920 on a relative basis. Most wealth in savings and fixed income claims had been lost already. Hyperinflation in America was prevented then by the combined actions of Paul Volcker and Ronald Reagan, but it was a close call.
Today the Federal Reserve assumes if inflation moves up to 3% or more in the U.S., they can gently dial it back to their preferred 2% target. But moving inflation to 3% requires a huge change in the behavior and expectations of everyday Americans. That change is not easy to cause, but once it happens, it is not easy to reverse, either.
If inflation does hit 3%, it is more likely to go to 6% or higher, rather than back down to 2% because the process will feed on itself and be difficult to stop. Sadly, there are no Volckers or Reagans on the horizon today.
There are only weak political leaders and misguided central bankers.
Inflation will accelerate as it did in the U.S. in 1980 and in Germany in 1920. Whether hyperinflation comes next remains to be seen, but it can happen more easily than most people expect. By then, the damage is already done. Your savings and pensions will mostly be gone.
The assets you need now to preserve wealth in the future are simple and timeless. Gold, silver, land and select tangibles in the right amounts will serve you well. Mutual funds designed specifically to protect against inflation should also be considered.
Should you be borrowing money?
A common question I get from readers is, “Should I be borrowing money, given the threat of hyperinflation?”
My answer is that if you have a legitimate reason to borrow, such as to finance a house or something like that, and you can afford it without being overleveraged, that’s fine.
But I would not advise you go out and borrow a lot of money right now to lever up. That strategy only works if we do, in fact, experience inflation. The trouble is that the inflation might not come right away. We might be faced with deflation. That’s why I recommend having a balance of hard assets and cash.
When I say cash, I’m not talking about money market funds or bank CDs. Instead, I mean the highest-quality instruments you can get. If you’re a U.S. investor, that would be U.S. Treasury bills or 1-year notes.
Then get hard assets to protect you from inflation. The cash protects you in deflation and reduces volatility. It’s hard to know which one we’re in for, so you should prepare for both. Next month, we’ll be taking a closer look at the threat of deflation and how you can prepare.
We’re setting up an extra special issue for you tomorrow. Don’t miss it.