Hyperinflation Can Happen Much Faster Than You Think
by Jim Rickards
There’s no universally agreed-upon definition of hyperinflation. But one widely used benchmark says hyperinflation exists when prices increase 50% or more in a single month. So if gasoline is $3.00 per gallon in January, $4.50 per gallon in February and $6.75 per gallon in March and the prices of food and other essentials are going up at the same pace, that would be considered hyperinflationary.
It also tends to accelerate once it begins, meaning the monthly 50% increase soon becomes 100%, then 1,000%, etc., until the real value of the currency is utterly destroyed. Beyond that point, the currency ceases to function as a currency and becomes litter, good only for wallpaper or starting fires.
Many investors assume that the root cause of hyperinflation is governments printing money to cover deficits. Money printing does contribute to hyperinflation, but it is not a complete explanation.
As I mentioned above, 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 $6 trillion since 2008, with over $3 trillion of that coming since last February alone.
But very little actual inflation has resulted, or at least very little official inflation. This is because the velocity of money has been decreasing. Banks have not been lending much, and consumers haven’t been 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, thus increasing velocity.
As inflation velocity spikes up, expectations of more inflation grow, and the process accelerates and feeds on itself. In extreme cases, consumers will spend their entire paycheck on groceries, gasoline and gold the minute they receive it.
They know holding their money in the bank will result in their hard-earned pay being wiped out. The important point is that hyperinflation is not just a monetary phenomenon — it’s first and foremost a psychological or behavioral phenomenon.
Hyperinflation doesn’t 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. 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 example of this.
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 one dollar in October to 7,183 to one 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, beforehyperinflation, when the first 96% was lost.
If you think this can’t happen here or now, think again. As I also mentioned above, something like this started in the late 1970s. The U.S. dollar suffered 50% inflation in the five years from 1977–1981. We were taking off toward hyperinflation, relatively close to where Germany was in 1920.
Most wealth in savings and fixed income claims had been lost already. Hyperinflation in America was prevented 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, and once it happens, it is even harder to reverse.
If inflation does hit 3%, it is more likely to go to 6% or higher, rather than back down to 2%. 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.
Hugo Stinnes is practically unknown today, but this was not always the case. In the early 1920s, he was the wealthiest man in Germany, at a time when the country was the world’s third-largest economy.
He was a prominent industrialist and investor with diverse holdings in Germany and abroad. Chancellors and Cabinet ministers of the newly formed Weimar Republic routinely sought his advice on economic and political problems.
In many ways, Stinnes played a role in Germany similar to the role Warren Buffett plays in the U.S. today. He was an ultra-wealthy investor whose opinion was eagerly sought on important political matters. He exercised powerful behind-the-scenes influence and seemed to make all the right moves when it came to playing the markets.
If you’re a student of economic history, you know that from 1922–1923 Germany suffered the worst hyperinflation experienced by a major industrial economy in modern times.
Yet, Stinnes was not wiped out during this hyperinflation. Why was that?
Stinnes was born in 1870 into a prosperous German family that had interests in coal mining. Later, he inherited his family’s business and expanded it by buying his own mines.
Then, he diversified into shipping, buying cargo lines. His own vessels were used to transport his coal from his mines abroad and within Germany along the Rhine River. His vessels also carried lumber and grains. His diversification included ownership of a leading newspaper, which he used to exert political influence. Prior to the Weimar hyperinflation, Stinnes borrowed vast sums of money in reichsmarks.
When the hyperinflation hit, Stinnes was perfectly positioned. The coal, steel and shipping retained their value. It didn’t matter what happened to the German currency; a hard asset is still a hard asset and does not go away even if the currency goes to zero.
Stinnes’ international holdings also served him well because they produced profits in hard currencies, not worthless reichsmarks. Some of these profits were kept offshore in the form of gold held in Swiss vaults. That way he could escape both hyperinflation and German taxation. Finally, he repaid his debts in worthless reichsmarks, making them disappear.
Not only was Stinnes not harmed by the Weimar hyperinflation, but his empire also prospered, and he made more money than ever. He expanded his holdings and bought out bankrupt competitors.
Stinnes made so much money during the Weimar hyperinflation that his German nickname was Inflationskönig, which means Inflation King. When the dust settled and Germany returned to a new gold-backed currency, Stinnes was one of the richest men in the world, while the German middle class was destroyed.
Stinnes saw the German hyperinflation coming and positioned accordingly. Hyperinflation may or may not arrive in the U.S., but you can be certain that inflation eventually will.
You might not become ultra-wealthy like Stinnes, but by owning hard assets like silver and gold, you can actually prosper from the coming inflation while millions of Americans see the value of their savings destroyed.
But you can’t wait until serious inflation arrives. By then it’ll be too late. Make sure you have your gold and other hard assets beforehand. There’s no time like the present.
(TLB) published this article from The Daily Reckoning
About the author
James G. Rickards is the editor of Strategic Intelligence. He is an American lawyer, economist, and investment banker with 35 years of experience working in capital markets on Wall Street. He was the principal negotiator of the rescue of Long-Term Capital Management L.P. (LTCM) by the U.S Federal Reserve in 1998. His clients include institutional investors and government directorates.His work is regularly featured in the Financial Times, Evening Standard, New York Times, The Telegraph, and Washington Post, and he is frequently a guest on BBC, RTE Irish National Radio, CNN, NPR, CSPAN, CNBC, Bloomberg, Fox, and The Wall Street Journal. He has contributed as an advisor on capital markets to the U.S. intelligence community, and at the Office of the Secretary of Defense in the Pentagon.Rickards is the author of The New Case for Gold (April 2016), and three New York Times best sellers, The Death of Money (2014), Currency Wars (2011), The Road to Ruin (2016) from Penguin Random House.
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