Embrace The Coming Hyperinflation!
John Soltez
September 8, 2010
Hyperinflation, or just a bunch of hype? That is the hot debate among economist types these days. On one side are the alarmists, sounding their warning sirens, flashing us pictures of Weimar-era Germans using wheelbarrows for wallets. On the other side are the skeptics and the pooh-poohers, such as Fortune magazine, which recently ran an article headed with the comment "irrational fears of hyperinflation won't die."
Right now, it's hard to argue with the doubters, particularly at a time when the Fed is doing all it can to fight deflation - whether it's buying up credit-card debt, or swelling up the money supply like a pregnant elephant. Unlike the Weimar folks, the thinking goes, we hold the world's reserve currency; theoretically we could inflate to kingdom come, and someone will still have to buy our debt. Hyperinflation threat? Stick it in the panic shelter along with the tuna fish and the shotgun shells.
The skeptics may be missing the point, though. Inflation, as Friedman famously remarked, is a monetary phenomenon. Hyperinflation, however, is a different animal altogether; despite common belief, it's not simply inflation on steroids. No, it stems from a different seed, one that involves politics rather than economics.
Hyperinflation has a lot more to do with incompetent government than runaway money creation. Both kinds of inflation involve currency debasement, but it's how that debasement occurs that makes the difference. During a period of hyperinflation, investors and consumers lose faith in government itself. And how do they grade this failure of confidence? By marking a big fat "F" on the government's report card, otherwise known as the national currency.
That's why, despite the non-stop running of the treasury's printing press, we've yet to experience the high-octane brand of inflation - again, because it's not a monetary phenomenon, but a political one. Yet make no mistake about it - should the American public show further signs of loss of faith in government, we will see hyperinflation.
When we do, what will it look like? Besides Weimar, we have a modern glimpse of life during hyperinflation: Argentina, circa 1989.
For the "can't happen here" crowd, keep in mind this was pretty much the same sentiment in that country up until the late '80s. Argentina had been the most prosperous country in South America, home to the continent's most productive and educated citizenry. "Rich as an Argentine" once constituted a popular saying. It was said that a walk into the country's central bank vaults was like walking into a pirate's stash cave, pregnant with gold bars.
And then, seemingly overnight, it all changed, as the Argentine government began to print money like there was no mañana, mainly as a way to keep outlandish political promises without suffering the unpopularity of raising taxes (sound familiar?). To keep the printing presses rolling, the government began to borrow heavily from the world and the IMF. Pretty soon the borrowing had spiraled out of control, until nobody - including the country's own citizenry - had confidence in the Argentinean government anymore.
Once the government failed the faith test, its currency got a big "F" on the Forex. Down went the peso like Liston to Ali; down went the poor Argentinean citizen's purchasing power. Suddenly, the supermarket stopped playing that canned music over its speakers, replacing it with a gentleman who barked out prices as they rose seemingly by the minute. "One peso fifty a pound, one peso seventy-five, one peso ninety…" The shopper rushed through the aisles, racing to get to the check-out counter before that pot roast went up another two percent. Oh what fun it must have been!
Argentina, land of of the gaucho, famous for its beef - back then you'd have been lucky to afford ground chuck, let alone a sirloin. Or you'd - as many people actually did - skip the supermarket, choosing to wait by the roadside, hoping to catch some falling meat or vegetable scraps from a passing delivery truck.
I could quote you the unemployment figures from that era, but I don't want to bring you down any more. (Besides, who needs depressing jobs numbers when you've got the government statisticians to cook the data?) As you can imagine, society didn't always function in an orderly fashion, and the crime rate soared along with the inflation rate. The government imposed curfews, though by then few people wanted to venture out after dark anyway.
So, my fellow American, now that you've seen what happened - really did happen - elsewhere, how do you prepare for a future in kind? As I like to say, an ounce of preparation is worth a pound of panic.
Why scare? Prepare! That way if the hyperinflation ever does come, you'll be ready. Get in shape, sort of like you might for a sport, with training exercises like these:
--- Two sets of squats daily, to strengthen the thigh muscles. This should come in handy when you're crouching in the brush, waiting for those food delivery trucks to pass by.
--Sprints, to build up both speed and endurance, for those dashes to the check-out counter to beat those skyrocketing prices. "Attention shoppers there is a sale on peanut butter in aisle five… $4.50 a jar… no wait, $4.65… make that $4.85…"
--Bicep curls and tricep dips: the better to carry those extra gas cans to the filling station on days when unleaded dips down under twenty five bucks a gallon. Also good for those wheelbarrow runs to the bank when direct deposit lets you down.
Or you can try this little exercise: walk down to your nearest reputable metals dealer, and purchase a little gold. If you can't afford that, try silver: at even $20 an ounce, it's still cheap. Not only that, but look for silver's value to rise, percentage-wise, even more than gold's. I know I am.
That way, if the worst ever comes, you've got an asset that will hold its value and more, recalling the famous story of the bellboy who bought the hotel he had worked at with the gold coin he'd purchased before all the German inflation hit. And if the storm never arrives? Well, at worst you've got a few shiny trinkets to go with your peace of mind.
Anyway, let's get back to the present. Above is a USDX chart; I'd like you to notice two things: one from a short-term perspective, the other from a long-term one. First, the short term: as you can see, the dollar's been a raging bull lately, just off its recent highs around 90. The patient's in fine shape, right?
Well, step back and look at the bigger, longer-term picture. The chart shows what appears to be a nasty triple top starting in 2005; others might see a continuation of a bear flag that's been in motion since the turn of the last decade. Neither speaks well for the dollar's future value.
If you believe charts speak, then this one's screaming out a warning. But what would ultimately take down the mighty dollar? Judging from the latest Presidential approval ratings, I'd say loss of confidence in government is as good a suspect as any. And remember, it's loss of faith in its policymakers that ultimately wrecks a country's currency - not the speed at which it runs its printing presses.
Once the dollar tips over the cliff, and the USDX breaks long-term support down at 72, gold's rise is assured. The question isn't if, or even when - it's how high, and how fast? I believe the answer will amaze us all. One thing's for certain though: gold cannot reach its long-awaited "blow off" phase until this hyperinflationary stage comes to pass.
Anyway, let me close with some good news: Argentina eventually bit the silver bullet, and took the steps necessary to crawl out of the hyperinflationary hole. Apparently it can be done - but not until the government gets serious about things. That includes a more sound and disciplined monetary policy. The Argentineans eventually pegged their peso to the dollar - who knows, perhaps one day we'll be pegging the dollar to gold!
BUENOS AIRES, May 21, 2010 (Reuters) - Argentina's economy grew at its fastest pace in nearly two years in March, expanding a sizzling 8.1 percent from a year earlier as brisk industry activity strengthened a recovery, the government said.
There were other signs that Latin America's No. 3 economy is putting last year's sharp slowdown behind it. Factory production soared in April and the trade surplus narrowed as demand for imported goods continued to pick up.
For Argentina, all's well that ends well. Here in the U.S., the fun may be just getting started. Consider the implications of the American public's recent dissatisfaction with its own government. Should We the People get to the point where we're ready to dump our leaders, you can bet the world's markets will dump the dollar - reserve-currency status or not. The rest will be hyperinflationary history.
JOHN SOLTEZ is a trader and the author of the novel Only in America, the story of a young professional struggling to cope with life during a time of social unrest (which includes hyperinflation). You can check out this critically-praised book at www.amazon.com/dp/061533007X Reach John with comments at: jsoltez@gmail.com
Copyright 2010 by John Soltez. All rights reserved.
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