Hyperinflation Won’t Be Like Germany’s

EST

I thought I’d overdosed on the inflation vs. deflation debate, but that was before I started reading Adam Fergusson’s When Money Dies: The Nightmare of the Weimar Collapse. Fascinating stuff. Anyone who thinks it couldn’t happen here is right in one respect: It won’t take ten years to play out in the U.S., as it did in Germany.  Far from it. My guess is that our own hyperinflation nightmare – and we will have one once deflation has had its way with all who borrowed more than they can ever pay back — will be over within ten days of the initial panic. Then it will be back to deflation for another 20-30 years.

wheelbarrow-money-small

Are you ready for it? Investors shouldn’t kid themselves about being able to avoid all the whipsaws. Just when you’re patting yourself on the back for scoring some ingots for $2000 an ounce after bullion has shot up to $5000 in mere days, quotes could plummet back down to $2000 in a blink. That would hardly be a catastrophe for long-term bulls who have been accumulating the stuff since it was $300 an ounce. But what about the guy who bet the ranch at $5000, thinking he’d get $10,000 from some greater fool a week later?  Which raises another tricky question:  When you sell your gold, what do you accept as payment?  Do you risk taking dollars whose purchasing power could fall by half overnight, as the German mark did?

Few Winners

Fergusson’s book makes clear that there were few winners and almost no big winners. Farmers made out pretty well, of course, because a potato was a potato no matter how many marks it took to buy one.  In fact, some who borrowed heavily to buy farms when hyperinflation took off in 1922 were able to retire their mortgages with proceeds from the first harvest.  A speculator these days could mimic that strategy by buying a bunch of wheat contracts when it appeared that the dollar was in imminent danger of collapse. Trouble is, the dollar could collapse tomorrow. Would you make out like a bandit if it did?  And:  If you have $50,000 sitting in a trading account for when the panic hits, how can you be sure the CFTC won’t raise margin requirements so steeply that the only players who can afford the game are Cargill and ConAgra?

I strongly recommend Fergusson’s book, the complete text of which you can access by clicking here.  Once you’ve read it, please visit the forum at Rick’s Picks, where we are having a thought-provoking discussion about the inflation/deflation conundrum.

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Comments on this entry are closed.

JR March 14, 2010, 4:48 pm

Hyperinflation, is a local event; it does not affect currencies in foreign countries, and may even help their stock markets via shifting purchasing power to unaffected countries. I help people prepare for what is coming at the below site; it will be very bad for anyone who is not prepared.
http://swissbankaccounts.webs.com/
If you have access to your foreign money in a foreign country, you are safe from hyperinflation, as well as bank failures that may result. In today’s world, Swiss banks can issue debit or credit cards that are good just about everywhere, so yo can still spend as you need to. The money you spend via debit or credit card would not be converted into the depreciating currency until the instant that the sale takes place.

Edward August 19, 2009, 10:42 pm

The idea that a hyper-inflation would come and go in a few days or weeks has no precedent, and, as such, I give it little credence. However, the question for those owning PMs concerning what to “transfer” one’s “profits” into, is very relevant. Furthermore, there is the issue of taxes on what could be, at least nominally, outsized profits. So, while leaving the question of what to buy momentarily behind, let me offer that arranging some sort of barter might be the way forward for PMs holders.

Choices of what to purchase will be more or less the same in future as they are today, but in what will likely be a chaotic environment, some items will be, for a variety of reasons, difficult to acquire expeditiously and economically.

But here are some of the choices that, depending on where one resides, and what connections ones has, may be possible. Each choice has obvious advantages and disadvantages having to do with relative liquidity, availability, percieved value, maintenance costs, taxes, “fungibility” etc.

1.) Raw Land
2.) Food Stuffs
3.) Currency
4.) Developed Property- commercial and/or residential
5.) Precious gemstones
6.) Objet d’art
7.) “Services” unspecified
8.) Other commodities
9.) Heavy equipment
10.) Businesses unspecified
11.) Stocks
12.) Bonds
I haven’t done much research on this question yet, but I imagine that bartering PMs for raw gemstones might be worthwhile.

&&&&&&

Why should precedent matter? History almost never repeats itself in a way that can be clearly foreseen and easily predicted. There’s always a twist, and in this case the speed of the collapse is exactly what we might expect to undo even those who profess to be “ready”. Bear in mind that the dollar is already a fundamentally valueless IOU, not money, and it is therefore only mere perceptions that need change to make this so in practice. That could happen — globally — in the space of time it takes to air the evening news.

Moreover, it is not the reichsmark or Zimbabwean dollar that we are talking about, but a currency in which nearly everyone on the planet has a crucial stake either directly or indirectly. Under the circumstances, and given the lightning speed at which news travels these days, it is not difficult to imagine how a global run on the dollar might become unstoppable in mere hours.

The world is ready and perhaps even resigned to the dollar’s collapse; what it is not imagining, however, is how very quickly the collapse could run its course around the world — as quickly, even, as a run on a single bank.

RA

Rich August 19, 2009, 8:44 pm

Our study of the Big 4 Commitment of Traders shows they are short precious metals, bills, bonds and big stocks. They are long select Ag, the dollar and yen.

These are deflation trades by the smartest insider money.

It seems defaults make Franklins scarce faster than helicopters can drop them.

Finally, an eerie parallel:

Hitler replaced von Hindenburg as President.
Markets gave a Hindenburg Omen 90% down day Monday…

Paul August 19, 2009, 6:30 pm

Rick,
Thanks for giving us this link to Fergusson’s work and Mises.

I was struck, as I guess you were, by the many similaries to today’s business events to those described in Fergusson’s recountings of the 1920s and 1930s in Germany and Austria-Hungary.

If I may, I’d like to quote from Fergusson on the Mises site, the couple of paragraphs which stood out to me, and one other sentence, please:

Chapter 15: The Wounds are Bared

“As the old virtues of thrift, honesty and hard work lost their appeal, everybody was out to get rich quickly, especially as speculation in currency or shares could palpably yield far greater rewards than labour. While the anonymous, mindless Republic in the shape of the Reichsbank was prepared to be the dupe of borrowers, no industrialist, businessman or merchant would have wished to let the opportunities for enrichment slip by while others were making hay. For the less astute, it was incentive enough, and arguably morally defensible, to play the markets and take every advantage of the unworkable fiscal system merely to maintain one’s financial and social position.”

Epilogue

“The Reichsbank’s display of naivete in its credit policies of 1922 and 1923 should finally dispel any suspicions of financial Machiavellianism on the part of Havenstein [President of the Reichsbank] and his associates. They staunchly denied that higher discount rates would moderate the inflation and, on the contrary, opined that they would merely raise the costs of production and push up prices further. Loudly as they later asserted that these inexplicably cheap credits were given principally for ‘profitable’ projects, the favoured firms who benefitted from this largesse turned the money to their best advantage — either by turning it into material assets or into foreign exchange, or simply using it to speculate against the mark and drive it downwards.”

Chapter 1: Gold for Iron

“If prices went up, people demanded not a stable purchasing power for the marks they had, but more marks to buy what they needed. More marks were printed, and more, and more.”

Best of luck to all.

ben August 19, 2009, 5:11 pm

I don’t see Weimar-stlye inflation happening in the USA either. Then again who in Germany saw that it would happen until it happened? If we had just a couple weeks of hyper-inflation followed by decades of more deflation, it would be the first time in history things played out that way. I myself am in the history repeats itself camp, and I don’t think we are going to be spared from inflationary doom like we were in 1980 because that was an aberration and its just not the same America any more.

Something that worries me is the Government not just taking from us through taxes and inflation, but taking more directly. The crackdown on undeclared Swiss bank accounts brings up the issue of why people can’t have any privacy in their assets, and why the government should care about accounts people hold that don’t even pay interest, and don’t create taxable events. Maybe someone is contemplating an asset tax, in addition to income tax, to mop up some of that wealth that is easy to get to (sitting in a bank account) but can’t be touched under current law. If the states can get a piece of this too there’s a better chance of it happening.

&&&&&

The debts to be inflated away tally into the hundreds of trillions of dollars, so it is clear that hyperinflation is coming, not mere inflation. On that we agree. Our quibble therefore concerns the question of how long a hyperinflation spike can be sustained. My guess is that it will take just a few days, since, unlike in Weimar, the preconditions for a collapse of confidence in the dollar are already in place. Money panic will spread much faster this time — for technical reasons related to the Digital Age, but also because the whole world is gravely concerned about the dollar, and tied to its fortunes, in a way that the world was not when the Reichsmark was on its way to oblivion. RA

It seems beyond argument that, once hyperinflation detumesces, it cannot simply fall to a lower level of inflation; rather, only outright deflation can ensue. RA



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