I haven’t thoroughly studied economics, but I do have a firm belief in laissez-faire and the free market. I had a long discussion with an Austrian economist co-worker about economics/politics and a lot of the things he said made a lot of sense. He also told me (and later I found this claim over the web, and made by Ron Paul) that the growing debt of the US government will lead to hyper-inflation. I am worried about this, is there something I should do? (people on a random forum were talking about buying gold or something). Also, please excuse my ignorance: I have no college education, just some knowledge left over from high school about Adam Smith’s Wealth of Nations and the like.
Hyperinflation will happen. We can’t predict exactly when though, because nobody can say exactly when people would lose confidence in paper money(that is it’s purchasing power).
Buy gold to protect yourself! In fact ANY commodity other than paper money will help you.
This isn’t the first time some Austrians are predicting the collapse of the monetary system.
And if you really believe it will, shouldn’t you be moving to another country? I wouldn’t want to stick around for that. Buying some gold is not going to be enough. If you’re predicting a global collapse, then you should be setting up in the woods somewhere.
While buying commodities (not only gold, but also prime land and similiar stuff) will probably be sound advice in the next decade(s?) to protect you from the effects of above-average inflation, I don’t think we will see hyperinflation.
Here’s a chart on Weimar Republic hyperinflation. As you can see, it took a million-fold increase in the paper money supply to create the horrific scenarios that we associate with hyperinflation today. Although the US is likely headed for inflation, I don’t see the money supply going into such an extreme direction.
Right, but look how it starts out. It isn’t an instant multiplication by one million. It takes a couple years of the currency rapidly debasing to achieve massive hyperinflation. Imagine if all of your currency was halved in value in 3 months. Then halved again in 6 month. Then halved again in 1 month. That’s how hyperinflation starts to roll, then cascade through an economy. Meanwhile governments implement currency controls, pay with promises etc.
I can’t predict the future but I feel confident saying that the US $ will collapse in my lifetime. Whether it dies quietly and quickly or long and painfully, who knows?
I’m also not much of an investor, but it is always a good idea to hold REAL THINGS in a fiat money system. Fiat money itself is a TERRIBLE thing to hold as a medium and long term store of value.
Nevertheless, the US is in a much better position than the Weimar Republic was at the time of the 1923 hyperinflation.
The US does not have to repay massive reparations. There’s a lot of debt to be paid, but creditors so far have been convinced to roll them over indefinitely. China has been selling a little treasury debt recently, but it’s uncertain whether this will become a trend.
The US is not in danger of losing its main manufacturing areas due to foreign occupation. Weimar experienced that in 1923 and supported workers by printing wages for them. Not to mention that lots of capital and manpower had been destroyed in the previous war. The US has to cope with military expenditures, but they hardly compare to the burdens of a world war.
Furthermore, not everything’s going down the toilet in the US. The tax-and-spend states do. The federal government has a printing press. But it’s reluctant to bail out the states with it. So the tax-and-spend states will be forced to cut spending. That’s a step towards economic recovery. The question is: will the federal government’s reckless policies be able to offset the positive influence of these true “green shoots”?
I’m slightly bullish on the US, medium-term. Yesterday, I read an encouraging interview with Texas governor Rick Perry in the WSJ. Quote:
And when it comes to the Obama administration, Mr. Perry doesn’t mince words: “To me, this is one of the great Frankenstein experimentations in American history. We’ve seen that movie before. It was from 1932 to 1940.”
When it will have become conservative mainstream to view FDR’s policies as Frankenstein, my short-term guesses will adapt.
Finally let us suppose that the banking system at no time reduces the rate at which it accelerates credit expansion, and instead does just the opposite: it constantly and progressively intensifies it, with the purpose of quashing any symptom of an emerging depression. In this case, the moment economic agents begin to realize that the rate of inflation is certain to continue growing, a widespread flight toward real values will commence, along with an astronomical jump in the prices of goods and services, and finally, the collapse of the monetary system, an event which will ensue when the hyperinflation process destroys the purchasing power of the monetary unit and economic agents spontaneously start to use another type of money. At that point the six microeconomic reversion effects we are familiar with will appear in all of their intensity, as will an acute economic depression, which to the painful readjustment of a totally distorted productive system will add the tremendous cost and social harm involved in any general failure of the monetary system.
It requires a constant, accelerating expansion of credit. Historically speaking, the Federal Reserve has done a “good” job at quitting while ahead (1937, arguably, for example), normally resulting in another bust, as the distortions created by its prior credit expansion are corrected by the market, but avoiding a complete breakdown of the currency in use. If Bernanke isn’t lying, the Federal Reserve’s open market security purchases will end soon enough… but, I’m not sure how much we can trust him, especially when the market crashes again after he ends credit expansion. In any case, it’s impossible to realy forecast hyperinflation without knowing the exact intentions of the Federal Reserve.
Investment rule number one says that no one can reliably and consistently predict future economic events- not even “Austrians”. Hyper inflation is no more or less of a certainty than deflation, “regular” inflation, or any other scenario.
Using “Austrian” economics , to forecast future economic conditions for "investing"is a grave error . In order to be protected from unpredictable future events, your savings must be at all times equally protected against [at least] all “usual” historically occurring general economic scenarios [ i.e. inflation, deflation etc. etc.], in order to for them to survive/grow.
I’m reminded of Mises explanation of the collapse in ‘The Theory of Money and Credit’:
"Inflation works as long as the housewife thinks: “I need a new frying pan badly. But prices are too high today; I shall wait until they drop again.” It comes to an abrupt end when people discover that the inflation will continue, that it causes the rise in prices, and that therefore prices will skyrocket infinitely. The critical stage begins when the housewife thinks: “I don’t need a new frying pan today; I may need one in a year or two. But I’ll buy it today because it will be much more expensive later.” Then the catastrophic end of the inflation is close. In its last stage the housewife thinks: “I don’t need another table; I shall never need one. But it’s wiser to buy a table than keep these scraps of paper that the government calls money, one minute longer.”
All that has to happen for the US to get hyperinflation is for the chinese to stop buying our debt. When we can no longer roll over the debt it will start. If I had to do one thing to survive a currency collapse I would suggest buying a 12 gauge and learning to use it. Even if it doesn’t happen anytime soon universal armament is required for a free society.
That is not all that needs to happen, but it is a good indicator. I expect mass inflation. (Gary North explains why at his website, I agree with him) According to the FED we already have mass inflation. (The monetary aggregate charts can be found at the Fed’s website.) It will translate to price inflation once the big boys have been saved.
I would also buy a rifle in addition to the twelve gauge. Either a battle rifle or an assault rifle in one of three calibers. 5.56X45 mm 7.62x39 mm or 7.62x51mm. This is the ammunition that will be used against you along with 12 gauge shotgun ammo in the event of a currency collapse. If you have a weapon that fires these rounds you should be able to acquire additional ammo pretty easily. If you don’t have the stomach for a fire fight, then you should prepare to run.
Also if you get surprised by the gunverment, surrender and formulate an escape plan. You will have an opportunity to escape in the initial chaos. Don’t throw your life away.(you can always reacquire material possessions)
Another option is to formulate a bug out plan to live in the woods, or the mountains with friends and family.
In order to protect yourself from the coming inflation, you will need to evaluate your own financial situation first. Without knowing this information nobody can give you specific advice on how to prepare.
How much debt do you have and what Kind? z.b. adjustable mortgage, credit card, fixed mortgage etc…
If you liquidate, will you be able to pay off all of your debt?
Is you primary income source secure?
Are you willing to relocate?
These are some the questions you should answer first. I would recommend subscribing to Dr. North’s website and absorbing the information contained there. It is more than worth it.
I apologize if I broke the rules by shilling for North. Let me know and it won’t happen again.
Gold / other commodities - yes, but bought right now - before runaway inflation’s start.
I think that it would be maybe even better to invest in yourself e.g. get an additional college degree, etc.
I found The Alpha Strategy by John A. Pugsley to be helpful. It’s available online in pdf form (see http://www.biorationalinstitute.com/zcontent/alpha_strategy.pdf). He explains the economics of inflation, and makes practical suggestions for how to protect your wealth in the face of inflation. The nice thing about this book is that much of the material is easy to implement without spending a ton of money. That said, he does talk a fair amount about gold and other metals.
No one knows when or if hyperinflation will hit, but it’s a guarantee that in the long run (perhaps very long run, perhaps not-so-long run), the value of paper money goes to zero. So diversifying out of paper-money assets into the kinds of tangibles that maintain their value is a great way to protect your wealth.
It depends on how you define hyperinflation. Frankly I do not believe we’ll see it in the short run, though every single economical indicator points towards a few years of stagflation as governments try to cheat their way out of the bust they created with their good mates in the banking and housing sectors. Above average inflation is already here (at least in parts of Europe) despite what the watered down CPI’s say: just have a look at our utility and grocery bills. And they still talk about deflation…
After this period of stagflation I have no idea what will happen. Right now I see no sectors that can lead to large bubbles but I am not a seer. If bubbles fail to appear expect States to start cheating more than usual to make ends: dropping or stagnating incomes do not go hand into hand with welfare expansion programs or costly wars. Even if you try to keep a (relatively) balanced budget the European experience teaches that welfare costs cannot be controlled even by the ever watchful French and German bureaucrats: as I’ve already said before that will be the day of financial reckoning. My bet is that it will start in ten years time, may be less if the Fed and the ECB fail to inflate a new bubble.
What to do in the meanwhile? Keep a close eye on gold and buy as much as you can. Then lock it up in a safe place and sit tight.
