Our
Money Is Dying
Don't
let your wealth die with it
by
Chris Martenson
10
July, 2012
A
question on the minds of many people today (increasingly those who
manage or invest money professionally) is this: How
do I preserve wealth during a period of intense official intervention
in and manipulation of money supply, price, and asset markets?
As
every effort to re-inflate and perpetuate the credit bubble is made,
the words of Austrian economist Ludwig Von Mises lurk ominously
nearby:
There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner, as the result of a voluntary abandonment of further credit expansion, or later, as a final and total catastrophe of the currency system involved.
(Source)
Because
every effort is being made to avoid abandoning the credit expansion
process -- with central banks and governments lending and borrowing
furiously to make up for private shortfalls -- we are left with the
growing prospect that the outcome will involve some form of "final
catastrophe of the currency system"(s).
This
report explores what the dimensions of that risk are. It draws upon
both historical and modern examples to try to shed some light on how
the currency collapse process will likely unfold this time around.
Plus, we'll address how best to avoid its pernicious wealth
destroying effects.
When Money Dies
In
the book When
Money Dies by
Adam Fergusson, which details Weimar Germany's inflation over the
period from 1918 to 1923, the most riveting parts for me were the
first-hand accounts from the people caught in the storm.
So
many people left their wealth in the system only to watch it get
eroded and utterly destroyed over time. The reasons were many:
patriotism, inertia, disbelief, and denial cruelly fed by hope every
time prices moderated or even retreated momentarily.
The
simple observation is that many people had a blind belief in the
money system. They lost their wealth because they were unable or
unwilling to allow reality to challenge their beliefs. It's not that
there weren't numerous warning signs to heed -- in fact, they could
be seen everywhere -- but most willfully ignored them.
Most
mysterious is the fact that in Austria and Germany, where the
inflation struck most severely, there were numerous borders and
currencies into which people could have dodged to protect their
wealth. That is, protecting one's wealth was a relatively
straightforward and simple manner. And yet…it did not happen.
The Many Types of Inflation
As
always, the landscape of inflation needs to be carefully mapped
before we can begin to hope to have a conversation with a
destination. Where the symptom of
inflation is rising prices – in fact, rising prices are the only
things tracked by the Consumer Price Index, or CPI – the causes of
rising prices are many, but they always boil down to the
overexpansion of money and/or credit. Knowing the cause is
essential to knowing what to do next.
Here
are the main flavors of rising prices that we need to keep in mind:
Non-inflationary
price increases –
These are caused by demand exceeding supply. It happens all the
time. A poor harvest driving up the price of corn is not
inflationary, but it will show up in the Consumer Price Index (CPI).
These sorts of price movements reverse themselves as markets respond
by chasing the price and delivering more of whatever was in short
supply. The only exception is when there is some essential,
non-renewable natural resource in sustained depletion -- which means
that demand will always exceed supply and prices will rise and then
rise some more. Excessive speculation can also lead to price
rises and, as long as the speculation centers on the item(s) involved
and not on excessive money/credit expansion, it, too, can be (and
eventually will be) reversed.
Simple
inflation – This
is the 'textbook' case of inflation where too much money and/or
credit is created relative to goods and services. Print too
much money or make credit too cheap/easy and prices will rise roughly
in proportion to the excess. Simple inflation operates in the
low single digit percentages. Central banks openly target
simple inflation in the 2%-3% range as that level of expansion allows
banks to have healthy profits, prevents past loan errors from
swamping the system, and generally keeps the exponential money system
operating well.
Loss
of confidence in money – A
more severe stage of simple inflation takes over when enough people
lose faith in the money and seek to actively spend their money on
something, anything, before that money loses value. This type
of inflation operates in the high single digits to low double digits,
somewhere between 8% and 15%. This is just simple inflation on
steroids. Not everybody participates in this game yet, as the
loss of confidence has not yet reached criticality, but enough people
do to keep this process locked in a self-reinforcing spiral that
requires aggressive money tightening to halt. Think 'Paul
Volcker' and '21% interest rates' and you get the picture.
Hyperinflation
– Further
along the inflationary spectrum is what happens when a critical mass
of people within a society lose faith in their money and the monetary
authorities are incapable of reducing the money/credit supply, either
because there’s already too much of it out there to ‘call in,’
or because they lack the political will to do anything but print more
money in response (i.e., there are no Volckers around). Once
this critical mass is reached, every corner of society is
participating, and it is no longer socially taboo to talk about the
hyperinflation or how to escape its effects. Everyone is
wheeling and dealing, speculation runs rampant in everything from
stocks to pineapples, and you cannot possibly spend your money fast
enough to avoid the ravages of inflation. The annual percentage
rates for hyperinflation range from medium double-digits into the
hundreds of millions.
Currency
destruction – There
is another type of inflation that happens when your state currency is
shunned by the rest of the world. While there may be no
additional money creation and credit may even be dropping, inflation
is still a very serious problem as everything imported goes up in
price. There are many reasons that a currency may be shunned.
It could be that other countries lose faith in the currency due to
mismanagement and overprinting. It could be due to acts of
war. Or it could happen at the end of a very long period of
excessive credit and money expansion, when that bubble finally bursts
and confidence in the associated currency unit(s) is lost. There
is really very little that local authorities can do to fix things
unless the country imports nothing, a condition that applies to
exactly nobody. Prime candidates to experience this form of
inflation are the US and Japan; the former because of massive
imbalances fostered by its several decades of reserve currency
status, and the latter because of persistent and massive
over-printing enabled by domestic savings and a once-robust export
surplus. The dynamic of currency destruction is for imported
items to rise sharply in price first, with everything else soon
following in upward price spirals. Policy responses are quite
limited and are usually ineffectual at preventing a massive amount of
economic destruction and wealth loss for the holders of the stricken
currency.
It
is this last type of inflation – currency destruction – that
we’ll explore here, because it represents a severe risk and is very
rarely talked about or analyzed.
Spinning in the Water
A
modern case study of a shunned currency is Iran.
For
a variety of reasons, Iran finds itself the subject of a sustained
effort by the US to subjugate its nuclear program to international
inspection and curtailment. Already the target of many overt
and covert efforts to bring it to heel -- ranging from two highly
destructive and invasive computer worms (Stuxnet and Flame), to
stealth drone overflights, to an international ban on oil exports --
Iran now finds that its currency is being internationally shunned.
The
impacts are obvious and the lessons instructive.
Already Plagued by Inflation, Iran Is Bracing for Worse
Jul 1, 2012
TEHRAN — Bedeviled by government mismanagement of the economy and international sanctions over its nuclear program, Iran is in the grip of spiraling inflation. Just ask Ali, a fruit vendor in the capital whose business has been slow for months.
People hurried by his lavish displays of red grapes, dark blue figs and ginger last week, with few stopping to make a purchase. “Who in Iran can afford to buy a pineapple costing $15?” he asked. “Nobody.”
But Ali is not complaining, because he is making a killing in his other line of work: currency speculation. “At least the dollars I bought are making a profit for me,” he said.
The imposition on Sunday of new international measures aimed at cutting Iran’s oil exports, its main source of income, threatens to make the distortion in the economy even worse. With the local currency, the rial, having lost 50 percent of its value in the last year against other currencies, consumer prices here are rising fast — officially by 25 percent annually, but even more than that, economists say.
(Source)
There
are several factors feeding into the current Iranian currency crisis,
including mismanagement of the economy that has left Iran even more
exposed to imports than it otherwise could or should be, and Iran's
currency is on the cusp of tipping over into outright
hyperinflation. Ever since the Revolutionary War, when the
British printed and distributed cartloads of Continental scrip,
currency debasement has been a useful tool of war. All is fair
in love and war, and whatever corrodes your opponent’s strength is
a potentially useful tool.
Note
that in the above quotes, we find that both the speculation already
in evidence plus the 25%+ price increases support the idea that Iran
has already tipped past simple inflation. Whether it can
prevent a worsening condition is unclear at this point, regardless of
whether or not international sanctions are soon lifted.
More
from the same article:
Increasingly, the economy centers on speculation. In this evolving casino, the winners seize opportunities to make quick money on currency plays, while the losers watch their wealth and savings evaporate almost overnight.
At first glance, Tehran, the political and economical engine of Iran, is the same thriving metropolis it has long been, the city where Porsche sold more cars in 2011 than anywhere else in the Middle East. City parks are immaculately maintained, and streetlights are rarely broken. Supermarkets and stores brim with imported products, and homeless people are a rare sight on its streets.
But Iran’s diminishing ability to sell oil under sanctions, falling foreign currency reserves and President Mahmoud Ahmadinejad’s erratic economic policies have combined to create an atmosphere in which citizens, banks, businesses and state institutions have started fending for themselves.
“The fact that all those Porsches are sold here is an indicator that some people are profiting from the bad economy,” said Hossein Raghfar, an economist at Al Zahra University here. “Everybody has started hustling on the side, in order to generate extra income,” he said. “Everybody is speculating.”
Some, like Ali the fruit seller, who would not give his full name, exchange their rials for dollars and other foreign currencies as fast as they can. More sophisticated investors invest their cash in land, apartments, art, cars and other assets that will rise in value as the rial plunges.
For those on the losing end, however, every day brings more bad news. The steep price rises are turning visits by Tehran homemakers to their neighborhood supermarkets into nerve-racking experiences, with the price of bread, for example, increasing 16-fold since the withdrawal of state subsidies in 2010.
“My life feels like I’m trying to swim up a waterfall,” said Dariush Namazi, 50, the manager of a bookstore. Having saved for years to buy a small apartment, he has found the value of his savings cut in half by the inflation, and still falling.
“I had moved some strokes up the waterfall, but now I fell down and am spinning in the water.”
(Source)
All
of the important lessons you need to avoid a currency destruction are
contained in those passages above.
- Savings are for losers.
- The more exposure you have to food and fuel price hikes, the worse off you are.
- First movers have the advantage. Get your wealth out of the afflicted currency as fast as possible and then trade back in when needed to make purchases.
- Paralysis is a wealth destroyer.
- Fending for oneself is a wealth saver, so faith in authority is best shucked as fast as possible.
Be
prepared to follow those rules and you will do better than most.
Barter,
speculation, and prices that gyrate wildly as formerly expensive
things are traded for basic necessities are all typical features of
the end stages of a currency. Crime, social unrest, and
sometimes war are handmaidens that accompany the death throes of
money.
The
basic strategies to protect one’s wealth are deceptively simple.
As soon as the process of money destruction has begun, if not before,
all savings have to be moved out of the afflicted currency and into
things, especially things that others with wealth or barter items are
most likely to want.
Turning
our attention back to the Weimar episode for a moment, the Amazon
summary for When
Money Diesreads:
When Money Dies is the classic history of what happens when a nation’s currency depreciates beyond recovery. In 1923, with its currency effectively worthless (the exchange rate in December of that year was one dollar to 4,200,000,000,000 marks), the German republic was all but reduced to a barter economy.
Expensive cigars, artworks, and jewels were routinely exchanged for staples such as bread; a cinema ticket could be bought for a lump of coal; and a bottle of paraffin for a silk shirt. People watched helplessly as their life savings disappeared and their loved ones starved. Germany’s finances descended into chaos, with severe social unrest in its wake.
The
parallels to the Iranian situation are obvious
.
Those
without the gift of foresight to identify what is coming, coupled
with an inability to take decisive action that cuts against the
social grain (at least early on), will simply lose their wealth and
not be in a position to buy or exchange anything but their own time
and labor in the future. This leads to the assessment that
owning or producing things that people need or want is a good
strategy.
Food
is always a good play. In the early stages, we’d also lean
towards highly socially desirable real estate and away from middle-
and lower-income housing, as ability to pay always get shredded from
the bottom up. Gold performs well in terms of protecting
purchasing power. According to the article above, Porsches work
too. In other words, owning things that wealthy people will
desire is a very good idea.
I
know this sounds harsh, elitist, and not terribly egalitarian, but it
also happens to be how things tend to work out. Since I have a
desire to be in a position to be helpful and of assistance in the
future, protecting my wealth is a matter of both self and selfless
interest. So I study what works and begin there,
while also seeking
a better future.
The
cruelest part of a currency destruction is that it will sneak up on
most people, their baselines will shift, and they will be confused by
false hopes along the way. This is completely understandable
and to be expected. There's a good chance you're well
acquainted with the chart of the value of German Marks against gold
during the Weimar hyperinflation. I want to take a closer look
at it by focusing on the wiggles instead of the rise:
Imagine
yourself there at that time, getting all of your information from the
newspapers and your personal rumor network. Note that from the
early part of 1920, prices fell by a lot over the next six months
(note that this is a log chart, so even a little downward movement in
the line represents a big price drop).
Headlines
reported that the corner had been turned and that the government
programs had been successful in bringing inflation under control.
People wanted to believe that story and so they did.
It
wasn't until the end of 1921 that prices began to rise again, spiking
into early 1922 before stabilizing again for approximately eight
months. Again people were calmed by the apparent success of the
authorities in controlling the inflation.
Because
there were three pauses and rescues along the way, the price spike
from late 1922 and into 1923 caught many off guard. It was
truly shocking. This is when the critical loss of faith finally
happened. Yet far too many remained paralyzed, certain the
government would again get things under control soon. After
all, three times before there had been a recovery, why not this time
too? One must have hope, after all...
In
the middle of 1923, with very aggressive government intervention,
there was a three-month dip in prices and a pause in the
hyper-inflationary process. Again, another hopeful moment, but
it was the final trap for the unwary.
To
put this in context, imagine if next month (August) gasoline prices
shot up by 300% to roughly $10/gal. But then, between August
2012 and May of 2013 the price of gasoline fell back to $5/gal.
I'd be willing to wager that many of your friends would be telling
you that everything was fine and that "they"
have everything under control.
Perhaps your continued concern would be ridiculed or dismissed.
Then,
when prices finally did again breach the old $10/gal highs, some 19
months after the first price spike (in February 2014, in this
example), many would have been habituated to the new prices, routines
would have been altered, and many would have already inserted a
rationalization process into their thinking that would have all of
this make perfect sense, albeit uncomfortably.
While
not tracking the percentages closely, this example tracks the time
frame.
An
important insight here is that baselines will shift, rationalizations
will be formed, and explanations adopted, principally by those unable
to accept that their money is in the process of dying. Avoiding
this yourself will require tuning those people out and trusting
yourself.
In Part
II: Positioning Yourself for When Our Money Dies,
we identify the most probable markers for identifying when a
full-blown currency collapse is imminent.
What
indicators should you watch for? Where should you place your capital
to best preserve its purchasing power? What will a collapse of the US
dollar look like and what will the likely aftermath be? These and
other implications are explored.
Click
here to access Part II of
this report (free
executive summary; paid enrollment required
for full access).
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