Living With High Inflation

I know that many of my readers remember the Carter years and high inflation. I won’t bother rehashing the whys of it. You will also remember the fix during Ronald Reagan’s first term, high interest rates. A central bank raising interest rates on intra-bank transactions, affects all interest rates, and this is the classic way to fix inflation. Therefore you remember when home mortgage interest rates were 17% and higher in some areas. But, the fix worked and America began a long period of prosperity.

In the not to distant future, you back in America are going to experience inflation at a level you are probably not familiar with. Inflation hurts everyone, but it hurts the middle class and those most vulnerable in society the worst. So, why am I warning you about inflation when the reported inflation has been so low for so long? The Federal Reserve is able to keep intra-bank transaction interest rates at effectively zero  only because the official inflation rate is so low. Yes, I know that you as individual are experiencing something quite different. You are affected by high gasoline prices and food prices which are not included in the official inflation rate number. There are several reasons for this including a devaluing dollar, high demand, a severe draught this past summer and the idiotic ethanol policies and renewable energy policies. But, I am warning you, my fellow Americans that there is a level of inflation coming in your future, the likes of which you have never experienced.

I have talked here so many times about the debt time bomb that threatens the entire Western civilization that you are probably tired of hearing about it. However, I am compelled to warn you because the fiat monetary system used by the United States and the world since 1971 can not continue to work much longer, in spite of the best efforts of the central bankers to prop it up. The reason that it mathematically has to fail is not complicated. The system put in place in the 1971 Brenton Woods agreement spawned an addiction to use credit, borrowed money. for the next fifty years or so, Individuals and nations have used credit to live beyond their means. Living on credit can not and will not go on indefinitely. The monetary systems of nations have collapsed many times in recent history. Think Argentina, Brazil, and after the fall of the Soviet Union,  Russia. I happened to spend about a month in western Russia while they were in the transition from a command economy to a more open and free economy. The poor Russian people were living through hyperinflation. It was sad to observe. I also  spent some time in Brazil in 1986 when that country was living with hyperinflation and in a moment I’m going share with you what I observed in Brazil. But first, please, my friends, understand this. Although many countries have lived through the collapse of their monetary system and, therefore, lived through a period of hyperinflation, never in the history of our world has the entire world experienced the collapse of its monetary system and that is what is coming sooner or later to you and everyone else. This is uncharted territory to be sure. There will be no World Bank or IMF to help bailout the world. Even though I have had the chance to see up close and personal the effects of hyperinflation on an individual country, I can not imagine what it is going to be like when the world is bankrupt. So, the best I can do for you is share what I learned in Brazil in 1986.

Brazil, 1986

In 1986 I was the Project Manger for the mining company for whom I worked, responsible for the design, construction,  and later the operation of a new important gold mine north of the small town of Winnemucca, Nevada. The  project caught the attention of mining magazines and news letters. Probably for that reason I was invited to speak at an international mining symposium in Rio de Jenero, Brazil. It would turn out to be the first of several visits to Brazil. A dear friend and semi-retired Metallurgical consultant, who consulted our company sent a large envelope to me at my office. He had learned that I would be going to Rio. Inside the envelope was a large quantity of money. Brazilian money to be precise. The denominations were 500, 1000, 10,000, and 50, 000. There also was a hand written note from my friend that read: Jim, with this and a dollar, you might be able to buy a cup of coffee in Rio. My friend had been to Rio the year before and Brazil was experiencing hyperinflation. The money he sent me was worthless. When I arrived in Rio, I quickly realized that Brazil had changed their currency. The bill looked different, but all they had really done was remove three zeros from their money. By the way, I lived through the something here in Venezuela about eight years ago, the Venezuelan government did the something. Although they spent tonnes of money promoting their new “stronger” Bolivar, all they really did was remove three zeros.

While I was in Rio, I had the opportunity to meet and talk with several professional Brazilians,  i.e., middle class Brazilians. Naturally I was curious how they manged to live with hyperinflation. This is what they told me. Merchants (store owners) were going nuts. They needed to change prices on daily frequency or even mor often. They never knew how much of their currency it was going to take to buy hard currency in order to import the products they were selling. The government forced all employers to index the wages they paid to the officially reported inflation rate weekly and to pay their employees weekly. On top of that a system was put in place so that everyone was not paid on the same day.  My new friends went on to say that when they received wages, always in cash, they would rush home as fast as they could. They would divide up the money with their spouse and responsible children. Each family member would then rush out, each with two lists of thing they  to buy if they could find the items at all. One list was of critical items the family needed and the other list was of items they should buy if they found them.  These other items they could use in barter with friends and neighbors during the days between pay days. That is how middle class Brazilians survived hyperinflation until the IMF imposed austerity programs finally tamed the inflation. Imagine what it must have been like for the majority poor people in Brazil?

The picture I have just painted for you is what happens when an individual nation  uses credit to live beyond its means and their monetary system collapses. The people learn to live with hyperinflation until outside entities bring order out of chaos. Who can imagine what will happen when the monetary system that supports the whole world collapses for the same reason. There will be no outside entities to bring order out of chaos.

In this modern high technology age, order will eventually return. The worlds biggest banks will, out of necessity if not for other reason, have to invent a new world reserve currency. The banks will begin to lend this new currency and business will reopen and produce products and employ people again. Their employees will  have their wages to buy the products that are being produced again and wealth generation will begin again and eventually some form of order will spread across the world. How long will it take for order to overcome chaos is anybody’s guess. It might take years or it might happen faster than we imagine. What do you do to survive during the chaos? Well, there are plenty of web sites devoted to that topic. We have an expression in Spanish: Cada quien tiene que hacer que pueda _ Each person has to do what they can.

Well, now you know what I’m thinking. What are your thoughts?

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17 thoughts on “Living With High Inflation

  1. Scary.

    Since Bretton Woods, our dollars have been slowly eroding, with prices climbing slowly but inexorably higher. Add in low interest and return on investment coupled with taxes on any meager earnings you may accrue, and now you understand why our savings rate is so low. In such an environment, blowing it as quick as you make it is the smart thing to do.

    At what point did our government turn into a malevolent force?

  2. I recall getting two raises in one year during the Carter years. One was 5 percent. Mortgage was around 20 percent. Been there, done that. Add the gas lines and Carter telling us to wear sweaters… Why must we repeat history.

    1. B, our first place that we built in 1978, (with our own hands, mind you) had a 22% mortgage, who knew back then that it was HIGH!!! We have 2 credit cards, one for personal use and one for the rentals we have….they are paid off monthly, I can’t imagine having to carry a balance. We have a 2005 1500 Chevy truck, a 2002 Pontiac Bonneville and a 1999 Mazda Miata, all paid for, as is our personal residence . We owe nothing to anyone and I like to keep it that way, I know so many that are maxed out on credit and have major car/truck payments…not the way I want to live day to day. At this late stage of the game, you would think people would be trying to put their finances in order, but I still see them spending like there is no tomorrow….however, I think tomorrow is coming and it doesn’t look pretty. Like most everyone that tried putting money away, we had about 2/3 of it taken a few years back, so, you start over…I am tired of this game the Government plays.

  3. You are right… down the road the U.S. will have to face it’s fiscal Armageddon due to its unsustainable economic policies and ginormous debt. The question is when. It won’t be very soon. There are a number of reasons for that.

    Primary among them, of course, is that the U.S. dollar is the world’s reserve currency. There has to be a source of global monetary stability and, pretty much by default, the U.S. dollar is it. No other currency is even remotely close to being strong enough to step up to the plate to replace the dollar. In many ways, the dollar is stronger now than it ever has been due to the weak global economy.

    Yesterday, the yield on 10-yr U.S. Treasury Securities stood at 1.61%. That yield is nothing less than astounding. It is only slightly higher than its all-time record low. Inflation is nowhere in sight for the United States and hyperinflation is impossible as long as the dollar remains the world’s reserve currency.

    We are told the reason yields are so low is because everyone is buying U.S. Treasuries as a hedge against the weak world economy. That, I believe, is not true.

    Though it is true that large international investors are buying U.S. Treasuries, they are NOT the folks driving down yields. The Fed is doing that. It is purposeful monetary policy specifically designed to meet the “price stability” half of its dual mandate. The Fed target is a 2% inflation rate. It buys something like 70% of Treasuries. That is why yields are low.

    The FOMC projects they will continue low inflationary monetary policy at until 2015. Even though it should, QE doesn’t seem to have any inflationary effect at all.

    The United States is building a house of cards. In a sluggish, long-term jobless recovery it will necessarily have to come down eventually if the rest of the world recovers and the U.S. languishes.

    The Fed can still save the U.S. dollar and the economy if it can figure out how to meet the other half of its dual mandate – “maximum employment”.

    That, unfortunately, is a lot easier said than done. QE is supposed to be doing that but it doesn’t appear to be having any effect.

    1. This is one of those times, AZ, when I have to disagree with you. Yhat the dollar is the world¡s reserve currency does matter. That is probably the US isn’t already Greece. Yes the world nust have a reserve currency. That is why the collapse is going to be so terrible! No cour and much less counties can keep support their own economies indefikitely by borrowing other peoples or countries money. The day will come when no one will believe in the “full faith and credit od the United Stats of America”. At that point the game is over. Except for Japan, no one wants to buy our bonds anymore. The Fed is using Quantitative Easing to buy most of our bonds these days. Butm the Fed has no money of its own. theey enter some number in the computer and call the Treasury and tell them they have so much money now in their accounts so please the requisit number of bonds to our office. AZ, that is insane! It can’t continue. Should the US government stop selling bonds and just writte worthless checks to the Fed? It’s the same thing. I know the Bernankw likws to say in public that if inflation begins to be a problem that the Fed has ways to unwind what it has been doing. What he means is the Fed would begin sell the assets on their balance sheets to suck this excess funny money out of the real economy. That is a nice theory. But, to whom is he going to sell the binds on his balance sheet if no one wants to buy them now. And, the other toxic assets on his balance sheet could only be sold at a deep discount. He will not be able to suck the funny money out of the economy. We will have runampant inflation.

      That is my opinion, AZ.

      1. I believe you and I fundamentally agree… the USA is on an unsustainable fiscal path and that, if left unchecked, it will have disastrous fiscal and economic consequences.

        I see it as a slow motion train wreck than can still be avoided. Perhaps you see it as an inevitability.

        In a speech today at the New York Economic Club, Ben Bernanke said – once again – that The Fed is at the limits of what it can do to meet its dual mandate. He said that if Congress and the President fail to take steps to deal with the fiscal cliff in the short-term and deal with unsustainable debt growth in the long-term that The Fed “lacks the tools” to fix things:

        http://www.bloomberg.com/video/bernanke-says-fiscal-fix-may-spur-very-good-year-8D3aS4Z7Qrqvwg11sNbxAA.html

        The Fed is like a steam valve… there is only so much that it can tweak the economy. When its bounds are exceeded there is nothing more it can do.

        The USA, as an economy, is knocking at that door. Congress and the President need to act quickly, decisively and correctly to right the fiscal Ship-of-State.

        Like me, I doubt you have much confidence in them!

  4. We will have plenty of warning before the debt load of the US reaches its breaking point and precipitates a European style debt crisis.
    First we will see the bursting of the Treasury bubble. The bursting will precipitate very high interest rates which will increase the budget deficits by $600 billion per 100 basis points – a rise of 5% – average in the 10-year bonds for the last 50 years – in the interest rate will add $3 trillion to the annual budget deficit. We could see deficits on the order of $6-7 Trillion. This will bring the debt crisis closer to the braking point. It is a series of events, each serving as catalyst for the next.

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