Living With High Inflation

Posted on November 20, 2012

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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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Posted in: Hyperinflation