Still Waiting On Hyperinflation...
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
Well the uber doom-and-gloomers have been decidedly reticent of late. This changed recently in the blog arena. Changes in purchasing patterns of bonds later this year seem to have everyone in a tizzy now.
I renew my stance that all of this HYPERinflation rhetoric is utter nonsense. These positions are generally coupled with someone trying to sell something (commodities, coaching, advice, etc.) so please be skeptical when you see them posted.
Following is a great, level-headed article on the subject for those that are interested:
Why the Pessimists Are Wrong About Inflation
and here are the real inflation rates:
I renew my request for anyone to provide TANGIBLE evidence that we are headed for hyperinflation.
Hyperinflation is different than inflation. If you take the original defination of inflation, (and as currently used by Austrian School Economists) you track inflation as an increase in the money supply, and price increases (commonly referred to as inflation today) are the effect of the money printing. So first defining which inflation, monetary inflation, or price inflation you are talking about is required.
There is no doubt that money supply has been inflated recently. The fed publishes figures and you can see what is going on. Somewhat more difficult to see is price inflation. The CPI is the most common but is skewed to make the govt look good. Looking at prices of common goods one can see price inflation; see gasoline, health care, college tuition, food, silver, oil, etc. The basic commodities are shooting up, which means that all derivative products are also getting more expensive. One way that producers are trying to mask this is by making packages smaller; a "green" package, "effeciency" packages, etc. The net result is maybe only a 10% increase in price, but when you couple that with the 15-20 decrease in product per package, you get 30-40% inflation. And this is happening more and more in the last year or two.
So that was inflation (the two types). Hyperinflation, on the other hand, is a loss in confidence in the currency being printed. It is not like in monopoly, when the more money you get, the more prices go up (remember, at first you dont have much money, so deals are cheap, but as the game progresses and everyone has tons of cash, the bids get higher and higher, hmm, sounds like the housing bubble), but rather that people realise that there is inflation, and that the currency is not a store of value, and they go out to spend (get rid of it, ie exchange it for something of value) it before it is worth less. So hyperinflation is when people do not trust their money anymore and want to buy stuff before the price goes up (ie the value of the paper money declines further).
So hyperinflation is a rare event, but not as rare, nor as impossible as people would like to believe. Argentina is now experiencing inflation in the area of 30% per year, this is very soon going to be hyperinflation if history has any rhyme to it.
The main complication today IMO with the hyperinflation/deflation/inflation debates is that there was such a huge increase in debt (learn how money is issued from banks, they can loan (create, print) 10x the money they have on deposit) money in the last couple bubbles that when the bubbles collapse the debt money disappears, this is monetary deflation (not price deflation) but means that there is less "wealth" on paper, and real losses for many. And debt is spending today what we need to tomorrow pay for, and if the earnings and savings are not there to pay, then money is tight. So the money printing, which is going to the banks to make up for that 10x debt money they created which is evaporating, and not going to the unemployed, underwater, etc, is not having such a big effect on prices yet... But money chases yield. Not going to housing yet, still such debt, and bankers not gonna buy their own shadow inventory, so it goes to stock markets and commodities. That is why the stock market has held up so well, and why commodities are so highly priced. And that is why food, clothes, etc are showing price inflation as well.
I do not see hyperinflation (remember, this a loss in confidence in the currency) happening yet; the US is still the largest producer of food in the world, still dominant in most areas, still no clear alternative (other than gold, etc) so most will cling to the hope that the US will be a safe haven. And remember, most people would rather believe the easy lie than face the hard truth, so they will cling to what has been, rather than look at the facts and accept what is coming.
I think that the situation is unsustainable, but for hyperinflation to come, people need to realize that, accept that, and react accordingly. I do not see the realization on a large scale yet; most would rather believe the easy lie perpetuated by politicians and media and bankers and real estate pros (NAR statistics, sorry for offending any straight shooting real estate people, but so many are clueless and lie) who push housing as the best investment, retirement/'investment managers, etc. They do not yet want to think that something is wrong and take the next step to figure out what and why, which would lead to what to do. When that happens (assuming that the economy and spending continue in this same direction, major deficits, high rate of unemployment, debt overhangs, etc) then you can worry about "hyperinflation", but for now it will be inflation, or stagflation, re the 70's. And look what happened then; gold, oil, etc shot up. Interest rates shot up. Inflation shot up. And then the economy took off, after a long period. Will that happen again this time? who knows, history does not repeat, but is rhymes. Some things are different this time; high debt, low savings, cannot really lower taxes more due to already insane deficit, wars, high oil, lots of jobs have been offshored and not coming back, it is a global economy now, not a US economy, so competion is worldwide for jobs, so many may not come back soon, at least as they were.
My outlook? Things which you "need", ie oil, clothes, food, healthcare, etc, will continue to get more expensive in the near term. Things which were financed/bought with debt will continue to get cheaper in the near term, ie housing, cars, boats, vacation cabins, toys, etc. People have to get rid of the debt items (cant pay for them) and pay for the things they need. And with higher unemployment, and tighter credit (banks not giving money to customers, putting it to "pay off bad debt", investing it in stocks, commodities,etc, remember money chases yield and the bankers have been burnt on housing and consumers, wonder why your HELOC which was unused was cancelled even tho you have 800 credit?), financing is not as big an option as it was.
So what about real estate? No crystal ball, I threw it away a long time ago... but I think that having a part of net worth in real estate or income producing assets is worthwhile. betting on appreciation will be a losing game for a while IMO, but if you can cashflow a decent amount and hang on to what you have even if prices drop another 30% (it can happen...) then you will be positioned well if/when prices increase in the future (10-15 years from now). remember, bottoms take time, recoveries are not instantaneous and even with the money pumping by the fed, this will take a while. but being in place, not too high leverage, and cashflowing allows you to build equity, gain experience, and when the prices start to rise, pull the equity out of your houses and start to buy. Not your own money at that point because renters have paid it.
Those are my thoughts, lol, just lookint that this was "quick reply"
Tony.
For those wishing more doom and gloom:
http://usawatchdog.com/hyperinflationary-depression-2012-2014-mainstream-media-keeps-putting-lipstick-on-pig-economy/
or maybe some would call it reality. I prefer to see both sides of an issue. I like real estate for the leverage, growth, income etc. But I also realize that what worked last 50 years may not work for the next 10 years. If I can plan to mitigate for the "fat tail" or "black swan" events then I can do much better than others when those events come and avoid the regression to zero.
I am not a gloomer, I just think that some things are inevitable unless something happens (was that a Yogi Berra?) and would like to be somewhat prepared if they occur.
Tony
Since my name has been used in a couple recent posts in this thread I thought I might elaborate a little bit on some of the things that I've said before and thoughts I have currently. I think there is some great information and suggestions in this thread and in my opinion this is one of the more interesting and beneficial one that we have going.
If 26% per annum is one definition of hyperinflation, count me in as one that thinks that might occur. As I've mentioned before, I lived through the 70s and I don't know exactly what the annual inflation rate was but my guess is it was pretty close to that with interest rates as high as 18%.
Bryan H- A couple thoughts.I don't believe the only way to avoid hyperinflation is to be self-sufficient. It certainly makes it easier but, that isn't the only way. Looking back on the 70s with its high inflation rate, I probably made a higher rate of return on investments than in any other time during the 40 years of investing.
You also mentioned I pay a high cost for for the method I use with dual investment programs going on at the same time. I really don't look at it that way I look at it as smart investing and not risking all in any one thing. I'm comfortable having a significant amount of cash that is generating no real return and with current inflation, is actually losing value. I'm okay with that- if we ever have deflation, I feel I will find good places to use my actual cash.
I know you don't like gold and that you constantly refer to it as speculation. As I've mentioned many times in many threads and posts, I do not own gold for speculation. I do own it as a hedge against future occurrences that might happen. I feel comfortable having some gold and some cash to use when the times are right for those items to be beneficial to me.
Gene-I agree that for most of the members here on BP, having a business of real estate is probably one of the top things people can do to prepare for a potential hyperinflation. I am one of those that uses gold strictly as a reserve and I have never considered it as speculation. I also like your comment about other commodities of which the most important in my opinion is food. I probably have a legitimate five year supply of food as well as adequate potable water or a method to create potable water. I also have a sun oven which will cook or bake or boil most of the food that I have in storage using strictly the sunshine in the air and air regardless to the temperature on the ground.
I don't consider myself as a doom and gloomer, but rather someone that tries to prepare for any potential possibility that might occur. I continue to hope for the best but still plan for the worst.
Anthony-I am not one that has any confidence in our banking system and prefer not to be involved with them, since the government is. I would much rather have my cash in assets or even just in cash rather than sitting in a bank account.
I have yet to have anyone convince me that the unlimited printing of money that we are going through at the present time, can lead to anything other than higher inflation. It also gets easier month by month and year-by-year to see how a hyperinflation might develop. As we see other countries attempting to deal with their small stash of cash, I'm afraid their decisions will also affect us here in this country eventually. It is extremely difficult for me, as one who has lived through many of these changes in previous decades, to not see the oncoming problems as inevitable.
The only question seems to be is not whether we are going to suffer through some of these problems, but how deep the problem might be and what the best methods are to prepare for those possibilities. I have shared openly my methods and plans in various threads and posts before. I have been ridiculed for many of these thoughts in the past but it does not change my belief in what I have posted. Again, the hope is that these things will never materialize and never worsen but I have yet to have anyone explain to me the method to avoid these things. Rich
I have made similar preparations. My personal residence has active solar for both heat and hot water. We have a well, and a back up whole house generator (we are on the grid). We are 400ft from a year round river so water will never be an issue. I have 4+ years of firewood stockpiled. And we have 25+ fruit trees and 2.5Ac of good land with irrigation in place if we ever need to plant a garden.
All of these things make everyday living more comfortable and less expensive.
I still have room to improve...I need to add a PV system. I have spent a ton of energy and resources building up my rental portfolio over the past few years that my personal residence tends to suffer.
I don't think its ever a bad idea to be prepared. These preparations would help in many situations... temporary loss of income, natural disaster, etc.
Heck, I don't think my house will burn down but I still buy insurance.
I am not hedged for deflation because I think it simply will not occur here...sure the CPI could dip in the negatives for a quarter or two but I would bet everything that the Govt and the Fed would respond with MASSIVE printing and stimulus. The govt benefits from inflation...they are the largest debtor of all. The fed had one tool..it can print money. It is what they do. All the deflation guys argue that "the fed is out of moves" or that there is nothing more than they can do. I do not believe this. If I learned anything in 2007/8 it is that they can do anything...they are very creative.
There is much more the Fed can do. Anyone wonder how far they can go...google "Helicopter Ben" to learn how he got his nickname.
Our currency is 100% fiat. Inflation/deflation is a policy choice. And I am pretty they will choose inflation.
Not sure I said high cost...maybe I did. There certainly is some cost though. There are tradeoffs one has to make with their investments so there is certainly nothing wrong with betting one way or the other as long as you know you are betting.
I think gold is expensive right now. I also think that the reasoning people use to purchase it is highly flawed. Purchasing it to hedge against "hyperinflation" is flawed IMO.
With a few proper tweaks this economy could be right back on track, even the debt put under control, granted Obama is pushing us nearer to ping point where may not be true.
Please share the "few proper tweaks" that would get the economy back on track and put the debt back under control.
How about spending less than we collect in taxes for one? If we do that over a sustained period it stands to reason we will reduce the debt and the interest to go with the debt.
Seems pretty simple to me.
That sounds like a good idea. Now, explain to me how that could ever possibly work? We have a very limited amount of people still being taxed in this country and the majority pay no taxes. Do you think we are still able to collect more in taxes? If we take all of the income from the so-called rich how much damage do you think that does to the debt? That's one and that we have to fix and it is limited.
The only other option as you mentioned is to spend less. How much less would we have to stand in order to reduce the debt over a ten-year period? The only thing they have been able to agree on so far is a reduction in the potential increase of debt in the amount of $1 trillion over the next 10 years. That does nothing to reduce the amount of spending that continues to spiral out of hand.
I'd love to see a specific program that would do what you are saying. The only two real programs that have been put forth lately where the Simpson program which was dismissed out of hand and the Paul Ryan program which also never made it even to the Senate floor. I like to see your your positive outlook on things being fixed and thinking this is a simple fix, but I just don't see it. I would love to see someone use actual numbers of what would have to be cut in spending chest to reach a balanced budget. To make it easier go ahead and increase the rich tax rate to 35 3945 or 50%. My guess is the increase in taxes would not put it can't in the debt which only leads cuts in our spending habits. I wish I saw something different. Rich
Simple? The devil is in the details.
I agree that we need to reduce spending but as we witnessed with the bipartisan super committee...its anything but simple. And these were very minor cuts...nothing like what we would need for real debt reduction.
And when debts become too massive it can become impossible to service the debt. We have resulted to borrowing with new debt to pay the interest of the old debts. I am not as sure as most that this can continue much longer.
Play around with the real numbers. It quickly become apparent how screwed we are.
Well it is quite easy to throw in the towel guys. Defense spending and entitlements could easily be adjusted to reduce spending drastically. We could then broaden the tax base and eliminate a lot of ways to mask income through the tax system. Simplify the tax code and make everyone pay. The tax system is so screwed up it is laughable.
Those simple things would fix the deficits year to year. You then repeat this over a few decades and you are back to financial health. This seems pretty simple to me. Lower debt year-to-year equals less debt service equals less deficit. You have an upward spiral instead of a downward spiral.
The debt markets will eventually FORCE the hand of politicians. IMO this will happen far before hyperinflation would be on the radar.
Throw in the towel? Not me. I would rather do my homework, understand what is happening and be prepared for the major risks facing our future. This reminds me when I sold my rental portfolio in 2006, I was the joke of all my investing buddies. But I trusted my research and the historical data...and in hindsight, I am very happy with the outcome.
But I don't have faith that our politicians will fix everything. Its not going to happen.
If the system worked as you imply, the markets would have forced the hand of politicians long ago. The debt markets are done with the dollar. The Federal Reserve is the only major buyer of our debt. They call it quantitative easing, or operation twist instead of what it really should be called.... moniterization of our debts. They create the new money and use it buy US treasuries.
The US Federal Reserve is now buying 91% of all long-term new US debt issuance. That is amazing if you think about it. Absolutely amazing.
Okay...fair enough Gene. I'll play along. You seem like a very reasonable guy and have cogent posts.
Please do give us your anticipated sequence of events and tie these events to historical events that mirror the situation we have today. Then please educate us on the EXACT (need specifics) way you plan to hedge said risk and the real tradeoffs associated with doing so.
Then viewers may get a sense for whether or not the costs of the hedge are worth the benefit given how likely they think our scenario will play out like past events did.
I imagine this thread is going to turn a little bit testy so this will be my last post if it continues. Let me just ask how you resolve the following:
in 1964 there were 50 million poor people in the United States and this is the time when LBJ launched the great Society programs to help level the playing field. Since that time, $17 trillion has been spent on welfare. The overall results was the percentage of people poor in the United States dropped by 4% at a cost of $17 trillion. It is anticipated with no changes that over the next 10 years an additional $10 trillion more will be spent simply on welfare.
Bryan-do you want to be the person to tell these folks on welfare that they're going to be removed from the list or even receive less money? I give you credit if you are but then please name me one politician on either side of the aisle that has seemed interested in cutting any entitlements of any sort. Rich
I don't think entitlements correlate very well with welfare Rich. I don't favor having the gov-mint pay for any "social net" though. If people aren't responsible enough to save for themselves then they shouldn't get anything. Ya know...capitalism. I'm sure we're on the same page here.
The thread doesn't seem testy to me. Hopefully some of the people that truly believe we are likely to have hyperinflation in our country can give us their ideas about what to do about it. Hopefully they can connect the dots clearly as well. One can certainly hope.
I think when people weigh the cost of the hedge against the likelihood of hyperinflation they will make the calculated decision that it isn't worth it. I think most people will also disagree with the idea we'll have hyperinflation given the facts, scenarios, etc. given too.
I have already shared most of this in my previous posts over the last few days.
I have been studying the subject pretty intensively for 3 year now. Honestly I have no idea exactly how it will play out. Historical examples differ and none have been the worlds reserve currency.
Let me start by saying I think there is a 95% chance the dollar will collapse. It could be a decade or longer but I think we past the point of no return. One thing I learned during the housing bubble is that markets can go WAY beyond what one would think is logical before correcting.
However, the collapse of the dollar can play out many ways. Hyperinflation is just one. A major restructuring over a short time window (as Argentina experienced) is probably more likely.
I believe the best hedge would be to have a skill or business in which you can keep rising your prices along with rapid inflation.
Real things will hold real value...gold, houses, equipment, tools, food, water. Loans with fixed financing would be easily paid off with inflated dollars. Savings will whither away quickly if it in fiat currency.
Here are my personal preparations (fit my strengths/lifestyle...other may have other solutions that fit their personal situations better)...
My primary business right now is rental properties....all spin off very healthy cash-flow. Fix and hold deals mostly purchased in the past two year.
I am also a partner in a retail store and I am a silent partner in a small outdoor equipment manufacture.
I have purchased equipment (equipment was crazy cheap in 07/08). I bought a tractor,2 backhoes, dump trailer, enclosed trailer, flatbed trailer, lots of tools, roota rooter, commercial steam cleaner, etc. These help keep my costs down on my rentals (and future rehabs), but also can be a means to income down the road if needed.
I have 2.5ac with several dozen fruit trees and 100+ trees for sustainable fire wood. I have accumulated about 6 years worth of wood over the years. My house has active solar heating (one the main reasons we have a wood surplus) and active water heating. We have a well and a full house generator (we are on the grid). We are very close to a year round river (like 400ft).
There are a few things I would like to do but have not yet... The main one is to add a PV array to my house. With prices of panels dropping I am still waiting...I just hope I don't wait too long.
All that said I am not just waiting around for the end to come. I love life, We live it up. I think my young kids will have a great future. I hope to raise them to be bright and resilient. I am excited to see how this all works out...also a bit nervous.
And I am working on some projects which will not do well with hyperinflation...the main one being that I am building up a real estate brokerage right now. Real estate sales will likely go to zero during the event (no financing...everyone tends to go into a holding pattern). But if there is Argentina style currency collapse, just high inflation, or if this all gets dragged out for another decade I see a brokerage being a good long term asset.
So how are your tenants going to pay you when the currency collapses?
Are you assuming the tenant's nominal income would drop? Nothing in history shows this to be the case. Wages would increase in nominal terms (but not real terms).
With hyperinflation any long term loans would be paid off so there would be no debt load. The govt would likely create price control including limiting rent increases. It wouldn't be easy.
With an Argentina style restructuring it would be less difficult. There would likely be several days or weeks of adjustment but the landlord would come out pretty good as any debts would be paid with the new currency.
So your tenant pays you in dollars. You then take delivery of said dollars. A few hours later said dollars are worthless.
How does this benefit you?
Wouldn't the same problem exist for any source of income?
As I wrote in previous posts...an hyperinflation event would not be fun or easy. The goal is to survive. A landlord that could get though it would have no debt on the other end. An entire portfolio free and clear...that is the benefit of rentals.
Like I wrote before: "I believe the best hedge would be to have a skill or business in which you can keep rising your prices along with rapid inflation." For me this would be a the two other businesses and the ability to create income with the equipment I own would also help.
But you make an important point. Cash management is critical to surviving hyperinflation...basically you need to get good at spending everything very quickly. There is an interesting book written for business owners on cash management during hyperinflation. Pretty interesting...its been a couple years sense I read it. I don't remember the name but I think it would be pretty easy to find via google.
Black markets and direct trade quickly develop to help alleviate some of these hassles.
So what would you accept in trade to store value on your rentals? And what would they trade to receive the thing you accept in trade so that they can pay you?
Jason- I'm 63 and been through many economies. We've never had the debt, loss of so many companies and jobs, and a 10% decrease in median income-without any adjustment for inflation. I guess enough of us haven't gathered the will to do so yet.
Bryan- 20 years ago I owned a barter club/organization. There are many items I plan on having for trade and will be open to things I need in the worst case scenario. Again, I hope this will not develop but I do have a harder time out of the mess each year. I also don't think dollars will be worthless in the matter of hours. I look at the lower definition of hyper(26% +) I can live with under 50%. If it is the higher definition of hyper, I have no sure method to avoid catastrophy. I don't even want to consider the problems if entitlement checks stop going out. The average person can't go very long with no income and most likely won't be happy about it... Rich
So I am asking because of people's conviction about this....
If you TRULY believe that there will be hyperinflation and the only way to trade is to result to barter then what good will real estate do you? What good will any investment that would potentially be a store of value do you? Do you really think people will trade their valuable service or good you need for a shiny piece of metal? Won't they save said valuable good or service for something else THEY really need instead of a shiny hunk of metal? Serious question.
Also...Why not completely eliminate your exposure to paper or real assets? The only way real estate will provide value for you in the hyperinflation scenario will be for you to procure a tenant that can give you a good or service that you need. Wouldn't it make more sense to completely eliminate your dependency or trade at all? Wouldn't it make sense to trade your securities for shoring up your basic needs in perpetuity?
Please describe in detail how you are adjusting your portfolio in the present day and what real tradeoffs you are making to prepare for hyperinflation.
So what would you accept in trade to store value on your rentals? And what would they trade to receive the thing you accept in trade so that they can pay you?
I guess the easy answer is... anything that I perceive as having value at the time.
As I said many times I am not sure exactly how it would play out. It is impossible to predict the future...I don't pretend to have all the answers. I just study the past to be more prepared for the future.
I have shared a lot with you. How about you. How are you planning on maintain and building your wealth going forward? Do you think there is ANY risk that our spiraling debts could cause a dollar crisis?
I think the debt problem will make the gov-mint err on the side of monetizing debt. If you read earlier in the thread I shared my thoughts about this. I have also shared these thoughts in other threads. Higher debt as a percentage of your overall capital controlled is probably a good thing as long as you don't go nuts with it. Hedging against long-term monetization of debt needs to be balanced with short-term liquidity to keep purchasing with all-cash no financing contingency offers. Cash also gives you staying power. My short-term goal is to build more liquidity after we loaded up on some debt in years past.
A balanced strategy is the way to go IMO. We are doing nothing specifically to prepare for chaos during hyperinflation. I think these fears are unwarranted. Perhaps I am naive. I haven't seen anything to convince me these fears are credible though.
That may make more sense for you. For me and my current situation and lifestyle I am happy with where I am. I do very well in today's market and I think I am adequately hedged to make it though a currency collapse or episode of hyperinflation.
Specifically addressing the rentals I will repeat again, the major benefit of holding rentals would be to come out the backside with a free and clear portfolio.