Gyroscopic Investing

Posted: **Wed Jun 30, 2010 7:13 am**

Here's a fascinating look at the effects of the German hyperinflation in 1923. (The essay was written in 1981).

http://www.pbs.org/wgbh/commandingheigh ... ation.html

Posted: **Wed Jun 30, 2010 11:06 am**

Great article. The conventional wisdom in economics today is that deflation is a worse threat than inflation so government should keep spending money. However if you review history where bad inflation impacted an economy it is plainly obvious that inflation is the far worse threat. Severe deflation certainly has its problems and I'm not trying to discount it. But it cannot compare to bad inflation in terms of destructiveness to society. I said in another thread that I'd rather live under Japan's deflation than Argentina's inflation.

I'm reading a book now called the The Hyperinflation Survival Guide. This book was published in the late 1980s by Figgie International (Harry Figgie Jr. was a famous and successful business owner). They put the book together as a planning guide for businesses on what to expect in a bad inflation environment. It was written by an economist who went with a team of people to study the effects of hyperinflation in the countries Brazil, Argentina and Bolivia. What's interesting about the book is it focuses just on what businesses need to do to survive the situation. I'm going to post a review when I get to it, but some of the quotes:

In an Argentine supermarket, it was common to take a loaf of bread from the shelf, only to find that the price had increased by the time it reached the checkout counter.

"The problem with hyperinflation is that it happens so fast. We never realized what was happening until it was too late." - South American Bank Director

In 1988, after three consecutive years of increasing its money supply by over 300 percent while amassing debt equal to one-third its GDP, Brazil had nearly 1000 percent inflation.

Inflation is very destructive. It's the only economic condition I've come across that can turn everyone destitute very quickly. The Gold in the Permanent Portfolio gets a lot of flak from critics at times. Yet, the more I study economics and the effects and suddenness of high inflation the more I'm glad I own some.

EDIT: I almost forgot. I have a stack of these old German bills I bought on E-Bay. They're just about worthless, but an interesting conversation piece. But what's also interesting is you can buy coins from that time that are still valuable even if just due to their metal content.

Posted: **Wed Jun 30, 2010 1:42 pm**

Is anyone aware of a precedent for hyperinflation in a world reserve curency?

I am not aware of anything like that ever happening before.

By "hyperinflation" I mean accelerating rates of price inflation at an annual rate in excess of at least 50%.

Given that most money today is electronic blips of debt, why would an entity like the Fed ever permit true hyperinflation to take root?

It's clear that the Fed's policy is to maintain a steady single digit level of price inflation at all times (ideally in the 2-4% range), but once price inflation started running much over 10% on an annual basis, why wouldn't the Fed just put the brakes on the creation of new credit by raising interest rates (as Volcker did) and stop the inflationary spiral cold?

I understand the fear of inflation, but I don't grasp the way it would actually unfold if we are talking about a true uncontrolled upward price spiral in a debt based monetary system.

Posted: **Wed Jun 30, 2010 1:46 pm**

Clive wrote:
The Gold in the Permanent Portfolio gets a lot of flak from critics at times. Yet, the more I study economics and the effects and suddenness of high inflation the more I'm glad I own some.
But what would you rather have in the event of a hyper-inflation event. 25% in gold or 100% in foreign currencies?

I'd rather have 100% gold honestly. But hyperinflation is so rare that to put 100% of my money in gold or foreign currencies waiting for it is a recipe for disaster. So I just have to be content with knowing that I have about 1/4th of my money in an impervious form of wealth. The other 75% I'll risk in other ways to grow the money.

The risk with foreign currencies however is that they may encounter their own 'domestic' currency crisis. Spread thinly across a basket of currencies however and the impact of any one failing might be minimal.

It might be minimal, or it might not. Right now the US is putting pressure on the G20 countries to keep printing money. So it could just be that I'm diversifying into more problems by owning much foreign currency.

Travel to a country that's enduring high inflation and write them a cheque (check) in US Dollars and likely that cheque wont even be cashed. They'll just trade it around as though it was a currency note whilst seeing the purchase power of that cheque rising with inflation. If you travel to that country with some gold coins in your pocket make sure you also bring your cheque book as likely you'll be needing it to pay the hospital bill.

I'll be in a country shortly that has a 9% inflation rate and has had multiple currencies over the decades. When I'm there I will try to remember to ask locals whether they'd prefer to have gold or a check in US dollars for payment. It won't be scientific, but I'm willing to bet they want the gold if given the choice.

As an aside, I remember reading another story about inflation in Argentina. The author's relatives would purchase LP Gas canisters and store them in their garage. On the weekends they'd go to the market to sell them as a vendor. They would then use the money collected to go out immediately and buy necessities like food, clothing, etc. from other vendors. The excess tanks were taken home and empty ones refilled during the week. They didn't hold onto cash. Cash would always be converted into tangible assets immediately and those assets sold at the market rate each week. I am sure if he could have put his savings in gold/silver instead of gas tanks they probably would have done so! The option of having a foreign account was not open to them as the government forced all non-Peso accounts (Euro and dollars) into pesos before devaluing them. So owning foreign currencies in that country would not have been a workable strategy.

Posted: **Wed Jun 30, 2010 1:56 pm**

MediumTex wrote: Is anyone aware of a precedent for hyperinflation in a world reserve curency?

No, but no currency like the Dollar has ever been so wide and pervasive. It is often the "best looking corpse in the morgue."

Given that most money today is electronic blips of debt, why would an entity like the Fed ever permit true hyperinflation to take root?

I agree with your premise that hyperinflation in the US dollar is not as near as people may think. But I also think that whether or not the Fed wants it to take root is not totally in their control. If the markets decide that a dollar is not worth what the Fed thinks, then it's not worth what the Fed thinks.

It's clear that the Fed's policy is to maintain a steady single digit level of price inflation at all times (ideally in the 2-4% range), but once price inflation started running much over 10% on an annual basis, why wouldn't the Fed just put the brakes on the creation of new credit by raising interest rates (as Volcker did) and stop the inflationary spiral cold?

It took them 10 years to get to this point though in the 1970s. This was after trying price controls, wage controls, blaming businesses, blaming consumers, blaming OPEC, blaming whomever. During that time the dollar fell quickly in value.

So yes, the Fed may do the right thing eventually. But ultimately they are a political body and will do what those in office tell them to do. The Fed could have stopped inflation in the past, but the people in charge decided that it would not be. By the time they did the right thing in 1981 a lot of damage had taken place.

I understand the fear of inflation, but I don't grasp the way it would actually unfold if we are talking about a true uncontrolled upward price spiral in a debt based monetary system.

I don't know either. I suspect it would self correct at some point. For instance if I saw LT bond interest rates over 10% I'd be mighty interested in buying if I thought the US Govt. was serious about controlling things. I suspect the market in general would hold the same attitude and the dollar would stabilize if the Fed showed any signs of doing the right thing.

But then again I've come across many interesting stories about inflation where everything was fine and then suddenly the currency started falling so rapidly that nobody could react to it fast enough. So while I don't personally think the US Dollar is going to go easily into a hyper-inflation, I don't think it is impossible either.

Posted: **Thu Jul 01, 2010 3:43 pm**

Clive wrote: Maybe a consensus view might form to move away from oil, gold etc. being priced in US Dollars in favour of a basket of currencies instead. Perhaps on the back of low returns against held US Dollars, or lack of confidence, or ...etc.

The stance might be to take the existing USDX comprised of a basket of currencies relative to the US dollar

* Euro (EUR), 57.6% weight
* Japanese yen (JPY), 13.6% weight
* Pound sterling (GBP), 11.9% weight
* Canadian dollar (CAD), 9.1% weight
* Swedish krona (SEK), 4.2% weight and
* Swiss franc (CHF) 3.6% weight.

(according to Wiki http://en.wikipedia.org/wiki/U.S._Dollar_Index) and combine that with US Dollars. They might for instance set the new basket to initially be weighted 50% US Dollar and 50% USDX (i.e. 28.8% Euro, 6.8% Yen....etc).

The problem then however would be large and rapid movement out of the dollar and into the basket set of currencies, the dollar would decline and become lower weighted in the basket, which would drive even more out of the dollar .... the next thing you know confidence in the dollar spirals downwards rapidly or the dollar is seen as a one way downward street and no one is buying the newly issued US dollar based treasuries that are being sold to refinance payment out against older maturing treasuries.

The government might then enforce compulsory seizures and/or prevent holding of foreign currencies, before perhaps devaluing to stabilise the decline and restore faith (basket currency ranking). Maybe ending up with the dollar being half the value it used to be, but having endured declines maybe down as low at 20% or less of its former value in the process.

I can't foresee a single currency being the dominant entity globally long term (next 100 years). Either by enforcement or through agreement the loss of stature would have a significant negative effect for the US Dollar.

EDIT: I ran a google search for "move away from US dollar towards a basket of currencies" and 87,400 results popped up. The first of which was this one http://www.independent.co.uk/news/busin ... 98175.html

In the most profound financial change in recent Middle East history, Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.

Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars.

The plans, confirmed to The Independent by both Gulf Arab and Chinese banking sources in Hong Kong, may help to explain the sudden rise in gold prices, but it also augurs an extraordinary transition from dollar markets within nine years.

There's been a lot of talk lately of using SDRs issued by the IMF to replace the USD as a reserve unit. Jim Rickards has some interesting opinions related to national security on this issue. One thing is for sure: without a dollar devaluation--either orderly or not--there will be no feasible means of growth in the near term and eventually no way of servicing debt currently in rapid accumulation.

All nations want a weak currency for export purposes but strong reserves for value storage. That's why I don't see a basket of currencies taking over the USD in a reserve role. In a zero-sum world, that would mean a stronger basket in order to achieve a weaker dollar. I tend to think the USD will be around for a while (much like Sterling) but gold will play a much more prominent role in the balancing of international payments.

On the issue of gold vs. international currencies, Zimbabwe provides a useful case study:

http://www.youtube.com/watch?v=7ubJp6rmUYM

Notice you would not be able to buy bread with Euro, Yuan, Ruble, etc.

Gyroscopic Investing

German Hyperinflation, 1923

German Hyperinflation, 1923

Re: German Hyperinflation, 1923

Re: German Hyperinflation, 1923

Re: German Hyperinflation, 1923

Re: German Hyperinflation, 1923

Re: German Hyperinflation, 1923