Hyperinflation or Deflation

As deficits and stock market speculation reach all time high levels, we are inevitably headed towards a financial crisis.  This time the national banks will be unable to do much of anything, as they have already lowered interest rates to zero (or even below) and have printed as much money as the dared (through purposely confusingly named programs like “quantitative easing”).

When the inevitable crash comes, the financial crisis can develop in one of two ways, Hyperinflation or Deflation.  Hyperinflation is frequently seen.  The examples are Zimbabwe today and Wiemar Germany.  Hyperinflation results when the national bank or government just prints money and starts paying everyone with it.  Inflation goes sky high (as in something like 100% per MONTH), and pretty soon, people either need wheelbarrows full of cash or banknotes denominated in billions to buy a loaf of bread.  Deflation is when the value of money goes in the other direction.  Prices go down, but so too do salaries, which go down faster.  What goes up dramatically is unemployment, as people put off purchasing, and, more importantly, banks stop lending.  The best known example of deflation is the American Great Depression.

If Hyperinflation happens, you are best positioned if you have a LOT of debt.  In fact, the more you borrowed to buy things like land, equipment, and precious metals the better.  This is because you can pay off the debts with almost worthless money.  If I borrowed $10,000 from a bank and owe it back in a year, and hyperinflation of 100% per month happens, I can pay that loan back with the equivalent of $2.50 (because $2.50 inflated 100%, or doubled every month, ends up being a bit more than $10,000 in a year).  So Hyperinflation eliminates debts.  Of course it eliminates savings too, but few have those today.  Most individuals, just like governments, are deeply in debt.

If Deflation happens, you are best positioned if you have a lot of savings, especially cash or precious metals.  As deflation plays out, what costs a lot today becomes very cheap over time.  The ability to buy things is even more enhanced for people with available funds, as others will be desperate to convert their property (especially real estate) into currency, as banks will stop lending.

Personally I believe that Deflation is the most likely result of the upcoming financial crisis.  I believe this for two main reasons.  First is that the amount of debt dwarfs the amount of currency and credit in the financial system (see the video in the first post on the “Economic” page of this site).  Maybe even more importantly, Hyperinflation would destroy the banks, as people would pay off debts in worthless money.  The banks are much more powerful than individuals, and they are going to protect themselves through laws and regulations.  The best recent example of this is when lawmakers changed the rules so that people can no longer declare bankruptcy to clear student loans.

You and I will face financial ruin long before the banks do.  They will see to this under almost any scenario.  Even if Hyperinflation happens, the banks will change the rules so that you can no longer pay them back in currency.  Instead, your loans and debts will be pegged to some non-inflating asset, like gold.  So they will say, you borrowed the equivalent of so many ounces of gold way back when, and that is all that they will accept in payment.  So no paying off your mortgage years later with what’s in your wallet.  Instead, people will become “debt slaves” once a financial crisis hits.  They will be unable to pay back their debts, and like a lot of students, they won’t be able to get rid of them through bankruptcy, as this won’t be allowed.

A financial crisis is going to happen, and when it does, it will happen faster than you or I can respond.  This is because of computer trading.  You will not be able to get your money out of stocks.  You won’t be able to sell your real estate because almost everyone will be trying to do the same thing.  And the banks will make sure that YOU will have to pay your debts.

What to Do

First off, you must get out of debt.  Get out of the worst of it (like credit card debt) as fast as you can.  STOP spending on credit.  Stop borrowing for things that you want but don’t fundamentally need.

Save what you can.  Precious metals are one of the few assets that will retain their value through a financial crisis.  But even here you have to be careful.  During the Great Depression, the American Government made it illegal to own gold.  They made people turn it over to them.  The same thing can happen again, as the legal precedent has already been established.


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