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Why Hyperinflation is Coming to America and How to Prepare Now
“We all keep worrying deflation, but it can turn so fast” – Adam Fergusson
Back in 1980 when my late grandfather, Abe Roseman, passed away, I inherited numerous personal items. These included tie bars, cufflinks, his old desk and lamp, and several other reminders of my childhood that to this day always put on a smile on my face.
Thirty years later, rummaging inside my late grandfather’s desk, I found 55 ounces of silver. Somehow, after all those years, I failed to pry open every drawer; what a surprise! How did he know I was a silver bull?
Or, perhaps, he wanted to be prepared for hard times.
Wisdom in Experience
I was pretty close to my grandfather. Abe was born in 1911 and lived through the Great Depression in Montreal. My grandmother would later remind me how bad things were in Canada at the time with unemployment at absurdly high levels from coast-to-coast. My grandparents knew how to be frugal and understood the value of money.
My generation (I’m in my early 40s) doesn’t know what it means to suffer an economic catastrophe; but we came darn close in 2008. I think we’re already in a “soft” economic depression. By “soft” I mean that without government backstops two years ago, we’d see blood in the streets, civil chaos and, possibly, runaway inflation by now.
In my view, this is a depression.
When 2 Million Marks Won’t Buy a Loaf of Bread
One item I inherited from my grandfather in 1980 was a bunch of old German bank notes, neatly tucked away in a plastic folder. At the ripe age of 14, I had no clue what these bills were worth, let alone what the German inscription meant. So I just buried Grandpa’s stash in my safety deposit box for the next 30 years.
Last month, however, I decided to review the causes and effects of the German Weimar Republic’s hyperinflation in the 1920s. I went to the bank and got Abe’s German notes. To refresh my history I read Adam Fergusson’s When Money Dies, first printed in 1975. I urge every investor to grab a copy ahead of “Quantitative Easing Part II” this summer.
It turns out my grandfather kept a bunch of German marks from periods ranging from 1922 to 1924; the note below is a scan. The amount is Zwei Millionen Mark or 2 Million Marks printed on Aug. 15, 1923 – exactly the same year that mind-boggling inflation started to run out of control in Germany.
Unbelievably, two million marks could barely buy a loaf of bread. Within hours, prices would escalate rendering that loaf to 3 million marks, four million marks etc. German paper had become almost worthless. Hyperinflation wiped out the entire middle class.
Click here to view larger image
Germany in the early 1920s was a desperate place when prosperity was spreading across the United States. The Allied victory in World War I had forced a tremendous financial burden on the new republic with France and England especially hard on Germany for war reparations. Eventually, the Germans couldn’t meet the ridiculous terms of payment and in order to settle financing obligations in gold, had to start printing – and print they did.
322% to 19,000% Inflation Per Month
The German currency was relatively stable at about 60 marks per U.S. dollar during the first half of 1921. But the “London ultimatum” in May 1921 demanded reparations in gold be paid in annual installments of 2 billion gold marks plus 26 percent of the value of Germany’s exports. The first payment was paid when due in August 1921. It all went downhill from there.
When it finally reached its zenith, Weimar Germany saw its monthly inflation rate top 322% per month by late 1923. On average, prices quadrupled each month during the 16 months of hyperinflation.
Weimar hyperinflation is widely understood to be among the worst episodes of runaway inflation in the 20th century. But other nations before and after 1923 suffered even worse inflation.
Zimbabwe is one example where inflation skyrocketed over the past 24 months and the currency is being printed like there’s no tomorrow. Hungary also experienced hyperinflation after World War II when, from August 1945 to July 1946, prices went ballistic, soaring 19,000% per month. Prior to Weimar, revolutionary Russia witnessed a currency collapse and hyperinflation, as did Poland and Austria.
Can it Happen Here?
There’s a fine line between deflation and hyperinflation. Some would argue they’re different sides of the same coin.
The Fed’s unorthodox operations since late 2008 should be a serious warning to investors. In all honesty, we have no idea what’s going on behind closed doors in New York.
I rely on Shadowstats (www.shadowstats.com) to determine the approximate level of broader monetary aggregates because the Fed publicly abolished these figures several years ago.
The Fed has lost control.
Waves and waves of money-printing continue in Washington with no end in sight. Bank reserves will start to expand and then the Fed will have to drain excess liquidity from the financial system to avert an inflationary spike.
Given the Fed’s history since its creation in 1913, I have little faith that the economy, the dollar and financial markets will transition smoothly once this monetary shift occurs.
My action plan, and the one I recommend to all of my friends, is to have enough physical gold, some silver, agricultural commodities like the grains and several cash-rich large-cap stocks.
The Fed is losing the fight against deflation again in 2010 and another round of printing lies ahead subjecting the dollar to more weakness and eventually, a collapse in bond prices.
In many ways, the economy in 2010 mirrors the events that unfolded prior to Weimar’s hyperinflation in 1923.
Be wary of aggressive central banks with unlimited power to print currency. Protect yourself.
Best Regards,
Eric Roseman
Editor, Commodity Trend Alert
P.S. For my Commodity Trend Alert subscribers I’ve created a portfolio that will weather good times and bad. It is the safest way to invest money in the toughest times. If you’d like to learn more, click here.
*The Sovereign Society has an advertising relationship with EverBank and may receive compensation for the sale of some EverBank products.
Other Posts from the Author
- Hogs on Top in Brutal Market for Commodities - July 12th, 2011
- Europe's Boat Springs another Leak - July 11th, 2011
- Poor Brazilian Crop Threatens Sugar Supplies - July 7th, 2011
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