Understanding the effects of hyperinflation (and debts) on a personal level

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Aura's picture
Aura
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Understanding the effects of hyperinflation (and debts) on a personal level

I'm hoping that some of you more knowledgeable folks can help me. I've been doing some reading on hyperinflation, mostly about Germany in the early 1920s. I understand (basically) hyperinflation, what it is, and what causes. What I'm having a hard time with is the direct effect on the average, middle-class citizen.

Problem #1: Hyperinflation and Debt.

From what I understand, during hyperinflation, prices skyrocket as does the amount of currency being circulated. I have heard that inflationary periods are great for paying down debt because the debt remains fixed while the amount of currency goes up. (Instead of having $1 to pay off a $10 debt, now you have $20 to pay off a $10 debt.) Now, here's where I'm having a problem.

That only works if you get a $19 increase in income during hyperinflation. This doesn't make sense to me. Hyperinflation occurs over a period of months, not years. (Is this a wrong assumption?) So, how does your income adjust during these months. Say I get paid $50,000/yr. I get an annual cost-of-living increase of 2%. That cost-of-living increase addresses inflation, not hyperinflation. When hyperinflation hits, I don't suddenly get a cost-of-living increase in January if the fiscal year doesn't end until June...Do I? Can the average worker expect their employer to suddenly offer a pay increase when it hits? This just doesn't seem right to me.

What I do see is when hyperinflation hits, my income does not adjust and I'm stuck with a debt while trying to pay $20 for a gallon of milk. So accumulating more debt or waiting until hyperinflation hits to pay it off just doesn't make any sense to me. What happens if not only do I not get a pay increase, but I actually lose my job? Now I have NO income and prices are going out the roof. I can't pay off the debt no matter how "little" it seems at this point. I get foreclosed on and now I have no job and no home.

Am I missing something here? Do incomes actually increase during a hyperinflationary period? Even if it did a little, how could it keep up with hyperinflation. (Isn't that why it's called HYPERinflation?) How can anyone be so sure that their or anyone's income will go up and therefore advise to actually increase one's debt? If hyperinflation hits and you have any kind of debt, including just a basic mortgage that is well within your current income levels, you could very well be looking at living on the street just for trying to put food on the table.

Truly, I am not venting or yelling at anyone, I just plain do not understand this mindset.

Problem #2: Hyperinflation and Direct Effect/Experience

As hyperinflation hits, what does the average person experience? We're not talking about stock markets, but the actual impact on the everyday life of the average, middle-class person. Is it just the sudden, dramatic increase in prices, which seem to have no end? (As if that isn't enough.) When this happens, will there be any kind of warning? I mean physical warnings that directly impacts one's daily life--not refusing to buy out of fear or speculating something bad will happen based on what the news says...maybe the banks start limiting withdrawals or credit card companies freeze or reverse credit limits. (I'm guessing here. Can you tell?) I guess what I'm wondering is if there are any steps that the average person experiences or do you just wake up one morning to find that the price of milk has doubled and then doubles again before you go to bed?

I hope my questions make some sense and aren't total ramblings. Thanks.

 

 

Brainless's picture
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Re: Understanding the effects of hyperinflation (and debts) ...

I have a mortgage on my house. still have to pay around 250.000 euro.

If you think inflation will be high or even hyperinflation you shoulds put a percentage of your income into gold. I buy around 1500 euro gold every month. Just started a few months ago.

In a hyperinflation situation lets say 1 euro worth will be 0.10 euro or even 0.01 euro i will be able to pay of this debt with 2500 euro worth of gold bought now. But even then it probably is better to just pay the interest and wait for some more inflation. In theorie you would be able to pay your debt with 1 ounce of gold.

With hyperinflation your job will be gone or you are paid in food if your lucky. I estimate the change it really happening low, but even if the chance is low you  should prepare for it.

If you see what governments are doing now i think a hyperinflation will happen in a few seconds without any means to stop it.  Today you think (are fed information) that everything will be going to be ok. Governments don't want people to panic. In such situation you are always too late.

For me in Europe i thought that the situation in the US will be some form of warning. Like when SHTF in the US i still have some time to prepare. Everyday that goes by however i think i have it wrong and a sudden collapse will be worldwide. Thats why i am buying gold and have a ticket prepared to fly to greener pastures.

 

 

TruthSpeak's picture
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Re: Understanding the effects of hyperinflation (and debts) ...

You are right, unless incomes goes up you won't get any help. The way people make money is through massive speculation. This is what really fuels hyperinflation. People borrow money to buy foreign currency, gold, and other commodities and sell them at later date for more local currency than what was used to pay for them. This is probabaly what will happen everywhere. As soon as prices start to increase certain people who can borrow will start a new phase of speculation. There is alot of money in banks waiting to be lent. We just have to wait and see how it will all start.

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Re: Understanding the effects of hyperinflation (and debts) ...

This of course only applies to those who have fixed term mortgages, ( 5 % for 30 yr fixed a while ago, what a deal !!  )

 

If floating, interest rate will get jacked to match or outpace inflation = no advantage

 

If say 3 year fixed, you get up to 3 years of gain, then you will probably be forced onto a floating rate ( what bank will be stupid enough to give you a fixed rate in hyperinflation ? )

 

So if you have  a mortgage, reset it to longest term possible if you believe high inflation is coming

 

Cheers Hamish

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Re: Understanding the effects of hyperinflation (and debts) ...

In a hyperinflationary environment, workers will frequently demand increases in wages more often in order to keep up....or  job hop.  Existing fixed rate debts will be more easily paid, but new credit will be hard to come by, variable rate, or extremely usurous.  Any business inventory has be priced on replacement cost...LIFO not FIFO.

I used to travel Brazil during their hyperinflationary period.  I think their currency changed completely on 3 occasions within a year or so, until they pegged to the US dollar.  I once made the mistake of exchanging US$100 and within 2 weeks could only exchange the same amount of their currency back for US$80.  However, I'd make a very good deal on the exchange rate charging my hotel bill, etc.. though, especially since the company I worked for based expenses on the exchange rate upon arrival.   Really, it didn't make much sense to exchange for their money anyway, nearly anyone would take or buy dollars.   Prices in the local currency changed daily. 

I would expect much the same in the US with a hyperinflationary environment.  Other currencies might devalue less quickly than the dollar, but gold would be safer.  

 

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Re: Understanding the effects of hyperinflation (and debts) ...

There is no mathematical distinction between inflation and hyperinflation, but only a matter of degree.  

Both exist, because the "basket of goods" which a fixed unit of currency (dollar) can purchase, becomes less.  Conversely, the same basket of goods will require ever more units of currency (dollars).

Inflation exists, because of an ever-greater supply of currency.   This ever-increasing supply "chases it's tail", so to speak, to service the growing debt, and in particular, to service the interest on that debt (see Chris' CC chapter).

However, in an hyperinflationary environment, the populus becomes keenly aware that their money is being "devalued" - i.e., there is widespread understanding that inflation is increasing rapidly - i.e., they realize "the gig is up".

Consequently, they begin to utilize the value of the currency on a nearly "instantaneous" level - i.e., they spend the money as soon as they get it, lest it be worth less tomorrow than today.

Inflation benefits borrowers, and penalizes creditors.  

Assume I borrow from you $1000, to be paid at some point in the future.   At today's "valuation", $1000 will buy a certain amount of gasoline, food, a television, etc.

In an inflationary environment, there are more dollars introduced into the market, and the purchasing value of those dollars is reduced.

So, in the future, when I pay you back the $1000, the value of that money has been "sucked out" - i.e., it buys a much smaller "basket of goods", then when I borrowed it.

So...

Now that the USA has nearly 5 times the debt of it's yearly total output (GDP) how can it be repaid?

By devaluing the currency (inflation).   The "number" to be repaid will remain the same, but the "value" of what those dollars can buy, will be reduced.

However, it not careful, this intention can instill an "awareness" in the overall population - i.e., hyperinflation.   In every historical case where hyperinflation has taken hold, the currency has been destroyed.

Gold, precious metals, and "real things", on the other hand, retain their true value, and generally then, get "indexed" up, when measured in the currency units (dollars).

People on "fixed incomes", who will receive the same "number" of dollars, will suffer an extreme loss of real purchasing power.

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Re: Understanding the effects of hyperinflation (and debts) ...

Aura,

Your question is very well thought out and you bring up some very good thinking points that are logical.  I have been apart of a union negotiating team and wage increases are generally supported by the CPI (Consumer Price Index) which itself is massaged to show a low number versus real inflation.  The main point here is that wage increases definatly lag behind rises prices and rising prices lag behind an increase in the money supply, so yes, if wages are to follow hyperflation then it will at best be lagging well behind real inflation.  Secondly, the data used to justify the wage increase versus the CPI are likely to be far less than the hyperinflation seen in real commodities like food and oil, and the under-weighted healthcare sector.  Of course, a bigger point than this, (which you bring up), is than this is what would happen in a more normal environment, which we do not have right now.  More unemployed workers will put downword pressure on wages, more people willing to work for the same job, bad business models that should have failed a long time ago will fail now and unload more unemployeed workers into the market helping to reduce wages.  Furthermore, many of our jobs are in the service sector and depend on consumer spending, which will be less due to our really high debt levels taking a toll and from wages remaining stagnent and even decreasing, like the auto workers.

So yes, I would say your point in very valid and true, that a period of hyperinflation will not yield higher wages that make debts easier to pay, it will acutally due the opposite.  Living expenses could skyrocket and we will have to pay for all this with less dollars due to wage destruction and less money will be available to actually pay down debt.  It is a very dangerous time to hold debt. (unless the govt magically pays it all off, the wild card)

On the back end, everything imported could become more expensive as currency of debter nations devalues, which could lead to high prices from imports.  The things we need or think we need we will keep buying and the price of these things will skyrocket.  Any wage increase, if we are lucky to see it after the lag effect will go right to paying for the neccessities.  Asset bubbles like housing, will continue to plummet, even though the currency will start to inflat and or even hyperinflate, since it was off of extreme debt that the inflated asset rose anyways. So some things will devalue or deflate like housing and other high price items, people can choose to change life stlyes and live in apartments and move in with family for community living, but other things, the basics, things imported will skyrocket.  It could be an inflationary depression, where inflation and assest deflation are happening at the same time.

It is possible however, the if a magic debt erasure shows up thorugh the govt or something and if everybody gets their debt severely reduced to basically nothing and they are able to borrow again, then we could get run head smack into hyperflation with everything. But what are the chances that the govt will make the debt magically erase?  That would result in a major moral hazard that would surely cause civil unrest among many who are not in debt.

Overall, the debt level, will prevent the things associated with that debt from hyperinflating, and in fact the debt being in existance will make it harder not easier to pay down in an extreme inflationary environment.  The general thinking is flawed in this area big time.  People don't understand that we are experiencing a double edge, of increase in the money supply but also severe crippling debt with bad business that rely on debt and jobs that depend on ever increasing debt. 

We go into hyperinflation regardless, but debt levels not being reduced will result in a very twisted hyperinflationary situation that is some combo of a depression yet inflation.

Hopes this helps.  I've been trying to wrap my mind around it for awhile.  Be careful what you here because a lot of advice doesn't add up.  The common sense factor should always be your first test.

Paul

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Re: Understanding the effects of hyperinflation (and debts) ...

I am of the opinion that taking debt now will leverage you against high inflation. You have to change your debt in something else as dollars of course. Preferably gold.

f you have no savings to exchange to gold, you will be one of the people without any means to survive.

Debt in such a case is survival.  

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Re: Understanding the effects of hyperinflation (and debts) ...

oops  mind meltdown at moment of typing in a hurry before out for the day....Foot in mouth

High inflation will of course effectively reduce the value of the principle.

However to get the gain you have to keep your job and get close to inflation adjusted wage rises....until one day, 1 weeks wages will pay off the entire principle sum.

Or own and hold gold till a small fraction of your gold can kill the mortgage

 But of course the banks will try and sting you for early payment if they can, probably at the inflated rate !

 

 

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Re: Understanding the effects of hyperinflation (and debts) ...

Pretend that you own a bakery and have ten employee's, what will happen first with high inflation is that your raw materials, milk, eggs, flour will go up in price, this means that you will have to charge more for your bread. Let's say that inflation has become so high that you have to charge $50,000 for a loaf of bread. To keep the employee's  the employer will have to raise their wages accordingly or else they will have to find a job that pays more. Let's  say they were making $25,000/year before the inflation , who would work for a year to buy two loafs of bread?

I read that during the hyper-inflation in Germany the employer's had to pay the employee's every day because the money was inflating so fast that by the next day  it was almost worthless. As soon as you got off of work you would go directly to the store and buy whatever you could.

I am buying silver and I'm thinking of buying things like cigarettes, candy bars, soap,  liquer, toilet paper to use to trade for things I may want. These types of things will become scarce in bad times.

Greg

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Re: Understanding the effects of hyperinflation (and debts) ...

A very interesting topic. I have been wondering about the practical effects of inflation/hyperinflation for a while. I have a couple of questions:

1. Given that I do not have a lot of current savings to buy gold/silver, but own my house outright, would it be a good idea to take out a fixed rate secured mortgage on my house to buy gold/silver? I have a relatively stable/safe job which I hope to keep to pay the loan payments.

2. If I buy gold/silver now, who will I sell it to in a hyperinflationary situation.  I am talking about holding physical gold/silver and trying to find someone with huge wads of dollars in a small local community to buy it. Will the banks still buy it at a reasonable price (not COMEX). I do not foresee merchants taking gold/silver directly (at least not early in the hyperinflationary stage). I would need many small units of gold/silver in order to cash them in on a weekly basis to buy necessities. I really wonder if gold is truly functional in this environment.

3. Would I be better off just buying food and things like Greg above. If I buy canned food, water, and other essentials I can meet my family's needs and also use it to barter for what I need.

 Would greatly appreciate any advice you have.

Will

 

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Re: Understanding the effects of hyperinflation (and debts) ...

Hi Will-

Buying and stocking for an inflationary time works to an extent but if you really want to thrive during those times - learn to grow your own food too. It's the most radical thing you can do to ensure your family's security during most un-expected events - like:

  • natural disasters -tornadoes, hurricanes, earthquakes, floods and . . like now - snow storms.
  • man-made disasters - economic swings, bank holidays, gas price swings and the like.
  • personal economic issues- illness, accidents, extra un-expected expenses arise . . 

Learning some basic skills- gardening, permaculture and raising animals, as well as how to survive off the land can be a great hobby that will ensure smooth sailing in any economic situation and the goods you produce in excess can always be used to barter for other goods.

The other thing we keep in stock & good condition is our bikes. We found them invaluable last summer when gas hit the roof. You'll feel healthier and more energetic too!

The great thing about this - it doesn't cost a lot. No reason not to get started.

It's all about the End Game.

 

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Re: Understanding the effects of hyperinflation (and debts) ...

Thanks EndGamePlayer,

I agree with your advice about growing food. We do have a backyard garden in the summer (I live in Canada and now have 18 inches of snow over the garden now). This does cut down a little on groceries but we simply do not have enough land to provide for a family of 5. Also in many places zoning bylaws prevent raising animals (even chickens). Unless you live in a rural area I do not think you can be truly self-sufficient. I do have an old farm in a rural area as a backup plan but for now I am still dependant on a JIT food/energy delivery system (as most people are). Given this situation, and the coming inflation (probably before the snow melts), I am wondering what the right plan would be? Buy food or buy gold/silver?

Will 

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Re: Understanding the effects of hyperinflation (and debts) ...

The notion of buying tangible assets on credit, and being able to repay the debt with inflated/devalued dollars later down the track may seem appealing, but this benefit is going to be greatly outweighted by the reduced standard of living for everyone under a hyper inflationary environment.

Long term planning and investment will be non existent, civil unrest and crime will reach epeidemic proportions.  The economy will grind to a halt as people resort to primitive bartering.
Wages will skyrocket, but they will always lag the real inflation rate and peoples real purchasing power will fall.  Anyone with a fixed income or savings in cash will be wiped out.

Everyone should own gold to protect themselves, even if its only an oz.
An oz of gold in 1920 could have bought a reasonalbe quality mens suit.  In 2009 an oz of gold will still buy you a reasonable quality mens suit.  People should hold gold not to make them rich, but to preserve their wealth.

Gold is perhaps not suited to everyday trading, so having a stash of ciggarettes, soap, tampons, toothbrushes, candles, whisky or basically anything that is durable and always needed is a good idea.

Growing your own food, even if its only to supplement your total food needs is a great idea, so is owning a bicycle.

Along with tangilbe necessities and precious metals, you want to own assets that generate real income.  Things like energy, agriculture and mining stocks.  You would also want to have a portion of your wealth stored outside of your home nation in the event currency controls/capital restrictions are introduced.

Some argue that if things get so bad that the currency is deemed worthless, you would have been better off buying guns and ammuntion rather than gold. This is quite logical, if you have prepared for the worst, you become a target for those who didnt and now have very little to lose.

If we do experience hyperinflation, it will be a horrible experience.  Ask the zimbabwean families panning for gold specks in the rivers in order to buy food what its like living in an economy where the money is worthless.  But even if the gold bugs are wrong and Bernanke pulls one out of the hat and the system of debt based consumption is revived, you haven't lost anything.  You can sell your gold and use the goods you;ve stashed in the cupboard.

It seems so irrational to not take some simple steps to protect yourself from a world where the currency is no longer a store of value or medium of exchange.

i'll leave you with two accounts from people who lived through hyperinflation in Weimar Germany:
 

Two women were carrying a laundry basket filled to the brim with banknotes. Seeing a crowd standing round a shop window, they put down the basket, for a moment to see if there was anything they could buy. When they turned round a few moments later, they found the money there untouched. But the basket was gone.

The memories of a German writer

A friend of mine was in charge of the office that had to deal with the giving out of ... pensions ...in the district around Frankfurt.... One case which came her way was the widow of a policeman who had died early, leaving four children. She had been awarded three months of her husband's salary (as a pension). My friend worked out the sum with great care ...and sent the papers on as required to Wiesbaden. There they were checked, rubber stamped and sent back to Frankfurt. By the time all this was done, and the money finally paid to the widow, the amount she received would only have paid for three boxes of matches.

A German woman who ran a Christian relief centre for the poor

 

 

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