Hyperinflation anyone?

The current rally in the stock market is your opportunity to get out. Media pundits opinions change daily in the current environment, and they are unable to fathom the severity or true significance of our predicament. Every recession in living memory has been relatively mild, so unless you have lived in Zimbabwe you think we have seen, or soon will see the bottom.

We have lived in a managed pseudo capitalist economy for a long while. The productivity gains that have come about as a result of advances in computers, science, and engineering are real. The tech bubble was over exuberance, but most of the gains of the 1990s were realized in sectors that gained real value. These gains are helping to slow the descent, as is ignorance of our predicament, but the foundation of our economy has been undermined.

Unsafe loans and the real estate bubble were in such a state last summer, that any downtick in home values, or the economy in general meant defaults and foreclosures. This started a chain reaction that put a stop to the slow managed marching of inflation as prescribed by Alan Greenspan. As the economy shrank, the value of the Dollar started to rise. Interest rates were cut to salvage the paper value. Money was printed to reduce the value of the Dollar.

Our problem for the past 6 months has been deflation. It threatens to bankrupt the country, and so inflation must be spurred. During a deflationary period, anyone holding onto debt is eventually unable to pay that debt. Prices are lower, because there are too few Dollars for the available goods. The opposite is also true, during an inflationary period, the value of our debt goes down relative to our income. At least for those who have jobs.

When the TARP program was announced, the amount it was going to cost was seen as unprecedented, and indeed it was. It dwarfed the cost of the Iraq war, and was seen as reckless. Talk radio hosts bemoaned that we were passing this cost onto our children and grandchildren. This money was never meant to come from the tax payer. In a way it already had. The value that had gone missing from the economy was now going to be printed to make up for it. This would require not Billions, but Trillions.

Politicians in Washington who were briefed on the situation began to see this as an opportunity to pay for programs that normally would never see the light of day. It was Milton Friedman's Helicopter, and President Obama would get to be the pilot. Inflationary spending was the prescription of nearly every economist, Keynesian or not.

Alf Fields spelled out the symptoms of the problem, and predicted the government reaction in January '08, in a very prescient commentary titled Into the Abyss. He followed that up with another commentary in November '08: Crisis Cogitations in which he gave some figures that may help us understand how much inflation we might be in for, and what our money will be worth if they achieve their goal.

In order for the debt to be made manageable, our GDP which is currently $14 Trillion must be somwhere in the area of $70 Trillion. The Dollar would have to be devalued in the coming years by about 80%. For every dollar printed the value of the existing dollars drops... it will stop when each dollar is worth about 20 cents in todays dollars.

How do you prepare for the future when you only have 1/5th of your savings? What will we see happen as we go there? What we will see is increased prices on everything, high interest rates, high unemployment, and even higher taxes.

Once the inflation starts in earnest, then the money tap has to be turned off, and the value of money managed via the interest rate. The stimulus bill (March '08 issue) was heavily tied to new programs. Additional programs are in the budget currently being debated. These new programs are just that. They aren't infrastructure improvements, or one time shots in the arm, but entities which need continued funding. Taxes will have to be raised to sustain these, and also raised to provide relief for the unemployed.

How do you prepare for the future? Buy "Store of value" assets, that is items whose value is going to go up. Buy anything today, while your money is worth more, that you are going to need down the road. I don't recommend anyone go into debt, but if you have debt such as a 30 year mortgage, you will eventually be paying it off with dollars that aren't worth as much as when you borrowed them. It probably wouldn't make sense to refinance to a shorter term, when your cost of living wage increases might be in the double digits.

So what is the little guy to do? Biking to work and learning to grow a vegetable garden come to mind. Try to be as self sufficient as possible. I don't quite anticipate a repeat of the weimar republic, but it is a possibility so I'll prepare for it anyway. I've got some food, clothes, and other goods put away, and should be able to get by for a while if I were to join the ranks of the unemployed. Other than that I'm not sure how to prepare.

This blog is one week old, but when you find it, and if you have any constructive suggestions, feel free to comment because I want to know what I'm missing.