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Hyperinflation—Calamity or Opportunity?

25 May

[courtesy Google Images]

[courtesy Google Images]

Jim Rickards, editor of Strategic Intelligence, recently published an article entitled Buffet Takes a Page From the ‘Inflation King’s’ Playbook”. 

In that article Rickards compares the apparent investing strategy of today’s Warren Buffet—one of the two or three most successful investors of our time—to that of Hugo Stinnes—the wealthiest investor and industrialist in Germany during the 1920s.

According to Rickards,

 

“Both Stinnes and Buffet were ultra-wealthy investors whose opinions were eagerly sought on important political matters, who exercised powerful behind the-scenes influence, and who seemed to make all the right moves when it came to playing markets.”

 

Stinnes achieved much of his spectacular wealth by accurately anticipating the Weimar Republic’s hyperinflation of 1922-1923 and investing accordingly.  Based on his seemingly miraculous success, Stinnes was dubbed Germany’s “Inflation King”.

•  Rickards notes that Warren Buffet’s current investing strategy seems practically identical to that which Stinnes used in the early 1920s.  Buffet has been selling off his investments in corporations (like Proctor & Gamble or Johnson & Johnson) that depend on consumer spending and buying “hard assets” like railroads.  Apparently, Mr. Buffet believes that consumers may soon be too impoverished to spend and consume much more.

Richards infers that, just as Stinnes anticipated German hyperinflation in the 1920s, Buffet’s investment strategy implies that Buffet must also be anticipating an imminent episode of hyperinflation—but this time, for the fiat dollar.

Rickards:

 

“To understand Stinnes’ wealth, recall that from 1922-1923, Germany suffered the worst hyperinflation experienced by a major industrial economy in modern times. The exchange rate between the German paper currency, the reichsmark, and the dollar went from 208-to-1 in early 1921 to 4.2 trillion-to-1 in late 1923.  At that point, the reichsmark became worthless and was swept down sewers as litter.

“Yet Stinnes was not wiped out during this hyperinflation. Why was that?”

 

Rickards didn’t describe Stinnes as an “Horatio Alger story”.  Stinnes was not a poor boy who made good.  Stinnes had advantages:  he was born into a fairly prosperous German family that had interests in coal mining; at age 20, Stinnes started his own business in competition to his father; when his father died, Stinnes inherited his family’s business, bought his own coal mines, and diversified into shipping, buying cargo lines and even a prominent newspaper.

Nevertheless, Stinnes was much more than a rich kid who got lucky.  Stinnes was smart enough to perceive that hyperinflation was coming to Germany.  More importantly, Stinnes had the courage to act on his perceptions.

.

•  The world has always had plenty of people who are smart enough to perceive what’s going to happen. But the world has only a few who have the courage to act on their perceptions.  Most of us tend to be members of a “herd” who would rather do what everyone else is doing, say what everyone else is saying and believe what everyone else is believing, than risk acting on whichever of our own perceptions run contrary to those of the “herd”.

That’s why it’s so hard to follow the fundamental rule of successful investing:  Buy low and sell high.  If you would “buy low,” you must buy when all the rest of the “herd” is selling, dismissing the particular investment vehicle you’re attracted to as trash, and regarding anyone who “buys” as a fool.  Most of us would rather stick with the herd than “buy low” and risk being labeled a fool.

Similarly, most of us would rather stick with the herd and keep buying and holding an investment vehicle that’s rising than “sell high” (when all the rest of the herd is buying) and risk being labeled a fool.

As a result, we don’t go broke simply because we lack knowledge or intelligence.  Knowledge and intelligence are important, but we go broke (or at least fail to prosper) because we lack the courage to act based on our own, independent perceptions.

.

•  Hugo Stinnes didn’t suffer from that disability. He had the courage to act on his own perceptions.

Stinnes undoubtedly anticipated the Weimar hyperinflation of A.D. 1922-1923.  He therefore borrowed vast sums of currency denominated in fiat reichsmarks and used those funds to purchase “hard assets” like coal mines and barges to haul coal.  When the hyperinflation hit, Stinnes was able to repay his debts with vastly cheaper fiat reichsmarks. 

Hyperinflation wiped out Stinnes’ debts—as well as those of every other German debtor.

However, while his debts were wiped out by hyperinflation, the prices of Stinnes’ “hard assets” (coal, steel, shipping vessels, etc.) rose dramatically, and retained their value.

Implication:  If you were sure, really sure, that hyperinflation was imminent, you’d be wise to borrow all you could before the hyperinflation hit and invest in “hard assets” like coal, steel, shipping vessels and gold and silver.

 

•  Rickards:

 

“It didn’t matter what happened to the German currency – a hard asset [something other than paper debt-instruments] is still a hard asset and does not go away even if the currency goes to zero.”

 .

If you’ve invested in hard assets prior to hyperinflation, the prices of those hard assets will at least rise enough to preserve their value during hyperinflation.  On the other hand, all “soft assets” (debt-instruments whose prices were fixed on paper and denominated in the hyperinflating, fiat currency) would tend to be destroyed.

 

“Stinnes’ international holdings also served him well because they produced profits in hard currencies, not worthless reichsmarks. Some of these profits were kept offshore in the form of gold held in Swiss vaults.  That way, he could escape both hyperinflation and German taxation.

“Not only was Stinnes not harmed by the Weimar hyperinflation, but his empire prospered. . . .  When Germany returned to a new gold-backed currency, Stinnes was one of the richest men in the world, while the German middle classes were destroyed.”

 

•  Stinnes’ spectacular wealth hinged on six points:

 

1) Stinnes had sufficient education to understand the nature of money.  I.e., he understood the difference between intrinsically-worthless, fiat reichsmarks and gold or gold-backed money.  He understood that the inevitable fate of fiat reichsmarks would be hyperinflation and fiat currency death.

2) Stinnes had sufficient intelligence to objectively perceive an imminent period of hyperinflation.

3) Stinnes had sufficient courage to trust and act on his own perceptions.

4) Stinnes borrowed German fiat currency before the hyperinflation began.  I.e., Stinnes knew that once the hyperinflation began, his debts would be virtually destroyed.

5) Stinnes invested his borrowed currency in “hard assets” whose value would not be destroyed by hyperinflation.  And,

6) Stinnes repaid all of his debts with hyperinflated (and therefore worthless) fiat reichsmarks.  He borrowed reichsmarks when they were 200 to the US dollar, and repaid his debts when (thanks to hyperinflation) the reichsmarks were valued at 4 trillion to the dollar.

 

Implication:  If you were sure that hyperinflation was coming, and you had a good idea of when it would arrive, you’d do well to borrow all you could to purchase all the hard assets you could find.

 

″  But, what, exactly, is hyperinflation?

It’s the inevitable fate of fiat currencies.

It’s not mere mathematics or the result of some fixed economics formula.  Hyper-inflation is an expression of the public’s loss of confidence in their national currency.

As people lose confidence in their currency, they don’t simply quit the currency, but they do demand more and more of it to pay for tangible goods and services.

For example, I might sell you a pound of steak today for $10.  Next month, I might demand $20, and the month after that I might demand $50.  I haven’t (yet) lost all confidence in the value/purchasing-power of the fiat dollar, but rising prices are evidence that I’m in the process of losing more and more or my former confidence in the fiat currency.

Eventually, I’ll demand so much hyperinflating currency to pay for a steak, that you might offer to pay me with a lamp for my desk, or perhaps a chair.  I will eventually prefer to take something tangible in payment for my steak because I’ll know that if I accept fiat currency, its current purchasing power will decline quickly and significantly over the next weeks, days or even hours.  At the point, some significant percentage of people will insist on bartering tangible goods for tangible goods, and the fiat currency will fail and be discarded.

Chaos will follow.  Those members of the “herd” who had held their wealth in the form of paper-debt instruments will be wiped out.

Stinnes must’ve understood the nature of money and realized that Germany’s fiat reichsmark was doomed to die in an explosion of hyperinflation.  He had to know that the German people would inevitably lose confidence in the reichsmark and it would collapse into worthlessness.  He invested accordingly and became rich.

 

•  Rickards:

 

“ Interestingly, today Warren Buffett is using the same techniques as Stinnes used almost a century ago.  It appears that Buffett has studied Stinnes carefully and is preparing for the same calamity (or opportunity) that Stinnes saw: hyperinflation.

If it’s true that Warren Buffet—one of the greatest investors of all time—is currently investing based on his expectation that hyperinflation is imminent, then it’s reasonable that you and I should do the same.

 

“Buffett purchased major transportation assets in 2009 in the form of the Burlington Northern Santa Fe railroad.  This railroad consists of hard assets in the form of rights of way, adjacent mining rights, rail, and rolling stock. The railroad makes money moving hard assets, such as ore and grains.

“Buffett next purchased huge oil and natural gas assets in Canada in the form of Suncor.  Buffett can now move his Suncor oil on his Burlington Northern railroad in exactly the same way that Stinnes moved his coal on his own ships in 1923.

 .

Over the last couple of years, Warren Buffett’s holding company, Berkshire Hathaway, reduced its exposure to American stocks that rely on consumer spending.

For example, over a two-year period, Buffett’s holding company reportedly sold off 96.8% of its holdings in Johnson & Johnson, 99.7% of its holdings in Kraft Foods Group, and 11.5% of his holdings in Procter & Gamble.  Apparently, Buffet suspects that consumers will soon go broke and be unable to buy.

But, surprisingly,

 

“A huge part of Buffett’s portfolio is [now] in financial stocks—particularly in banks and insurance companies—that are highly leveraged borrowers.

.

Q:  Why would Buffet seek out financial stocks that are “highly leveraged” (deeply indebted)?

A:  Because—if hyperinflation is imminent—today’s “highly leveraged borrowers” should be able to repay their debts with worthless fiat dollars and thereby legally “rob” their creditors.  I.e., deeply indebted people and businesses will be suddenly freed from their debt bondage by hyperinflation.

If we enter an era of hyperinflation, the value of all debts and debt-instruments will be dramatically reduced or even destroyed.  Hyperinflation is almost miraculous for debtors but catastrophic for creditors

All of which raises several more questions and answers:

 

Who’s the world’s biggest debtor? The US government.

Therefore, who might stand to gain the most from a dose of US dollar hyperinflation? The US government.

Who might lose the most from a dose of US dollar hyperinflation? All lenders who are now holders of US Bonds, or other paper debt-instruments denominated in fiat dollars. Both domestic and foreign (even Chinese) creditors would suffer significant financial losses as their US bonds and US dollar-denominated debt-instruments suffered hyperinflation.

Domestic and even global chaos might ensue if the fiat dollar were subjected to hyperinflation—but even so, is it conceivable that the US government would want to cause or allow hyperinflation in order to eliminate much of the National Debt?

 

The answers to the first three questions are obvious. The answer to the fourth question is more subjective.

We know that our government wants to cause inflation.  Could the US government also want to cause or allow hyperinflation?  The answer is, at least, “maybe”.

Clearly, being the world’s greatest debtor, the US government has a powerful, vested interest in causing hyperinflation.

.

•  Rickards concludes:

 

 “If hyperinflation were to slam the U.S. today, Buffett’s results would be the same as Stinnes’. His hard assets would explode in value, his debts would be eliminated, and he would be in a position to buy out bankrupt competitors.   Of course, the middle classes [a/k/a the “herd”] in the U.S. would be wiped out, just as they were in Weimar Germany.

“Perhaps Buffett sees the same hyperinflation in our future. It’s not too late for you to take some of the same precautions as Stinnes and Buffett.”

 .

The fate of virtually all fiat currencies is death by hyperinflation.  Sooner or later, the fiat dollar will fall to hyperinflation.

Although the timing can’t be known, Jim Rickards says Warren Buffet and several other super-wealthy investors are acting as if they believe hyperinflation is imminent.

It would be in the interest of every overly-indebted government on earth (from Greece, to Japan, to the EU, to the United States) to allow or cause a hyperinflationary “currency reset” in order to wipe out their national debts.

Imminent hyperinflation is at least probable—perhaps within the next six to twenty-four months.

If so, that gives all of us a window of opportunity—time to act—before hyperinflation begins.

If you believe hyperinflation is imminent, you should ignore the conventional wisdom of the herd and determine to act courageously and independently.  You should move as much of your wealth as possible from paper debt-instruments into “hard assets” like steel, transportation, railroads, silver and gold.

 
11 Comments

Posted by on May 25, 2015 in Gold & Silver Coin, Hyperinflation

 

Tags: , , ,

11 responses to “Hyperinflation—Calamity or Opportunity?

  1. Roger

    May 25, 2015 at 1:16 PM

    Calculations on historical data from the mid-1970s to the present prove the 3-month Treasury bill is by far the best hedge against inflation with an investment horizon of one year.

    There’s your opportunity for a big windfall in hyperinflation, folks, based on a correlation confirmed in the real world for 40 years. Good luck.

     
  2. Adask

    May 25, 2015 at 5:03 PM

    A short-term, three-month Treasury bill might be the best protections against inflation. Because that bond is short-term, it can constantly readjust to reflect whatever the current inflation rates may become. But, changes in inflation rates are relatively slow-moving.

    Hyperinflation moves at hyper-speed. In the case of Weimar Republic, hyperinflation changed the value of the reichsmark from 200 to the dollar to 4 trillion to the dollar in roughly two years. IF I’m doing my math correctly, that implies that the value of the reichsmark fell by an average factor of 20 billion in roughly 2.5 years = 10, 3-month quarters.

    That works out to about a average loss of value to about one two-billionth of its original value per quarter.

    The 3-month Treasuries might work fine in a world where the rate of inflation is rising by 5% or 10% per year. But what good will they be if a hyperinflation occurs that destroys 99% of of the purchasing price of the three-month Treasury before the three months expire? Do you expect to see three-month Treasuries sold that can keep up with hyperflation?

    Stinnes and Buffet didn’t.

    The lesson appears to be that, if hyperinflation is coming, we should avoid investing in anything as “soft” as paper debt-instruments and confine our investements to “hard assets” like coal, petroleum, railroads, silver and gold.

    The fact that three-month Treasuries have protected people against inflation is no reason to suppose that the same paperTreasuries can protect against hyperinflation.

     
    • Ted

      June 4, 2015 at 7:09 PM

      The Death of Money: Project Prophecy 2.0 – YouTube
      Apr 6, 2015 … The Death of Money: Project Prophecy 2.0 To view this presentation in full-
      streaming HD, please click here: To read the transcript for this video, …

       
  3. Toland

    May 25, 2015 at 5:51 PM

    @Roger

    Yeah, it makes economic sense that the 3 month Treasury would be the best hedge against the always “just around the corner” US Dollar Doomsday, if you’re looking for a quick return.

    Also good are oil, real estate and gold – though they don’t move as precisely opposite to the dollar as the 3 month Treasury does. These other markets are more complicated. Sometimes you end up waiting years for them to do what they “should” be doing, as recent experience shows.

     
  4. Roger

    May 25, 2015 at 11:12 PM

    Al, world reserve currencies never hyper-inflate. There’s no record of it ever happening.

    The US isn’t Zimbabwe or the Weimar Republic. Perhaps one can imagine a similar process happening here as happened in those places, but economic fundamentals make it highly unlikely to actually happen.

    There have been several episodes of inflation during the 40 year period over which the 3-month Treasury bill has proven itself a hedge: the type of inflation that does effect a world reserve currency. Expect more of the same, not hyper-inflation.

    If the US dollar were to cease being the world reserve currency, then hyper-inflation would be possible. Such a change for the dollar might even be underway right now, but these transitions take decades to complete.

     
  5. Adask

    May 26, 2015 at 12:33 AM

    How many other “world reserve currencies” have there ever been that were also fiat currencies?

    How many other “world reserve currencies” have there ever been that were issued by the most indebted government in the world?

    I agree that the dollar’s status as “world reserve currency”/petro-dollar has protected it from hyperinflation. But I also know that the fiat dollar is no longer the only “petro-currency. The dollar’s status as petro-currency is waning. And it’s at least appears that China wants to share the role of “world reserve currency” with the fiat dollar.

    My first point is that, if the US dollar is the first “world reserve currency” that is fiat, then we are in uncharted territory where no one can predict what will happen or when.

    My second point is that the US government, being the world’s biggest debtor, may WANT hyperinflation to wipe out the national debt. How many other times in world history have seen circumstances where the same government that issued the world reserve currency had a vested interest in seeing that currency destroyed by hyperinflation?

    These points may seem more or less fantastic, but they’re not original with me. Every government, politician or economist who’s talked about, considered, predicted or even advocated a “global currency RESET” has implicitly advocated some degree of global inflation sufficient to wipe out most governmental debts. It is at least possible that everyone who advocates a currency RESET is advocating a sudden, controlled episode of hyperinflation where a dollar that has 100 cents or purchasing power on Monday evening is suddenly devalued and hyper-inflated so as to have 50 cents purchasing (or maybe only 10 cents purchasing power) on Tuesday.

    That sort of ONE-DAY “reset” is not the kind of hyperinflation seen in Weimar Republic in the 1920s or more recently in Zimbabwe where the hyperinflation process lasted for several years. It’s also not like Weimar’s or Zimbabwe’s hyperinflations that reduced the value of currencies to four-trillionths of their original value.

    Nevertheless, a controlled “currency reset” that results in US dollars, euros, pounds, yuans, and pesos all shedding 50% to 90% of their purchasing power (and thus wiping out 50 to 90% of government debts) in a single day is “hyperinflation”.

    Anyone who believes that a global currency reset will soon happen also believes that some sudden and significant episode of significant inflation and, arguably, hyperinflation is also about to occur.

    Given that global currency reset would necessarily be achieved by means of secret currency agreements that were “sprung”on the world in just a single announcement, such reset could happen at any time. Early tomorrow. A month from now. Three years from now. We wouldn’t have to watch for changes in the economy or markets that would signal the approach of hyperinflation. There’d be no signal. No sign that we could read and rely on. One night your dollar would be worth 100 cents. The next morning it would be worth a dime. The National Debt that was worth $18 trillion on Monday night would be reduced in terms of purchasing power to $1.8 trillion on Tuesday morning.

    That’s hyperinflation. We might call it “controlled hyperinflation,” but it’s hyperinflation nonetheless.

     
  6. Roger

    May 26, 2015 at 2:22 AM

    > “How many other times in world history have seen circumstances where the same government that issued the world reserve currency had a vested interest in seeing that currency destroyed by hyperinflation?”

    Your premise is incorrect. The US government does not issue the world reserve currency. On the contrary, the US government borrows, at interest, about $500 billion per year. The only issuer of the world reserve currency is the privately chartered Federal Reserve which creates US dollars out of thin air and then loans them into circulation, at interest.

    Whereas the US government, a dollar debtor, would in some ways benefit from hyperinflation, the Federal Reserve – i.e. the creditor who also controls the dollar’s value – clearly stands to lose by hyperinflation.

    Why would the Federal Reserve destroy the currency in which their outstanding loans are denominated?

     
  7. Adask

    May 26, 2015 at 3:00 AM

    You have some valid questions. But Alan Greenspan has recently whined that he was never really in control of the economy, that the Federal Reserve was always subject to the will of the federal government. Whether Greenspan was telling the truth or just trying to justify some of economic blunders that are now placed at his door is not known to me.

    But there’s at least a chance that the Fed is servant to the US government.

    More, given that the Fed has increased its “balance sheet” (debt) by over $3 trillion since A.D. 2008, and given that much of its balance sheet represents “toxic assets” whose market value is only a fraction of its face value, the Fed has become something of a “dumpster” for “toxic assets” (unpayable debts). One way to conveniently destroy all of those “toxic assets” might be to destroy the Fed.

    It’s not inconceivable that people in positions of power might be willing to do the unthinkable and let the Fed die in bankruptcy. And why not? All they’ve go to do is sell the printing presses (if there will be any more printing presses) to a new corporation to print pink fiat dollars rather than green fiat dollars.

    Or, given all the recent talk about going to a “cashless” monetary system, perhaps they could kill the Fed and use the old printing presses as paper weights in our brave, new cashless society.

    A collapse by the Fed might provide the perfect pretext to go to a cashless society.

    We’ve been led to believe that the Federal Reserve has been the de facto “master of the universe”. But maybe that’s not true. If so, the Fed is not immune to being sacrificed for a new monetary system. And if that sacrifice helped write off a bunch of otherwise worthless debt, that might just be frosting on the money masters’ cake.

     
  8. Anthony Clifton

    May 26, 2015 at 9:59 AM

    in Hosea 1:11 there are no Gog & Magog so-called “Jews” !

    who determines Value…?

    http://www.smoking-mirrors.com/2015/05/it-is-not-easy-to-be-arthur-topham.html

    is Truth as valuable as Jesus declares in John 8:32 ?

    where specifically do Stupid Idiots go to collect their reward for

    “JEW” worshipping – 24/7/365…?

     
  9. dog-move

    May 26, 2015 at 12:41 PM

    thanks Anthony.

     
  10. Roger

    May 26, 2015 at 6:08 PM

    I wouldn’t say the Fed, as such, controls the US government – nor would I say the US government controls the Fed. There’s about zero evidence either way.

    What I would say is that the international Money Power, which founded and controls the Fed, has expanded that control to include its debtor the US government. This follows the established historical pattern whereby a nation is hijacked by its creditors.

    You mentioned what Alan Greenspan said. Here’s what the US government said:

    “Examining the organization and function of the Federal Reserve Banks, and applying the relevant factors, we conclude that the Reserve Banks are not federal instrumentalities for purposes of the FTCA, but are independent, privately owned and locally controlled corporations.”

    – Lewis v. United States, 9th Circuit, 1982

    As to your point about an eventual deliberate implosion of the Fed and the US dollar to make way for a cashless society, I suspect this is indeed the plan.

    One of the reasons I suspect this is the role Bitcoin has been given and the support it’s getting from certain corporations and the media. A second reason to suspect a planned end of the US dollar is the rapidly executed near-extinction of the US industrial economy upon which US dollar hegemony was originally based.

    Still, I don’t expect the transition away from the US dollar as world reserve currency to happen overnight, simply because the Powers That Be don’t have enough control over all the variables. They have to proceed with caution. If they push too hard too fast, they could completely lose control of the situation.

     

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