Hurricane Fed approaches, and it will be HUGE.

As anyone who has ever lived on the Gulf coast of the USA knows, hurricanes are tracked days in advance, their strengths are predicted, and their courses are plotted and projected.  Nobody knows exactly how bad they will be, nor exactly where they will strike, but it is generally evident well in advance which are going to be bad, and which are going to be catastrophic.

Our economy has a category 5 hurricane approaching.  Some call it an economic earthquake, but all amazing alliteration aside, I prefer to call it a hurricane. Hurricane is more valid term for one simple reason - today’s hurricanes are never a complete surprise.  Hurricanes don’t do sneak attacks like earthquakes.  Anyone who doesn’t know this is coming is just not paying attention.

Most Americans have not lived in hyper-inflationary environments.  I have, and assure you that your primary protection is to not hold cash. Treat it like a hot potato, let it rot in somebody else’s hands. This is repeated as Rule #1 below, but it bears saying several times.  Never forget it, when you get cash, flee to something else as quickly as possible.

In the 90’s I lived in Zaire. During that time the inflation rate was somewhere around 24,000%.  To the right is the face of hyperinflation.  When the 5 million Zaire note was pushed out, merchants initially refused to accept it as it was “too inflationary”.  Unfortunately, the government had used the new note to pay soldiers, and when the merchants refused to accept them, the military looted the capital city as well as several others.

I remember in 1993 when I needed to buy a freezer.  The price (black market) was 18,000,000,000 Zaires, or $600 at the then 30 million to 1 exchange rate.  I paid in 5,000,000 Zaire notes, a box full of them.  I have somewhere a photo of my wife standing in front of a pile of money, up to her waist.  After taking the photo, I threw the money into the trunk of the car to go pay taxes.

Hyperinflation is a hurricane, trust me, but like a hurricane it is survivable.  Individuals can survive it, even if “the economy” doesn’t.  It might really hurt, watching all you have worked for get destroyed, but you can survive.

In reality, in Zaire I largely lived “outside” of the impact of hyperinflation. My income was dollar-based, and to the extent I could avoid using Zaires, the impact on me was minimal as compared to my Zairian brothers and sisters.  But I learned much from them and from my own experience, and would like this opportunity to pass it on.

Rule #1 – Don’t hold cash, treat it like a hot potato, let it rot in somebody else’s hands. The key to surviving hyperinflation is to not hold cash while it is being inflated.  When you receive cash, convert it to a “hard” currency, consumer goods, or “hard” assets immediately.  In Zaire in the 90s, the hard currency was dollars, and the wise quickly converted excess Zaires to dollars. 

In hyperinflationary America, holding the dollar will not be an option.  Perhaps gold will protect?  But will it be easy to trade?  Perhaps other currencies?  Which ones?  It is hard to say, several other major currencies are significantly at risk just like the dollar. Just don’t hold an inflating currency - pass it on to the next guy like a hot potato, let it rot in his hands rather than yours.

Rule #2 – Have some type of business, even a “black market” one.  Businesses which survived the inflationary hurricane in Zaire included those which were involved in the supply chain of basic consumer goods, food, beer, and cigarettes.  Those items had price elasticity, and often prices were adjusted up daily or even twice a day.

Money changing was also a profitable business in Zaire.  People needed a means to store value in a portable form, and money changers provided that by converting Zaires to dollars, Belgian francs, or other currency, and back again. They generally got 3-5% on each transaction, more when the prices were really shooting up, and with large turnover did quite well.  Incidentally, they also were jailed somewhat regularly because they were the scapegoats of the economic deterioration.

Rule #3 – Own a house and enough land to farm to feed your family.  Houses (a primary residence), well bought and paid in full, served as a good hard asset, and provided a roof over one’s head as well. Having a little land to garden or for raising small animals helped keep a family from starving, regardless of whether they had income or not.

Rule #4 – Buy food, fuel, etc. whenever it is cheap.  Non-perishable consumer goods, foods, fuel, etc. well bought, were a good store of value.  Hyperinflationary environments always have “distortions”, which occasionally cause prices to be skewed in favor of the buyer.  Buy a lot at that time.  Same thing for other necessities, buy well and buy lots when able.  These “distortions” occur because of government edict (price controls), “black” markets and other causes.  Don’t worry about why, just buy when the opportunity presents itself.

About the “black market” – ignore the government edicts and the threats.  The “black market” is the free market, use it to your advantage.  The “black market” is a white knight in disguise.

How will American inflation differ from Zaire’s?  Well, I hope and am hopeful it will not be as bad, we’ll see.  Keep the above rules in mind, and never forget Rule #1 … Treat cash like a hot potato, let it rot in somebody else’s hands.

See also:

• Hurricane Fed – Part 2
• Decline of the Empire, Death of the Dollar
• Art Laffer on Inflation