Lessons from South American Hyperinflations

MARCH 09, 2010

Lessons from South American Hyperinflations

Mike Maloney - Guide to Investing in Gold and Silver:

In the end, I think we are in for a wild roller coaster of a ride, with a few whipsaws thrown in. First the threat of deflation, followed by a helicopter drop, followed by big inflation, followed by real deflation, then followed by a hyperinflation.

This scenario is the one that fulfills predictions made by Robert Kiyosaki, and several other people I have great respect for. I think that our current subprime fiasco will turn into a larger problem than it is now, and as the real estate sector begins to plummet, and the credit currency that was borrowed into existence begins to evaporate, the threat of deflation will loom. Then Ben Bernanke will come to the rescue and bail us out by orchestrating another helicopter drop of currency.

Whatever turn we take next on this financial "roller coaster" ride, GoldSilver.com strives to have contingency plans for all economic scenarios: deflationary depression, stagflation, high price inflation, or even a possible hyperinflation.

There is a looming threat of hyperinflation coming to pass in the United States and we strive to be prepared.

How do we do this?

We study history compared with present circumstances and pay close attention to items that have 100% track records.

Then for our own strategy we examine how others have handled high inflationary climates in the past. Let's take for example South America in the 1980's:

  • In 1988, after 3 years of consecutively increasing their money supply over 300 percent, Brazil had nearly a 1,000 percent inflation for that year alone.
  • In 1985, Argentina suffered an annualized inflation rate of 1,000 percent.
  • Bolivia, also in 1985, suffered a record inflation level of 50,000 percent annualized.

Remember that these countries have incredible resources at their disposal such as agriculture, mining, and a large work force. It's not like they are much different than other economies at their core.

In 1989, Dr. Gerald Swanson, author of The Hyperinflation Survival Guide, visited South America over a two year period to study the development of inflation and it's impact on businesses, individuals, and governments. He and his research team interviewed 80 leading bankers and industrialists, as well as ordinary citizens from Brazil, Bolivia, and Argentina.

"Inflation is when you go to the same restaurant each morning, order the same breakfast, and each time have to ask how much it costs.

 - Brazilian businessman


Inflation in South America

The following excerpts are from The Hyperinflation Survival Guide:

Imagine that a customer has just placed the largest order you have ever received, and he is preparing to pay cash for immediate delivery.

Your response? You thank him and explain that you can't afford to fill the order, in spite of the fact that you have enough inventory.

You explain further that you gave your employees a 10 percent pay hike last week, and they will be demanding another within the month.

The price of your most important raw material went up 12 percent yesterday, and to purchase more you will need a loan, with interest rates currently running at 6 percent monthly.

In spite of your increased wage and supply costs, you can't raise your own prices because the government refused your latest price increase request.

If you fill you customer's order, you will actually lose money.

This scenario, in one form or another, is not uncommon in economies with soaring inflation rates, and has become practically routine in countries like Brazil, Argentina, and Bolivia.

But I am not asking you to imagine what it would be like to run a business in South America, where the situation is often worse than I have described.

I am asking you to imagine what it might one day be like in the United States.

Is your Nest Egg made of Monopoly money?

"Any government, like any family, can for a year spend a little more than it earns. But you and I know that a continuance of that habit means the poorhouse.

 - Franklin D. Roosevelt, 1932


As business and financial leaders throughout Bolivia, Brazil, and Argentina pointed out, though, it will not take triple digit inflation to wreak havoc on the United States economy. A sudden acceleration into the teens and twenties would be sufficient to alter personal and corporate lifestyles, and would necessitate changes in the way Americans run their businesses and their lives.

An inflationary surge of this scope is easily possible given current U.S. economic conditions. Indeed, many South American leaders are convinced that rising inflation rates are the logical byproduct of what they see as our ruinous fiscal policies. Again and again, these business and financial leaders expressed dismay that America's headlong sprint down the classic inflationary path was receiving so little attention in the United States, while it seemed so obvious from their vantage point at the end of that road.

If there is one overriding lesson from South America, it is that governments cannot indefinitely continue to spend beyond their means without suffering terrible economic consequences. There is simply no logical reason to think that the United States can become the first country in world history to successfully manage it's economy by continuing to rely on the resources of other nations to finance its excesses.

Below is the latest chart from the Federal Reserve showing base money creation:

Money Creation by the Federal Reserve Board

This money creation is unprecedented in the United States and shows no sign of slowing down. It may be new to us, but people from other countries can tell you from first-hand experience how it will turn out.

How many times do governments have to reprove that the formula of:

Slowing economy + increased currency creation does not equal long term prosperity for the country?

When this has happened in other countries there have been many losers, but the positive part of this equation is that there are also some individuals and families that win big with life changing wealth. Those who understand what is happening and take action, not only protect themselves but massively prosper in the final equation.

Mike Maloney - Guide to Investing in Gold and Silver:

Gold and silver have revalued themselves throughout the centuries and called on fiat paper to account for itself. In doing so, gold and silver bring fraudulent money to justice. They've always done this, and they always will.

Once again, the accounting has begun, and it will not stop until the full accounting is completed.

The resounding answer we have come up with for ourselves and our families is holding physical precious metals either directly or in storage.

Examples in these other countries show that when this debasement of the currency happens there is a massive wealth transfer from those that hold the depreciating paper assets to those holding items of intrinsic value.

Are you ready?

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