EDITOR NOTE: “Sub-hyperinflation” is the author’s neologism (newly coined word) for “inflation,” which is kind of funny because he could have just called it “inflation.” But at any rate, we can take this word and bring out something important which he was perhaps trying to say but somehow missed the boat on the connotative current he pretty much created. Sub-hyperinflation is a condition that happens to a certain percentage of people who are experiencing unemployment, low economic growth and high personal inflation (everything is too expensive for them). Hyperinflation is what happens to an entire society or country when the inflation rate begins rising by 50% a month. By the time the prefix “hyper” gets affixed to “inflation” in the news headlines, it’s already too late to do anything about it. But like personal inflation rates, hyperinflation doesn’t affect everyone. The winners are those who hold non-CUSIP physical gold while the losers are those who hold fixed-income assets and cash. A simple concept, a simple problem, and a simple solution for what becomes a complex dilemma once it takes hold.
As “hyperinflation” begins to work its way into headlines and draws investor and consumer attention, it is really sub-hyperinflation that does the damage.
Here is why: Hyperinflation does not emerge quickly. It begins slowly with normal inflation and then accelerates at an increasing rate until it becomes hyperinflation.
This is critical for investors to understand because much of the damage to 1’s wealth happens at the inflationary stage, not the hyperinflationary stage.
Using one of the most well-known and well-researched cases of hyperinflation in the 19th Century, Weimar Germany demonstrates how harmful regular inflation can be.
From January 1919 to January 1922, the Reichsmark’s value slowly dropped from $0.13 to $0.005 ‑ a loss of 96% value in 3 yrs. This does not meet the definition of hyperinflation because the decay of purchasing power happened over 3 yrs and never exceeded the hyperinflation threshold in any single month.
The 1 yr later, hyperinflation kicked in and the Reichsmark was debased 58-B%.
That is the frame most interesting to economists and historians when we see pictures of hollow-eyed laborers pushing wheelbarrows full of paper money or malnourished children playing with bundles of worthless money.
Hyperinflation destroyed the Reichsmark’s value. By the time the word “hyperinflation” hit headlines, it was too late to do anything about it.
According to LTN economist Bruce WD Barren, “The worst hyperinflation ever recorded took place in Hungary in 1946 at the end of World War II. As in Germany, the hyperinflation that occurred in Hungary was a result of a requirement to pay reparations for the war that had just ended. Economists estimate that the inflation rate in Hungary reached 41.9 quadrillion percent per month. During this period, prices in Hungary doubled every 15 hours.
“Inflation of the Hungarian currency was so out of control that the government issued an entirely new currency for tax and postal payments. Officials announced the value of even that special-use currency on a daily basis due to massive fluctuations. By August of 1946, the total value of all Hungarian banknotes in circulation was valued at one-tenth of a United States penny.
“Can we expect that in regard to the US Dollar? Indications are on the horizon that given our growing out-of-control Federal deficits and our free spending Congress, hyperinflation could become quickly a reality for us for our currency is starting to experience a startling decline in value. While good for our exports, it opens the door of the value and dependency of our Dollar as a World currency. Caution is now in the Air!“
The Winners and Losers in a hyperinflationary scenario: Hyperinflation does not affect everyone in a society equally. There are sets of Winners and Losers.
The Losers are those with fixed income assets like savings, pensions, insurance policies and annuities.
This means is that it is a really savvy idea to make sure your portfolio is positioned to survive regular inflation 1st, then hyperinflation will not matter.
Originally posted on HeffX