Is the US Dollar About to Become Wothless? The Danger of Hyperinflation
A few weeks ago, I attended a dinner party. The men stood in a corner and talked sports, business, and politics. The topic of national debt came up. Being a group of fairly conservative men, we all expressed concern about our mounting national debt. But one of the guys dismissed the concern. 'We control the Federal Reserve,' he said. 'Therefore, we can never default on our debt.' This was not a dumb guy. Smart in many ways. College educated. And he honestly was not concerned about debt because the USA controls the Federal Reserve of the closest thing we have to a global currency. Now, if this was just an individual crank making an obvious blunder, I would not be writing on it. But his mistake is more common than you imagine. I have heard it repeated by other friends, congressmen, and celebrities. Even idiot economists:
Let me start by talking about something called hyperinflation. Most people are aware of inflation. Over time, most of the stuff you buy goes up in cost. A weeks worth of groceries used to cost $100 but now it costs $200. A nice car used to be $20,000 but now the same model is $30,000. A McMansion used to cost $400k but now it is $800k. And so on. We have all experienced this. We are all aware of it. We take it as a matter of course. But hyperinflation is something much more dangerous. Imagine showing up at the grocery store tomorrow and having that bill goes from $200 to $20,000. In one day. Imagine going to the gas pump to fill up and having the price be $1000/gallon. Imagine the price of everything you buy during the day spiking to almost unimaginable prices. The price of your internet, the price of a movie ticket, the price of clothing, the price of a taxi, the price of a home repair, and etc. If you want to do anything, you have to pay a pile of money.
How would you function? Well, maybe you go to your boss and say, 'I need a giant raise or I cannot even pay for gas to get to work.' And what does your boss say? Well, if you make wigits and those wigits are now 100x more expensive then they were, chances are not too many people are buying them. Your boss politely says that due to a drop in demand for wigits your services are not needed anymore. So, now jobless, you go from not being able to afford groceries or gas to not being able to even pay the things that haven't changed in price (like your mortgage bill for example). Suddenly you fear not only not being able to have groceries, gas, or new clothes but simply keeping a roof over your head.
And so on. Countries suffering from hyperinflation are terrible places to live. People starve. People steal. People suffer.
But..... why, you may ask, are you bringing this up? Doesn't the Federal Reserve monitor inflation? Yes, they do. They aim for about 2% inflation every year. I won't get into the idiotic reasons they do not aim for zero but let me explain why they have a lot less control than you would think.
The people with the power in this situation is not the Federal Reserve but the people spending the money: Congress and the President. And for the past 50 years, these people have spent like Mike Tyson at an exotic zoo.
Consider this chart:
Other than a brief time in the 90s (when the GOP congress had guts and Clinton was trying to pretend to be a moderate) we have spent more than we make for 40 years - and WAY more since 2000. Some blame tax cuts for this but keep in mind that many of the revenues over the past 10 years have been RECORD revenues (more taxes collected than ever before). No, despite having more money than they have ever had before, congress is spending so much that our deficits hit records almost every year. And as a result, our debt continues to pile.
Consider this chart.
We are now well over 100% of GDP in Federal Debt. We owe more than the entire annual gross domestic product of our nation! But it is actually so much worse than this. Our national debt is listed as $22 trillion and our GDP is listed as $20 trillion. But our real debt is way higher. $22 Trillion is only the debt we have borrowed to date. In addition to this, there is something we call 'unfunded liabilities.' These are financial commitments that we, as a nation, have made to our own citizens. We don't call them debts but that is mostly semantics. When you commit to pay something and there are consequences for not doing so, a promise to pay something with consequences for not doing so is usually called debt. According to the Treasury Department, total U.S. unfunded liability includes Social Security (along with Medicare Parts A, B, and D), federal debt held by the public, plus federal employee and veteran benefits. How much do we have in unfunded liabilities? More than $122 trillion.
$122 Trillion. This is six times the GDP. Six.
Okay, you get it. We are in debt. But what does this have to do with hyperinflation?
You have played Monopoly right? Okay. Imagine for a moment that all properties have been bought. If you had say, $5000 in Monopoly dollars, you might be able to convince the guy who owns Broadway to sell you that property. $5000 is quite a bit in Monopoly and it might be helpful to build houses and hotels and survive bad rolls. Okay but then the game progresses. We all know how this goes. With time, one player starts to collect more and more cash and the other players slowly run out of cash and eventually go bankrupt. But in this game, we decide not to end the game. We declare no limit to borrowing. Everyone can borrow as much as they want forever. You have a good idea. You are losing but you remember that deal for Broadway. What if you just borrow $50,000 and buy 10 more properties? Will this strategy work? No. Not if the other players understand the new game. They can see that they too could borrow the $50k and do the same and none of them would be willing to sell their own properties. What happened? Well, we made something that was scarce, not scarce. When the game was young, $5000 were hard to come by. For that reason, you might trade a valuable property for it knowing that others would give you valuable things for it in time. But with unlimited borrowing, no one would give you anything for it. They could get that same amount for free anytime they wanted.
This is an imperfect but valuable analogy of how currency works. We go to work all day to make money because money is hard to come by and we know that others will give us stuff (TVs, groceries, clothes) in exchange for it. But as that cash becomes less and less scarce, you will be less and less willing to work any hours or sell any of your stuff to get it. It becomes worthless.
Everyone knows this but like the player losing in Monopoly, politicians always have an interest in making the dollar less scarce. If they raise taxes, people get pissed and vote them out. If they cut spending, people get pissed and vote them out. But no one seems to mind borrowing more from the Monopoly bank. It is painless for politicians. They vote every year to raise the debt limit. They borrow more (from themselves) and print more dollars. And by definition the dollar becomes less scarce.
This tendency is well known in world history. Most governments protect against it diligently. When they do not, hyperinflation comes. It happened to Germany in the 1920s (the inflation rate was 20.9 % per day for a while). It happened in Zimbabwe in the early 2000s (the inflation rate was 98 % a day for a while and prices doubled every 24 hours). And most recently, it happened in Venezuela (prices rose1,642 % in 2017, 2,880 % in 2018, and is projected to top 3,497 % in 2019).
So, having seen these disasters, why would the US not protect against it? Well, go back and look at my first paragraph. Despite these warnings, many (including politicians and economists) do not understand the danger. The argument that some make is that because we are almost a global currency that nations will have no choice but to continue to value the dollar. But this is ridiculous. People do not choose what to value. Things are valuable because of supply and demand. If the supply of dollars increases, the value will drop. Like gravity.
But... you might protest, the Feds are watching this diligently we are being careful. Inflation has been low recently. Why should we be so worried?
Well, here is the scary thing. Hyperinflation doesn't happen slowly. You know those scales at the doctor's office? With the weights on it that you move over until it tips and tells you how much you weigh? If you are 180 lbs, you put the big weight up to 150lbs and then you start to inch the smaller weight forward. You move it to 160, 161, 162, and nothing happens. You keep going. You move it to 170, 171, and 172.... still nothing! You suddenly feel that it does not matter what you do with the weight. You keep going. But once you get to 179, look out. One more and the whole thing tips. Go to 181 and you have gone too far.
This is hyperinflation. You inflate the dollar and nothing happens. Politicians are happy. Population is happy. No tax hike needed. No spending cuts needed. So you do do it again. And again and again. All is good. It seems like magic. Until, like that scale, everything tips. You get Germany in the 1920s. You get Zimbabwe. You get Venezuela. Over night. And it is so hard to dial it back after that.
Balancing the budget should be enshrined in our constitution. It has to be a law that politicians cannot violate. Anything short of that will allow politicians, like the bankrupt Monopoly player, to go on forever. Until disaster comes.
It is my argument that with our current policies in place, this could happen any time. I am not saying it will..... sometimes you walk a tightrope and cross without issue.... but we are walking a tightrope. We are playing with fire. Whatever analogy we want to use.... we are in danger. And I don't see the political will by either party to do anything different. We are walking toward the edge of the cliff and not a single person is telling us to stop.
So what should we do? Well, the historic way to hedge your personal finances is to invest in commodities: gold, silver, real estate, cattle futures, etc. I would highly recommend that everything have at least a decent amount of commodities as part of their savings and investments. That is the short term recommendation that I have. I recommend at least a 10% commodity hedge. The longer term solution is to push for a balanced budget amendment. The government will never do the right thing unless they are forced to.
Hyperinflation happens. It has happened at various times in history. And everything the US is currently doing would indicate that it is a major risk for us again. At the minimum it is a risk we should all prepare for.