Another true story: A banker friend of mine manages the assets of a fabulously wealthy 70-something gentleman, whom I'll call Alfredo. In 1973, Don Alfredo was a youngish man, just starting out, with a degree in engineering but no money—until he inherited US$3,000 from a deceased aunt. Alfredo realized that the $3,000 were in a sense worthless: He couldn’t buy anything with them, and it wasn’t enough for him to leave the country and start over someplace else. After all, even then, $3,000 was not that much money.In his pieces, Lira emphasizes not the apocalypse, but post-apocalypse. Hyperinflation would be a hellish time, but anyone prepared could see themselves doing something like Don Alfredo.
So he took those $3,000, went down to the stock exchange, and spent all of it on Chilean blue-chip companies: Mining companies, chemical companies, paper companies, and so on. The stock were selling for nothing—less than penny stock—because of the disastrous policies of the Allende government. His stock broker at the time told him not to buy stocks, as Allende’s government, it was thought, would soon nationalize these companies as well.
Alfredo ignored his broker, and went ahead with the stock purchases: He spent all of his $3,000 on buckets of near-worthless equities.
On September 11, 1973, the commanders in chief of the four branches of the Chilean military staged a coup d’état. Within a year, Alfredo’s stock had rebounded about ten-fold. Since then, they’ve multiplied several thousand-fold—yes: Several thousand-fold. Don Alfredo has lived off of that $3,000 investment ever since—it’s what made him a multi-millionare today.
Addendum: Don Alfredo's story reminds one of John Templeton's first great score; in 1939, Templeton went to the NYSE and bought 100 shares of every company whose share price was under one dollar - there were 134 of them, including some in bankruptcy - and over the next few years "turned large profits", probably hundreds of percent worth.
This is Gonzalo Lira.
ReplyDeleteThank you for your kind words, regarding my posts.
Do link your references to my work to my blog.
http://gonzalolira.blogspot.com/
I can't seem to find your e-mail—so e-mail me with your impressions/comments/criticisms of my posts at "expat229@gmail.com"
All the best, and once again thank you.
GL
Gonzalo: I'll shoot you an email, but for just now I'll say that I was very impressed with both pieces. Your second piece answered the question I had after I read the first, namely "where will the money come from?".
ReplyDeleteI'm also quite impressed with what I take to be your autodidacticism.
Excellent articles. From the first one:
ReplyDeletebut I do know that, after such a hyperinflationist period, there’ll be a “new dollar” or some such, with a few zeroes knocked off the old dollar, and things will slowly get back to a new normal.
As a semi-conspiracy theorist, I believe the US dollar is purposefully being destroyed in order to 1) maintain some semblance of "normalcy" during this crisis as well as the PTB do not know what else to do and 2) bring in the "Amero" as the new currency for North America and the steady plod towards a one world government.
I agree with Mr Lira that the time to buy up property and valuable assets will at this time.
Gonzalo:
ReplyDeleteI liked your articles. One thing you might do to consider, which makes the US situation different from the Chilean one, is the massive underclass in the US. 50% of American adults don't pay any taxes. We won't just all putter along, all sharing with one another, until a new normal appears.
Welfare cases, used to living a life of relative plenty, will not take kindly to the kind of privations they will experience during the $100 bill-burning stage.
Besides our love of big government socialism, what possible reason would Canada have to join our currency to the dollar and peso?
ReplyDeleteThe one thing that gives me hope (and which usually bugs me), is Canadians' fanatical anti-Americanism. There would be blood in the streets if they tried to join us to the buck.
I recommend highly Mr. Lira's summary of Allende's ruinous policies as outlined in part 2 of his essay. Almost every American leftist/liberal I have met who has any knowledge of Chile at all has swallowed whole the fable that Allende and his glorious revolution were done in by Chilean fascists and the Nixon administration. Lira succinctly lays out the facts of the matter which demonstrate conclusively that Salvador Allende had to be the stupidest head of state that ever took over a major country. Allende makes Hugo Chavez look composed, measured and sane by comparison and Obama would be refracted as a veritable Calvin Coolidge in his lens. And Allende won the Chilean presidency by gaining a bare plurality, getting something like 34% of the vote. (Due to a fluke in the Chilean constitution, the winner just needed a plurality). Once in office Allende took every conceivable measure to destroy any semblance of economic rationality in the Chilean economy. And he did it as fast as possible. Within 3 years (1970-1973) he took a prosperous, on the track to be a first world economy and reduced it to a Zimbabwe like nightmare. If Allende did not have an organic brain disease he had a death wish, both for himself and the Chilean people. Such are the heroes of the left.
ReplyDeleteMr. Lira's articles are eye-opening to say the least.
ReplyDeleteHe shines light on the path that we are likely headed. I read Mangan to better understand the mistakes we've already made (or are in the process of making).
Lira discusses the difference between Japanese debt and America's. Dennis, if you would be so kind, please help clarify how the decedents of a brilliant Anglo Protestant socio-economic order find ourselves on this precipice.
They [sellers of Treasurys] would get out of Treasuries—supposedly the “safest” investment there is—and get into something even safer—something even more tangible: Actual commodities. Not ETF’s, not even futures (or anything else that entails counterparty risk)—sellers of Treasuries would get into actual, hard commodities.
ReplyDeleteHere's where I lose the plot, just as I do with gold bugs who advocate selling everything and stocking up on gold coins and bars. What are they going to do with them? Negotiate the value of gold coins with the grocery store clerk? Take a bar to the car dealer?
Similarly, for ordinary individuals, owning commodities except through a derivative like an ETF is impractical or impossible. I'd think it would be a serious problem even for institutions.
Aside from the cost and logistical problems of transportation, what are they going to do with huge quantities of physical goods?
Buy up football stadiums and fill them with iron ore? What about petroleum — I imagine there is little excess storage capacity in this country, and it would take years to build more on a mass scale.
Basically, for every commodity I can think of, the sheer difficulty of owning and physically possessing the actual stuff in significant quantities seems to make this a non-starter.
Rick: You can't take a stock certificate or Treasury bond to the grocery store either, but that doesn't stop people from buying stocks or bonds.
ReplyDeleteOne of the properties of gold that has made it an historical store of value is its compactness. Buying and storing physical gold in large quantities is relatively easy.
There have been a number of cases that I know of in which large institutions have bought physical commodities, for instance some have bought oil and stored it in tankers to profit from contango. Right now, a a trader by the name of Anthony Ward has bought much of the global supply of cocoa, and has stored it in warehouses. China is buying and storing commodities not only for their own use, but to diversify out of the dollar.
For the ordinary Joe, gold and silver will be the commodities of choice, along with the third precious metal, lead. Shadow Stats' John Williams recommends bottles of scotch as a good store of value.
The difficulties of using PMs in transactions will be alleviated by a barter system, which seems to be a regular feature of all hyperinflations.
Someone referred recently to the advice of an Argentinian who had experience of coping with monetary troubles. Don't buy gold coins, he apparently said - they are tooo valuable. Buy second-hand gold jewellery of lower carat rating. You can buy food with that.
ReplyDeleteOr rather than buying no gold coins and only low-carat gold jewelry, buy gold coins to store the major part of your wealth and then buy U.S. "junk" silver coins as a mixture of dime, quarter, and half-dollars to use down at the black market when the hyperinflation and price controls hit. Heck of a lot easier to quickly assess the value of a silver quarter than some random piece of gold jewelry.
ReplyDeleteThe hyperinflation stage probably won't last beyond a matter of months or at most a year or two, at which point you emerge with your gold coins ready to convert them to the new currency to snap up bargains.
Your post reminds me of an interesting story my mother told me. It seems that when I was around 4, she and I were flying coach to go visit some relatives. We ended up sitting next to a distinguished older gentleman who engaged us in conversation and eventually revealed that he was involved in investing. He apparently took a liking to us and offered to personally invest money for my mother and told us to contact him if we ever needed any assistance in San Francisco. From what my mother said, he showed no indication at all of untoward intentions.
ReplyDeleteFor whatever reason, my mother never followed up on the offer and that was that. Anyway, a few years later she was watching TV and recognized the man who had befriended us. Sir John Marks Templeton.
It's an interesting billionaire who flies coach and offers assistance to random proles. Makes you think maybe the world isn't completely rigged.
Inflation is ...when an economy’s consumables (labor and commodities) are so in-demand because of economic growth, coupled with an expansionist credit environment, that the consumables rise in price. This forces all goods and services to rise in price as well, so that producers can keep up with costs. It is essentially a demand-driven phenomena.
ReplyDeleteThis definition is a loose mixture of two different economic situations. It conflates price increases due to demand with price increases due to an increase in the money supply, an increase outstriping basic productivity.
Rising prices from demand happen when buyers outnumber sellers. This price increase has nothing to do with monetary supply. Inflation, in the monetary sense, occurs when the money supply increases at a rate not tied to real production.
Also, one must factor in the so-called velocity of money. An increase in the money supply is not necessarily inflationary if the velocity approaches zero: that is, if no one is buying or lending. In this scenario price deflation can actually happen in spite of an increase in money.
For instance, the Fed buying Treasury notes will not in and of itself increase the money supply to inflationary levels. Money in circulation mostly increases due to fractional reserve bank lending (the so-called multiplier effect). If no one borrows then there is no real monetary inflation.
Gold is not necessarily an inflation hedge, and a gold backed (or any metal, for that matter) monetary system is not a prerequisite for a stability. Our debt backed monetary system controlled by a private central bank, along with the ability of politicians to borrow at interest is the root of the problem. Fiat currency is perfectly reliable in a non debt backed system featuring fiscal (i.e., political) restraint.
Dennis, dearieme, and MnMark - your comments in response to Rick Darby (re the utility of commodities) answered one of my own concerns as well. I had already considered the limited utility of using jewelry for barter; hadn't really thought of U.S. "junk" silver coins. For some reason, the appalling quality of our featherweight coinage has really started to bother me. It increasingly reminds me of plastic play money or the coins I used in the USSR in the 80s.
ReplyDeleteThe thing to note about his Chile discussion is that people could (and did) use dollars, and could (and did) flee to the USA.
ReplyDeleteIf the dollar goes to hell and the US imposes an authoritarian regime after hyperinfation... what currency, and what country, can we flee to? There isn't one. Hell, if there were a "1970 USA" out in the middle of the Pacific, I'd already be living there.
Sheila - I agree with you about the crappy quality of our coinage.
ReplyDeleteI read somewhere that a "coin" is properly defined as being made of a metal of intrinsic value - gold, silver, nickel, copper.
What we actually have are "tokens" - they have no significant metallic value. Their only value is a "token" value assigned to them by the government.
Which is just what you are saying when you say they are like subway tokens -- which (with the possible exception of the nickel) they in fact literally are: "tokens", not coins.
Which is something nice about U.S. "junk" silver coins...the last true coins we had here. Kind of makes sense that the cycle should eventually come around to where they are again what people use for everyday purchases.
If your home provides you sufficient storage capacity then an obvious thing to do is buy a large amount of supplies of stuff you'll eventually need anyway.
ReplyDeleteBut there are other options as well:
- Buy stocks or bonds or even real estate in a country that is stable and unlikely to experience hyperinflation.
- Invest in housing improvements that decrease your utility bills. Insulation, solar hot water heater, solar PV panels, and other upgrades will cut your future costs.
- Buy high quality farm land.
I too think we are headed for hyperinflation. The question is just how soon.
ReplyDeletehttp://pair.offshore.ai/38yearcycle/#hyperinflation