Ever since the Federal Reserve started qualitative easing, or QE, I have been wondering when it would cause inflation. I think the answer is “right now!”
Thanks to the government changing the way in which they track inflation, I do not have any proof that inflation is starting, unless you count my grocery bill or the reports from Shadow Stats. Based on purely personal and anecdotal evidence, however, I believe we are starting to see early warning signs of rising inflation. Here are just a couple pieces of evidence:
- According to this article from the Wall Street Journal, ground beef was 10.4% higher in May 2014 than it was a year ago. Pork chops went up 12.7%.
- The same article argues that restaurants are not raising prices, but my experience is the opposite. A local burger place where I grab a basic meal every week or so, the cost of my standard fare has gone from $4.95 to $5.35 to $5.49, all in the space of a year. That’s a 10% increase.
- And food is not the only thing increase. Electricity costs are higher than ever, according to this article.
Inflation, High inflation and Hyperinflation
We almost always have some inflation, but it is usually “under control,” meaning it is low. Governments prefer a little inflation because it means they can pay off old debts with money that is worth less than it was when they borrowed it.
High inflation is more dangerous. Experts consider an annual rate of inflation between 30 and 50 percent to be high. For the record, I consider that to be too freaking high, although rates in that realm have been seen recently in Venezuela and Argentina, (along with civil and political unrest and other troubles). In my opinion, anything over about 6 percent (as we count it now, or 12 percent if we still used the old government formula) will be painful enough to send the country into an economic tail spin. The Fed must agree with me, because they want to keep inflation at around 2 percent, maybe 3 percent at the outside.
What’s so bad about inflation? Well, inflation will drive up the cost of everything, including food, fuel, utilities, housing, and healthcare. This puts the squeeze on everyone who lives paycheck-to-paycheck or is on a fixed income. Even for those who are better off, there is less money to spend on discretionary items, leading to lower company earnings and a subsequent devaluation of the stock market. When costs go up, wages usually lag, meaning people will have less money to eat out or go on vacation. They hold off on buying new vehicles, repair the washer instead of buying a new one, and defer spending. This will lead to business closures, layoffs and rising unemployment. Consumer spending is the driving force of our economy. Without it, we will slide back into a recession.
Inflation will also make sustaining the $17 trillion U.S. debt much more expensive as the country’s borrowing costs rise and will result in higher taxes and a cut back of services. I see this as are largest threat as it could lead to the U.S. defaulting on its bills or using the Fed to create even more money out of thin air. In a high inflation scenario, the government could not tax or confiscate enough money to pay the interest on its past debts.
Hyperinflation is generally considered to be an inflationary rate in excess of 50 percent per month, which is the equivalent of 12,875 percent per year. I’m no expert, but I think they set the bar too high. Anything over 50 percent a year is frighteningly high and will probably spiral out of control.
To put this in perspective, think of a burger that costs $5. At 100 percent inflation, that burger will cost $10 in one year. In inflation like Germany experienced in 1922, where prices doubled an average of once every 28 hours, that $5 burger would cost $10 the next day, $20 the day after, and about $160 at the end of the week. Now imagine that your hourly range remains unchanged and you see the extent of the problem…
What is usually the cause of hyperinflation? According to Wikipedia, it is nearly always “caused by government budget deficits financed by money creation.” Hmm. Sound familiar?
By the way, the Wikipedia entry has lots of interesting historical information on hyperinflation and if you are worried about this, it’s probably worth a read.
By the time hyperinflation hits, it’s really too late to do anything about it. It is too late for individuals to prepare, and too late for governments to change their ways. It’s already a crisis that is spiraling out of control and the hole will quickly be so deep you cannot climb out of it. The best you can do is to hunker down and try to get through it alive. Expect bank runs early on and ineffective rules to prevent them. Expect soaring prices and price controls that achieve nothing but cause shortages. Expect that government programs will not keep up with inflation and everyone on food stamps, welfare, social security and a pension will be unable to afford food. Expect protests and civil unrest. In short, be prepared for a massive collapse of the financial situation and everything that relies on it, including our society.
- If you see the price of something you buy regularly (whether it be a gallon of milk, cup of coffee, or a Diet Coke) start to cost more every few months, you are probably living in inflationary times. When you see it increase weekly, it’s too late to do anything about it.
- When the price of gasoline hits new highs, over and over again, and the price never dips, you are probably living in inflationary times. When it costs more to fill up the tank than you paid for the car, it’s too late to do anything about it.
- When the Fed raises interest rates by 1 percent or more outside of a regularly scheduled meeting, you might be living in inflationary times. When the interest rate for a 30-year mortgage is over 10 or 15 percent, it’s too late to do anything about it.
- When you can no longer afford your normal beer and have to buy a case of that cheaper brand, you may be living in inflationary times. When a single bottle costs as much as a case used to, it’s too late to do anything about it.
- If you start to see lots of news coverage about inflation, you may be living in inflationary times. If they start to describe it as “soaring” and then move on to “galloping,” it might be time to clean out your bank account, buy some supplies, and head for your retreat.
How to Protect Yourself
During high or hyperinflation, you do not want to hang on to your cash; you want to spend it as soon as it hits your account. You are better off liquidating your savings account and buying hard assets that will retain their value.
If you have cash on hand and you start to see those warning signs, consider converting it into goods that you 1) will eventually need, consumer or use, or 2) can easily sell or barter, such as: canned food, dried food, over-the-counter medications, alcohol, cigarettes, diapers, guns, ammunition, tools, etc. (And note that all of these items would be useful in a survival situation.)
If you really don’t need that much canned food, then buy gold or silver. I personally recommend “junk silver” or American Eagles. (We’ll do a post on this subject in the future.) Just remember: You can’t eat gold.
You can also preserve your spending power or “wealth” by buying and holding real estate (especially farm land and single-family homes), high-end jewelry or precious stones, fully-automatic firearms, and other assets that can be sold after the crisis is over for “new dollars” or whatever currency is being used. If you are mega rich, invest in artwork; if you can’t cash it in, at least you can enjoy looking at it.
Once inflation kicks in, don’t lend money to anyone and spend your cash on hard goods as soon as you get it.
If you can, transfer your funds into a more stable currency, such as one backed by gold or commodities. (This is much harder than it used to be.) Usually, the U.S. Dollar is the currency in which people living in countries with high inflation wish to invest, so we’ll have to look at the Canadian dollar or the Australian dollar. I expect currencies tied to our and from countries that have large investments in U.S. debt and/or depend on us for an export market will suffer along with us. This includes the European Union and China.
Take advantage of the inflation by paying down any debt you had from before inflation hits. If you have a mortgage or school loans, wait until inflation has been high for a while and it will be very easy to pay them off.
Take steps to protect yourself from a societal collapse. If you plan to bug out, leave before things collapse. Read Captain Dave’s Survival Guide or some of our recommended books for more information on how to prepare.