Lessons from South American Hyperinflations

"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

To put these figures into context... how prepared are you for $35 a gallon milk?

What about $35 a gallon gasoline?

You want breakfast, try $1000 for a carton of eggs ( 50,000% annualized price inflation ). 

Those prices are not out of the realm of possibilities if things go very wrong with the U.S. dollar.  

Remember too that Brazil, Argentina, and Bolivia have incredible economic resources at their disposal (such as agriculture, mining, and large work forces). At their core, these nations are very similar to other developed economies yet today there are still economic issues in the region.

Argentina suffered from a severe currency crisis in 2002, and it is struggling with its economy today.  On November 26, 2012, the Spanish-language publication La Nación of Buenos Aires reports that Argentina will have the worst record in South America for 2012 in terms of inflation and growth. The Argentine economy will barely grow 1% in 2012, and inflation will be above 25%, while the rest of the region enjoys healthy growth and low inflation rates.

Argentina is currently appealing against a U.S. ruling ordering it to pay $1.3 billion to foreign creditors holding bonds on which it defaulted in 2001. The country defaulted on $100 billion worth of bonds in 2001, a record amount at the time.

In Bolivia, the precious metals mining industry is key to the economy. However, president Evo Morales is planning to nationalize the silver project directed by South American Silver Corporation (SASC), sending a very negative message to new silver investors in this country. 

In 1989, Dr. Gerald Swanson, author of The Hyperinflation Survival Guide, visited South America over a two-year period to study the development of hyperinflation and its 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.

Here is a brief example of a business manager's life below, including Dr. Swanson's commentary:

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.

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 of price inflation 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 its economy by continuing to rely on the resources of other nations to finance its excesses.

Since the Federal Reserve was established in 1913, the U.S. dollar has become nothing more than fiat currency.

Dollars are created by the Federal Reserve from thin air, and their supply has expanded at insane rates over the past 40 years in order to pay for government deficit spending. 

In other words, the U.S. government has debased the purchasing power of the dollar, and thus stolen wealth from every person or institution that holds dollars, in order to bail out banks, fund wars, and increase its debt ceiling to the point of no return.

Governments throughout history have undertaken the same kind of experiment using fiat currency and monetary base expansion, increasing the currency supply to support unlimited spending.

The experiment always ends the same way: the failure of the fiat currency and a collapse of the nation’s economic system.

The chart above illustrates that the U.S. dollar is still the world's reserve fiat currency ( covering 62.2% of foreign exchange reserves ) but it suffers from a rapidly diminishing public confidence.  Sooner or later, the U.S dollar is headed for collapse.  

Because the U.S. dollar is the world’s reserve currency, as goes the U.S. dollar so too will go every other fiat currency on the planet.

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

This currency creation is unprecedented in the United States' history.

With rounds of currency debasement ongoing ( Quantitative Easing / QE, QE2, QE3, QE4, etc. ), the situation shows no sign of improving anytime soon. 

The Silver Lining...

When reckless currency expansion has happened in other countries there have been many losers, but the positive part historically is that some individuals and families win big... gaining life changing wealth. Those who understand what is happening and take action ahead of time, not only to protect themselves but they prosper massively when the currency finally collapses.

As this brief survey of South American countries illustrates, whenever governments debase their currencies, there is a massive wealth transfer from those who hold wealth in depreciating paper assets to those holding items of intrinsic monetary value - such as gold and silver.

Societies throughout history have turned to gold and silver to restore stability.  This time around it's going to be global.

As Mike Maloney wrote in his book, 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 solution we have come to for our families and ourselves is to hold physical gold and silver bullion either directly or in secure segregated vault storage locations.

What lessons might you take from history to prepare for the global monetary crisis ahead?