How to Survive Hyperinflation

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Hyperinflation is inflation on steroids. While regular old inflation may be known as the silent tax, its hyper sibling is anything but silent. Imagine the price for a gallon of milk rising a dollar a month for the next year, and you'll have a rough idea of the concept.

In the United States, an annual inflation target of 2% is gospel when it comes to monetary policy. Realistically, we could handle inflation around 5% without TOO much adjustment to daily life.

Change that rate to 5% per month and the effects would be devastating. Think about monthly expenses for a second; $4,000 a month becomes $7,100 a month in 1 year!

What is Hyperinflation?

The classic definition of hyperinflation dates back to the 1950's and economist Phillip Cagan: a 50% monthly price increase, on average, over a 12 month period. Annualized, that's an inflation rate of 12,875%.

I know! Sounds impossible, right? Think again. Bolivia met that criteria in 1985. Zimbabwe blew that number away between November 2007 and November 2008, averaging a rate of 89.7 sextillion percent![1]

Hyperinflation in Zimbabwe
Buying 3 Eggs in Zimbabwe?
That will be $100,000,000,000 please...

But as mentioned above, you don't need to hit 50% per month to run into problems. For practical purposes, a rapid increase in inflation leading to a sustained loss of purchasing power is called "hyperinflation".

Under those conditions, a country's currency becomes virtually worthless (i.e. you need to start buying things with million dollar bills).

How Hyperinflation is "Controlled"

Since hyperinflation is really just "out of control" inflation, "controlling" it is a bit of a misnomer. But that doesn't stop the government from trying.

The tools of choice are wage controls and price ceilings.

Wage controls come in several forms: salary freezes, mandated salary increases, fringe benefit limits. Back in 1971, inflation was only at 4.7% annually and wage controls were imposed by President Nixon. Companies can work around this type of control, in order to keep good employees, by using fringe benefits (i.e. interest free loans, grants, bonuses), which are then controlled as well.

Imagine having to get not only your boss, and his or her boss to approve your raise, but also the government!

When a government creates price ceilings, they force companies to limit the price of their products, in an attempt to keep prices at a level that people can afford. But hyperinflation not only increases the prices for you and me, but also the costs of making a product. Companies can't pass these increases onto customers without getting government approval. As a result, companies produce less and shortages arise.

Any type of price/wage control disrupts the natural push and pull between supply and demand. Usually, this results in shortages, hoarding, under-the-table arrangements, and black markets.

What you can do

In a hyper-inflationary environment, money management becomes critical, both personally and corporately. In particular, your ability to quickly convert income into assets is key.

"Cash is trash", because its value falls so quickly. On the other hand, asset values rise just as quickly, so trading income for assets as fast as possible is key. Get paid in cash, as often and as quickly as possible. Have gift cards? Sell or use them immediately. As prices rise, your gift card balance won't.

Those insurance policies you have aren't dynamic, so they'll only cover a fraction of your costs during the period of hyperinflation.

Be prepared for shortages too. You might find that your stash of Twinkies is suddenly worth its weight in gold...literally!

When investing, expect a lot of volatility and adjust your decision-making process accordingly by keeping your timeframe short (i.e. assets that are short-term and/or very liquid). Investments like certificates of deposit, bonds, loans etc. must be short-term or avoided all together.

Stock selection will also be critical, because corporate profits would be hammered by price controls. Look for international firms that use a different currency than the one that's in trouble. Check their balance sheet and associated financial metrics for a track record of flexibility in managing their cash, inventory, accounts payable, and accounts receivable. You'll want to see superstars in the finance and purchasing departments that are able to adjust quickly.



Sources:
[1]Hanke S., & Kwok, A. (2009) "On the Measurement of Zimbabwe's Hyperinflation", Cato Journal, 29 (2)" (PDF). 11 July 2015.