Forbes and me on how to protect yourself from inflation
Posted by John Reed on
On the subject of high inflation, I tell readers what I think is the way to protect yourself. Most other writers pontificate as if they were the president’s top economic advisors telling him how to use his power to prevent or fix hyperinflation. A waste of time given that politicians are not interested in doing the right thing.
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So I was surprised to see that Steve Forbes’ Inflation book has a chapter titled ‘What about your money?” It supposedly tells you how to “preserve and even grow your assets.”
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Great! Only I did not find it very useful.
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For one thing, it never mentions foreign currency. Read a diary or article about people living in hyperinflation and they hardly ever STOP chasing foreign currency. If it does not also hyperinflate, it is highly liquid and total protection from USD hyperinflation by definition.
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Some say stocks are an inflation hedge. I disagree. So do Forbes and his co-authors. In my book, I quote Benjamin Graham, author of the classic book The Intelligent Investor. He merely says getting some inflation protection from stocks is a “possibility.”
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Here is my slightly more detailed analysis. Stocks are sometimes valued based on their fundamentals. I say that stock values eventually regress to the fundamentals. How inflation affects fundamentals is fairly straightforward. Corporations need to read my hyperinflation book and follow it. To the extent that they do, their stock may be a hedge against inflation. If they own relatively little USD-denominated assets and do a lot of exporting, they may do well in inflation.
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But most of the time, fundamentals do not rule stock prices. Irrationality does. End of discussion. I cannot predict stock values. No one can. And I sure as hell cannot predict irrational prices.
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I can tell you that when hyperinflation hit in Austria in 1921, sales of corporations lept upward as did stock prices. In hyperinflation, the USD will become a hot potato. The moment you get it, you will go try to convert it into something, that is, buy something with it before it loses value.
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So practically every corporation is having record sales, And in comes the federal government slapping price controls on everything. So much for record sales levels. The price controls are so low that the economy stops. No one can buy anything cheap enough to resell it at the price controlled prices, and on go the complications of the five bad laws.
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So should you buy stocks to protect you from hyperinflation?
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No.
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Like me, Forbes is not high on gold as an individual investment because it will collapse when fear of inflation ends. He LOVES gold as a basis for monetary policy—the gold standard. But that is the advising-the-President fantasy. I do not recommend gold at all as an inflation hedge. https://johntreed.com/.../60940227-disadvantages-of-gold...
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Forbes more or less agrees with me on commodities. I say to own coins the melt value of which equals or exceeds their face value—nickels and pennies. Both of those metals are currently priced at their normal levels. Silver, however, is overpriced and gold is now way overpriced. Forbes agrees with me that you should take delivery of the coins and not invest in commodity futures contracts.
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They suggest maybe buying stocks in companies involved in gold or other commodities. Nah. Don’t do that. There is basis risk and gold mining companies have a bad history. They tend to be in ugly countries. Companies that grow or sell agricultural products or minerals are more complex than owning a silo full of wheat.
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I say that one way to end hyperinflation is to end capital controls, In other words, end the inflated currency. Use currency that is not inflated from another nation.
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Forbes sort of treats that as unthinkable. His writing is about trying to achieve disinflation. In other words, making inflation subside as in 1981. As far as I know, there has never been a dis-hyperinflation. The nations that had hyperinflation had to create a new currency, for example, the Rentenmark in Germany in 1923.
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Forbes says if inflation is a danger, bonds “should be avoided.” I state it more emphatically. If there is any chance of inflation, do not touch a bond with a ten-foot pole.
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Then they say you should have some of your assets in cash during hyperinflation. They admit that’s “counterintutive.” Counterintuitive? It’s nuts.
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Put some of your money in a diversified portfolio of well-managed foreign currencies. That is both total protection from USD inflation and a liquid asset. They want you to have some USD cash to buy stocks and bonds when they become cheap. No. No. No. If that happens, you can use foreign currencies to buy stocks bonds or any other attractive asset.
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I reject TIPs as a fraud in hyperinflation. They are too slow and ultimately indexing is nuts because there is not enough money in the world to make the TIPs owners whole after hyperinflation.
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Forbes does not recommend TIPs because he says they cost too much.
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I very much recommend your buying the most expensive home with a mortgage that you can afford. And I mean a 4,000 sq. ft. or smaller structure on an acre or less land. Forbes is more or less anti using a home as an inflation hedge but his reasoning is nuts and wrong.
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Neither Forbes nor I have any use for crypto although I have heard it was of some use as a way to get from a inflated local money in Argentina to non-inflated USD or euros or such. That seems to be a matter of what laws the Argentines do not bother to enforce. I cannot deal with that in giving you advice.
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I enthusiastically urge you to have a house with a mortgage because the hyperinflation destroys the mortgage letting you profit from inflation. Forbes acknowledges that debtors make out like bandits but he seems to think it is dangerous to play that game. I have no idea why. Inflation makes the real payments and mortgage balance shrink. What’s not to like about that?
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Chapter three of Steve Forbes Inflation book says inflation is not just a financial issue like interest rates.
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Rather it destroys society. In hyperinflation, law-abiding people literally die. In Anna Eisenmenger' diary, which is free on the Internet, her elderly aunt refused to break the law in hyperinflated Austria and starved to death as a result.
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Anna's daughter also died. To eat, you have to buy food from the illegal black market. The black market sellers will be the same as now, only with a broader product line. Pimps, drug dealers, child sex traffickers, illegal gun sellers.
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You may be robbed on the way to or away from meeting the black marketers. You may be robbed or cheated by the black marketers. In that all criminal all the time market, you will likely run out of things to barter quickly.
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Barter items are precious metal jewelry, guns, not ammo, cars, rare coins, bullion coins, gem stones, art, electronics, power tools, musical instruments, aluminum cans, books, computers, bikes, antiques, snowboards, appliances, camping gear, kayaks, designer clothes, women’s hand bags, video games, watches, fishing gear. To see the full list, visit a pawn shop. Where you see a sign that says “We pay cash for __________,” what’s written in the _____________ is a barter item.
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Generally, when you barter, the seller will pay you less than half of the value of your barter item. Especially in hyperinflation when EVERYONE is suddenly wanting to barter for cash, food, fuel, or medicine.
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People in hyperinflation complain that all who played by the rules—savers, law abiders, debt avoiders—got punished and those who did NOT play by the rules—borrowers, criminals—got rewarded. "Upside-down" is the way those who played by the rules describe the world in hyperinflation.
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Forbes' basic assertion is that hyperinflation comprehensively destroys society. It is not just some sort of concern only to one small part of financial matters.
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He is correct. If you doubt it, visit one of the current hyperinflater nations like Venezuela (do not go there really; it is too dangerous) or Argentina or Zimbabwe.
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Again, this is all why I say you need to leave the US if we get hyperinflation. Most Americans worried about hyperinflation think all they need to do is buy gold. Actor William Devane told them so in Rosland Capital TV commercials. He is quite wrong.
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Think about it. Say you buy $20,000 of gold coin. That is about nine eagle coins worth $2,200 each today. So you and your family are out of food. The store shelves are empty. Possession of gold coins has been outlawed by a 2024 version of Executive Order 6102.
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You want three bags of groceries, such as would cost about $200 today. In hyperinflation, ir before, that would require about one ninth of your coin. But black market sellers do not give change. They also probably do not want to sell 33 bags of groceries because they do not have that much and they can make more selling 33 bags of groceries to 11 different people in barter where people have to grossly overpay.
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After your transaction in a back alley with former drug dealers and pimps, you need to make your way home in a city of starving people to your house where the criminals from whom you bought think maybe you have more gold coins that they can rob.
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I was surprised to learn that the IMF often forces nations to end hyperinflation by following IMF prescriptions which are disastrously wrong and which predictably failed.
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I know how to end inflation overnight—Repeal the five bad laws that all hyperinflated nations immediately pass: capital controls, price controls, rationing, anti-hoarding, and financial repression laws.
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That does nothing to restore the value of the hyperinflated currency. But it does instantly restore the economy to normal function. And, to be precise, since it lets you use whatever currency you want, it just changes your inflation rate to the rate of the currency you switch to. Generally, that would be a nation with little or no inflation. In the US, for example, people might switch to the Canadian dollar or the euro.
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Forbes’ book says to go on a gold standard, meaning the Fed reduces the money supply until it reaches the gold price the Fed decided was the stable price. After that, the Fed increased or decreases the money supply to maintain the designated gold price.
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Okay, that might also work, but there are armies of economists who would rather die than say anything good about a gold standard. My way is simpler and can be readily understood by the public. No one wants the USD, but they will sell for CAD or EUR, so give them CAD or EUR.
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Thank you, William Devane, for telling me all I needed to know about protecting myself from hyperinflation.
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Go north, young man hoping to escape US hyperinflation.
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Reading further in Steve Forbes’ book inflation I have additional thoughts.
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Steve tells readers what I have told you. Gold’s value is tied to fear of inflation. The corollary to that is when that fear falls, so does the price of gold. When that happens, gold is arguably the worst investment on earth.
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When Reagan was inaugurated, gold was at something like $650 an ounce. He told Fed chair Paul Volcker to know down the high inflation. Volcker did that, and gold plummeted to $300.
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You do not want to pay a fear price then see it fall by more than half when the fear ends.
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I never bought gold. We have some because my wife inherited it and she did not want to sell it. I recommend against buying gold at my web article https://johntreed.com/.../60940227-disadvantages-of-gold...
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Having said all that, you may have some. When should you sell?
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Unlike most financial advisers, I urge an insurance mindset rather than a seeking return or gambling mindset. In insurance, being early is not much of a sin. You pay a relatively small premium each year, then, if you have a loss, you are protected from loss. The great sin in insurance is being late. You delay buying insurance too long and your house burns down when you have no insurance.
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So if you already own gold, keep it until the hyperinflation hits. Then sell. Might that be early? Probably. I expect US hyperinflation to end after 6 to 24 months. You might be tempted to wait 23 months. Do NOT do that. Sell in the first month of the hyperinflation.
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Basically, hyperinflation is as bad as it gets. And as I keep saying, hyperinflation always ends and it ends overnight. You absolutely must get rid of the gold BEFORE that. Might you miss out on a little bit more growth? Yep. Investing has bulls and bears, but the thing you need to avoid being is a pig. The sell date is the date of maximum inflation fear. Hyperinflation is the equivalent of your house being on fire. It isn’t going to get any more on fire.
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Sell at that time.
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I am reading Inflation by Steve Forbes and Nathan Lewis and Elizabeth Ames. I got to know Steve somewhat speaking at FreedomFest.
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One statement in it is that bad ideas are the hardest to kill. They were referring to Keynesianism. The way I would state that with reference to Keynesianism is that the hardest economic ideas to kill are those that give politicians intellectual cover to let them buy votes with taxpayers’ money. Keynesianism suggested deficit spending was okay in recessions as long you offset it with increasing taxes to pay off the deficit spending. That got translated by Democrats and the Labour Party in the UK into “KEYNES SAYS DEFICIT SPENDING IS OKAY!!!”
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Pages 30 and 31 seem to have two errors: They say the German Weimar Repblic had to print money to pay WW I reparations. Actually, the Versailles Treaty required that the Central Powers—Germany, Austria, and Hungary—pay the reparations in the form of gold.
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Wikipedia
The Treaty of Versailles (signed in 1919) and the 1921 London Schedule of Payments required the Central Powers to pay 132 billion gold marks (US$33 billion at the time) in reparations to cover civilian damage caused during the war.
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Page 31 says FDR “confiscated” the bullion gold of US citizens. Somewhat but the more accurate way to phrase it is that he ordered all citizens who had bullion gold to sell it to the nearest Federal Reserve Bank by Executive Order 6102.
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Wikipedia:
Executive Order 6102 required all persons to deliver on or before May 1, 1933, all but a small amount of gold coin, gold bullion, and gold certificates owned by them to the Federal Reserve in exchange for $20.67 (equivalent to $487 in 2023).”
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That was less than the $35 it was supposed to have been worth before the EO. You might be able to say the government “confiscated” the difference between the $35 and the $20.67, but they paid the $20.67.
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‘The order specifically exempted "customary use in industry, profession or art," a provision that covered artists, jewelers, dentists, sign-makers, etc. The order also permitted any person to hold up to $100 in gold coins, a face value equivalent to 5 troy ounces (160 g) of gold valued at approximately $10,000 in 2020. The same paragraph also exempted "gold coins having recognized special value to collectors of rare and unusual coins", which protected recognized gold coin collections from legal seizure.’
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I did not realize it, but Switzerland only has nine million people but it has eight times more Swiss francs in circulation per capita than Canada has per capita in its dollar. The reason is Swiss francs are one of the most trusted currencies on earth. Because people around the world want to hold, not spend them, Switzerland must produce more per capita than, say, Norway. Swiss francs are one of the seven currencies I have and recommend.
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Forbes is a big advocate of the US having a gold standard.
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Uh, there is zero political support for that. So why is anyone talking about it?
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And in order to have a god standard, you have to state the fixed exchange rate and agree to turn over gold in return for paper dollars at that rate. So what, pray tell, is the proposed fixed exchange rate? Set it too high, and the world will empty Fort Knox and the NY Fed gold vault (which I have visited).
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