Hyper-Inflation-Deflation - Amazon S3 · inflation & Depression. I added depression to the subject because depres-sion is largely deflation and it’s hard to write a book about inflation

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John Reed Report: Hyper-Inflation-Deflation

How hyperinflation and deflation wrecks economies and wipes out individual wealth.

Plus an ACTION PLAN to rearrange your assets and liabilities so that you are not devastated if/when

hyperinflation or deflation strikes the U.S.

About John T. Reed

I am John T. Reed.

I write a monthly newsletter on real estate investment and I have written and published 34 how-to books on 6 subjects and 1 novel.

Topics I write on include; real estate investment, coaching football, coaching baseball, success in life, self-publishing and protecting your finances from hyperinflation and deflation.

In 2016, I published my first novel, The Unelected President.

I also have 8 blogs where I write about headline news subjects, the subjects of my books, and the military.

I am a person, a home-office-based sole proprietor, not a company or a corporation. My wife Marty and my son Mike help me. If you order a book, Marty or Mike will put the book in the mail to you. If you order a Real Estate Investor’s Monthly subscription, Marty or Mike will enter your name and address into the mailing list.

I graduated from West Point and got an MBA from Harvard Business School. I have worked in the fields I write about and researched them thoroughly. I only write about subjects where I think the existing books are incorrect or incomplete or both.

My books typically differ from those of other authors in a number of ways:

more real world, for example, my baseball coaching books tell how opposingcoaches try to cheat in the player draft

more iconoclastic more thorough more tell you what you need to know; not what you want to hear more ethical and legal more safety conscious (mainly applies to sports coaching books) as much emphasis on risk management as reward more likely to identify and explain the basic principles underlying expertise in the

field, for example, the basic principle of offense in football is strength againstweakness

more strategic thinking (big picture), not just tactical more holistic, that is, covering how seemingly unrelated factors affect outcomes

like the character of individual football players or a landlord’s personalityregarding dealing with difficult tenants or how different forms of asset ownershipaffect various goals like estate planning, asset protection, and so on

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I grew up in Southern New Jersey and began my investing in real estate career there.

I went to college in New York State and to graduate school in Boston. I also invested in Texas. I am a Vietnam vet. I have now lived in the San Francisco, California area for most of my life.

My wife and I got married in 1975 and have three grown sons. They are graduates of Columbia, the University of California at Santa Barbara, and Arizona. The oldest and youngest work in the same marketing software company in Northern California; the other works for a worldwide for-profit education company in Manhattan. One is married. They have a daughter and a son.

I began my writing career in 1976 and have been doing it ever since. I have had this website since December 1996.

You can take a look at all my books find links to the blogs I write here: www.JohnTReed.com

You can reach me here:

[email protected]

Phone: 925-820-6292

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The 2008 financial crash in home prices and mortgages caused me to research how my readers could have avoided being hurt by that. The result was my book Best Practices for the Intelligent Inves-tor. Generally, it is about real estate investment risk management and would likely have protected you had you followed its advice before 2008.

But in the course of that research on that crash and others, I kept coming across references to increased danger of hyperinflation in the U.S. I could not find a good book on that subject, so I wrote one. It is called How to Protect Your Life Savings from Hyper-inflation & Depression.

I added depression to the subject because depres-sion is largely deflation and it’s hard to write a book about inflation without also covering deflation. For one thing, some steps that would make sense to protect against inflation would be disastrous if we got deflation instead. And we can.

The election of Donald Trump creates a new need to read How to Protect Your Life Savings from Hyper-inflation & Depression.

1. Trump’s promised increase in tariffs is verysimilar to the Smoot-Hawley Tariff. Arguably, the stage for the Great Depression was set by the easy-money margin lending that created an asset bubble in the stock market. But the trigger for the crash was the Smoot-Hawley tariff which was a campaign promise in the 1928 election, a looming certainty in 1929, and signed into law in 1930. Furthermore, the Depression was deepened and prolonged by the New Deal interference with free markets and Fed policies, many of which were deflationary.

2. Trump’s promised increases in defense andinfrastructure spending and tax reductions could, if not accompanied by hoped for growth and Laf-fer Curve increased tax revenues, cause the national

debt-to-GDP ratio to increase. That ratio was 17% when the Great Depression began. It was a record 122% after World War II, but that was not as bad as it sounds because everyone knew the World War II spending would end and tens of millions of military personnel and military contractor employees would get pink slips when it ended. And they did.

The national debt-to-GDP ratio when Reagan began a Trumpesque increase in spending on defense and tax reductions in 1981 was 31%. Now it is 108% and the cause is not world war spending that is about to go away. Rather, it is entitlement spending that will not go away at all.

I am not predicting an imminent bout of either inflation or deflation. I do not make such predictions. There are other factors like people around the world fleeing the euro, yen, yuan, ruble, and bolivar to the “safety” of the U.S. dollar. It was pretty safe when we had debt-to-GDP ratios of 17% and 31%. At 108%, however, those who see the US dollar as safe are too history-minded and not enough look-at-the-numbers minded.

However, neither am I predicting that your home will burn down in the next twelve months, but I still recommend that you buy a one-year fire insurance policy on that house. Not because it will probably burn down this year, but because it could burn down this year. And such a loss would be financially devastating to you.

An insurance approach, not a gambling oneThat is my approach to monetary-instability risk (inflation/deflation)—an insurance approach, not a gambling or crystal-ball-gazer approach.

With insurance, you protect yourself against a possibility, not a probability. And you do so not

Overview



by gambling that it will happen, but by insurance methods like hedging, diversification, purchase of hard assets that you will personally use in the future, liquid hard assets (no, that is not a contra-diction in terms—there are a few liquid hard assets).

To my great surprise, my research found that two things everyone assumes are THE hedges against high inflation—gold and index clauses—are, in fact, very bad things to rely on in such times. I reject both entirely. The detailed explanations of why are in my book.

Gold, for example, comes in very inconvenient denominations. It is currently the rough equivalent of a $1,000 bill and it is a barter item and barter markets generally do not give change. Also, gold, alone among all metals, was outlawed in 1933 and ordered sold to the Fed for a below-market price.

Index clauses, including those in TIPs bonds, just move way too slow to deal with hyperinflation, and speedier index clause are not the answer because the government cannot get the enormous amounts of money to keep the promises made by index clauses during hyperinflation.

Fortunately, we have two thousand years experi-ence with inflation/deflation—entirely a govern-ment-caused phenomenon (with the odd exception of gold inflation when a whole lot of it suddenly came to Europe as a result of the discovery of the Western hemisphere).

Because of the two thousand years of experience, we can clearly see three things: how governments react to it, who wins, and who loses.

Below is the chapter from my book on how gov-ernments react to inflation and deflation. I cannot predict whether we will get inflation/deflation or when or how bad it will be. But I can easily predict how the government will react, because they all re-acted approximately the same around the world for two thousand years.

The second chapter below was in the first edition of How to Protect Your Life Savings From Hyperinfla-tion & Depression but not the second. I took it out to make room for additional material on specific protections.

As I said, my approach is low-cost, low-risk ways to protect yourself. I do not tell you how to get rich on inflation or deflation or to bet your life savings on a strategy that will pay off big if the inflation or deflation arrives soon. Rather, I tell you how to protect yourself from both simultaneously. Yes, that can be done with certain investments where you can

win but you cannot lose. Yes, such things really exist and they are in the book. Here are a couple of hints about those: circulating coins with high melt-value-to-face-value ratios and real estate financed by non-recourse mortgages. Think about it.

There are also assets, like a free-and-clear home, which essentially provide you with the same useful-ness whether we get hyperinflation or deflation.

John T. Reed




6 Government and Institutional Reaction to Inflation/Deflation

Institutional reactionsInstitutions—government, banks, securities firms, insurance companies, publicly-traded corporations, stock and commodity exchanges—behave in predict-able, almost comical, ways during financial crises. So there are no excuses for not getting out of the way of institutional attempts to cheat you after you read this book. As much as possible, avoid trusting institutions with your life savings. Try to keep your net worth as much as possible at your home or in your safe deposit box or in selected foreign banks.

When there is severe stress, the politicians, who are always promising they are our saviors during cam-paigns, feel obligated to get involved in everything. We would be better off if they got out of the way, but they never do.

Here is a great line about the issue from Sylvia Nasar’s book Grand Pursuit:

[Economist Irving] Fisher had focused on the effects of inflation and deflation on debtors and creditors, the arbitrary redistribution of wealth they caused, and the “vicious rem-edies” that governments adopted at the behest of the victims but that “like the remedies of primitive medicine, they are often not only futile but harmful.”

CorruptionOne result of increased government involvement is increased corruption. If you hope to live an honest life, times of high inflation or deflation make that harder. It also makes it harder to trust your employees and associates. In Latin America during hyperinfla-tion, businesses found they had to put relatives in key positions in their companies to prevent embezzle-ment and kickbacks.

In general, government officials lie. When the news is bad, they lie more. On page 42 of The Com-ing Generational Storm, authors Larry Kotlikoff and Scott Burns relate multiple instances of presidential economic guys like the President’s Council of Eco-nomic Advisors and Treasury Secretaries lying during economic troubles. Kotlikoff was an economist with the President’s Council of Economic Advisors for Reagan and George H.W. Bush.

‘Broad sweep of activity’One of the first things governments do during fi-nancial or other crises is try to look busy. Here is a line from Amity Schlaes The Forgotten Man history of the Great Depression,

The main tasks Roosevelt assigned himself were simple. The first was that there be a broad sweep of activity; Americans must know Washington was doing something.

Governments and institutions react to financial crises in stereotyped, predictable ways. By knowing and anticipating those reactions, you can deploy your assets and liabilities to avoid being hurt by those reactions. Also, you must realize no institution is trustworthy. They have all been unwilling or unable to pay their debts at times, and misbehave to save themselves. When the financial going gets tough, their attitude is “Tough luck for the little guy.” The common theme of the reactions is to hold you in place while the government or institution steals your money.



Nowadays, I think informed Americans would feel better if they knew Congress was in recess and the President was on vacation. In Texas, the legislature is only allowed to meet every other year. Texas also has one of the strongest state economies in the na-tion in 2012.

Depression-era comedian Will Rogers said of Roosevelt,

The whole country is with him….If he burned down the Capitol, we would cheer and say, ‘Well, we at least got a fire started….’

Both the New Deal and the Soviet government were big on showy public works like huge dams and bridges. Expect more of that if and when we have a much worse financial crisis.

Schlaes goes on,

The second goal was to get prices up, without much regard to whether the methods applied to achieve that goal made sense.

CBO is not reliableIn 2009, the Congressional Budget Office (CBO) was often touted as neutral and respected by the media and Republicans. Neutered is more like it. They are not truth seekers. Rather, they are restricted by numerous rules imposed by Congress.

For example Kotlikoff says they are required to assume real (after adjustment for inflation) wages will increase by 2.2% per year. Since 1959, real wage growth has averaged 1.7% or less. From 1820 to 1950, the average U.S. GDP growth rate was 1.57% per year.

The CBO also assumes taxable income will not be affected by changes in tax rates. In other words, if Congress raises the tax rate to 100%, the CBO will assume that will increase tax revenues and that everyone will still go to work and earn the same pre-tax income as before the tax rate increase.

Obviously, a 100% tax rate would cause all af-fected workers to quit work.

The CBO has also repeatedly put out bogus num-bers before an election, then quietly “corrected” them afterwards. You cannot trust the CBO.

Obvious bad assumptionsThis from page 73 of The Coming Generational Storm:

…The CBO routinely assumes the govern-ment will miraculously shrink, the Clinton

Administration censored generational ac-counting, during its first term the Bush II administration yanked publication of the $45 trillion fiscal gap [unfunded liabilities], the Treasury blocked generational accounting by the OECD, the Social Security trustees have ignored their own technical experts in forecasting longevity, the CBO is ignoring its board of advisers’ generational accounting recommendations, the Social Security trust-ees have understated the system’s financial problem by a factor of three and buried the truth deep inside their annual report, and the Centers for Medicare and Medicaid Services have low-balled future growth in Medicare expenditures by a factor of two.

And page 74:

To describe this as a conspiracy to hide the truth would be close to the mark except for the fact that it’s not centrally directed. It doesn’t have to be. Each political appointee…knows that the truth will set her free—free, that is, from her job.

Argentinian hyperinflationArgentina seemed to be doing everything right. Their national-debt-to-GDP ratio was lower than Japan’s. They s old m any n ationalized i ndustries b ack i nto private hands. They reduced tariffs. Their economy was growing.

But they had a bad reputation in the international financial community and with their own citizens. In the past, they had repeated bouts of hyperinflation, governments toppling, defaulting on federal bonds.

As a result, whenever there was financial turmoil anywhere in the world, people fled from Argentina and its assets. The w orld fi nancial ma rkets wo uld demand higher interest from Argentinian borrowers. That, as in any country, caused recessions.

Finally, each of the 12 provinces (like states) of Ar-gentina issued their own currencies. That was illegal, but the federal government did not stop it and even offered their bureau of engraving to the provinces so their money would be harder to counterfeit.

When people tried to withdraw their bank ac-counts, banks closed. Unemployment hit 25%, same as the peak in our Great Depression. The wealthier, better-educated Argentinians fled the country.




The country that cried ‘wolf’The key issue here is the reputation of Argentina. Even when they do the right thing, no one trusts them because of their past misbehavior. The country that “cried wolf” can no longer issue its own currency. That’s not the end of the world. It might even be a good thing for them.

A German immigrant to Youngstown, Ohio lost everything by investing in German bonds before the hyperinflation there. After the hyperinflation, the German government held a lottery each month. They drew out some bond numbers and gave those bond owners five times the original cost of the bond. Those whose numbers were not picked got nothing.

Shut the escape hatchesIn order to use inflation to pay off federal deficits cheaply, the government cannot let the public escape from inflation. So they slam shut escape routes like gold, moving money out of dollars by capital con-trols, stockpiling goods, and so on.

The government also passes laws like wage and price controls, rationing, and protectionist tariffs that are devastating to the economy but which help them escape blame for inflation. Tariffs are especially devastating if you import products or components to make products, especially when combined with price controls. Generally, higher tariffs will force you to pay more for domestic products or parts of equal quality and you will have to sell for less because of price controls.

When a nation’s currency hyperinflates, it sees great improvement in tourism, foreign investment in the hyperinflated country, and exports. However, those advantages displease other countries whose currency is not hyperinflated. They often respond by cancelling out the advantage with

• capital controls that restrict how much moneytourists can spend in the hyperinflated countries

• capital controls that restrict investment in thehyperflated country

• tariffs that nullify the currency value advantageon exports from the hyperinflated country

Making your living catering to foreign tourists, foreign investors, and exporting may shield you from U.S. hyperinflation. But that may only be temporary, because foreign governments can and do enact legislation to protect their own businesses from the competitive advantage in those industries of a hyperinflated currency.

During price controls, Latin American countries find it more productive to focus on expense cutting than normal revenue sources because the government will not let them increase revenue by raising prices to market levels.

Price controls killIf you have a business, price controls have a good chance of busting you. In Latin America, where hyperinflation is common, wage and price controls are also typical. Businesses incessantly apply to the government for price increase permission. Just doing that costs much time and money. Plus they rarely get as much as they want so their profit margins get smaller and smaller until they cease to exist.

My wife briefly was detailed from FDIC to Nixon’s Wage and Price Commission. Their job was to approve or disapprove requests for greater-then-standard price increases.

As your various products and services become inadequately profitable, you need to discontinue them. If you try to continue them out of habit, you will bankrupt yourself even faster.

You must also constantly read the details of the current wage and price controls so you can use the “loopholes.”

For example, imported beef was not subject to Nixon wage and price controls. So farmers near the Canadian border would ship their own cattle to Canada then bring them back so they could sell them at market prices. Others would make slight modifications to products to make them “new.” New products are not price controlled initially.

The same is true of used products. They are not price controlled. One Brazilian heavy equipment manufacturer would deliberately use his own brand new, heavy, earth-moving equipment to move dirt around the yard at his home to turn the new product into a used one. People engage in all sorts of idiocy like that during price controls to get around them.

Foreign employers in the U.S.One of the unexpected, to me, ways to get around hyperinflation in past episodes was working for for-eign individuals, foreign governments, and foreign companies.

In major cities around the U.S., you can find plenty of foreign consulates, foreign banks, for-eign manufacturing and service companies, and foreign residents of the U.S. who are paid by their home country in the currency of that country. There are a lot of U.S. non-profits and charities in other



countries. I do not know of any such things here, but there may be.

An American employee of, say the Australian consulate in San Francisco, might keep that job and have their pay adjusted by the Australian employer so that it is a constant Australian dollar amount. That would more or less totally insulate that income from U.S. hyperinflation, although not from related problems like non-availability of goods and services.

Of course, it could end. Or the Australian govern-ment could take advantage of the situation and staff most of the consulate with cheap American workers who get paid only as much as necessary in U.S. dollars to attract and retain adequate American employees.

One could also cater to foreign individuals living in your area like an American lawyer specializing in an area of law that Canadians need or Sigmund Freud specializing in treating expatriate British patients in Vienna during the hyperinflation there.

Since they are compensated in their uninflated home country currency, they can afford to pay in that currency if allowed or pay more by paying in U.S. dollars but in an amount that was a constant amount of their home country currency.

Don’t need wars anymoreSpending more than tax revenues used to happen only during wars. Now, however, politicians no longer need wars to spend warlike amounts. They simply give the voters one new, expensive entitlement after another, mainly “free” pensions and health care.

Social Security is the pension. Although people pay “into it,” they get three times as much out than they paid “in.” The excess is the free part. [There is no “into.” FICA (Federal Insurance Contributions Act), better known as Social Security, tax is just another tax and it goes into the general revenues of the country. You are entitled to no Social Security benefits. The federal government can reduce or eliminate them.]

To make matters worse, the Obama administra-tion sought, and got, a payroll tax holiday for 2011 and sought another one for 2012. What I am saying here is that not only is the amount of money that goes “into” Social Security each year inadequate, in 2011 and 2012 they put nothing “into” it at all. Basically, Obama thought 2011 and 2012 were great years to make the deficit worse by ending Social Security tax collections.

The health-care benefits are in the form of active military, veterans, Medicare, and Medicaid, plus the new benefits from the 2010 health-care law.

Can’t raise taxes enoughIn theory, raising taxes would run surpluses which would pay down our national debt. But do the numbers. The rich will not pay much more taxes. They will simply refuse by cutting back economic activity, emigrating, etc. The tax base will have to be broadened, that is, tax the middle class and poor, a lot more than they have been paying.

Even then, the amount of additional taxes needed is simply too big. In 2012, the U.S. government will collect $2.4 trillion in taxes and borrow about $ 4 or $5 trillion more to pay off maturing U.S. bonds and to fund government operations.

It is mathematically impossible to raise U.S. taxes from $2.4 trillion to $7 trillion. Not only will tax-ing those who make more than $250,000 not fix the problem, taxing everyone who makes anything won’t be enough to fix it.

Hauser’s Law says that the U.S. federal tax rev-enues are been around 19.5% of GDP almost every year since World War II, regardless of the tax rates which have fluctuated quite wildly during that pe-riod. 2009 U.S. budget documents found that the average tax revenues from 1946 to 2007 were 17.9% with a range of 14.4% to 20.9% but actually almost all years were within one percent or so of the 17.9%.

In other words, the only way to increase tax rev-enues is to increase the GDP. Democrats hate that and call it “trickle down.” Too bad. It is an immutable fact. If the government tries to raise tax revenues above 19.5% by some combination of extreme rates and greater force, high-income people will literally leave the country as they have left many states that tried to go that direction.

In Dollar Meltdown, Charles Goyette says there comes a time in fiscal difficulty when the government must “inflate or die.” We have arrived at that time.Second, they can cut government spending. On page 62 of The Coming Generational Storm, authors Kotlikoff and Burns calculate that,

…future generations face a lifetime net tax rate that is twice the rate we’re paying.

Your lifetime net tax rate is all the taxes you pay in your life divided by all the taxable income you make in your life. Doubling taxes, of course, is impossible not only politically, but also because the public would simply refuse to work or pay if the politicians dared pass such laws.




The Doctrine of Odious DebtThis is from page 63 of This Time is Different by Rogoff and Reinhart:

The doctrine of odious debt basically states than when lenders give money to a govern-ment that is conspicuously kleptomaniacal and corrupt, subsequent governments should not be forced to honor it.

There can be little doubt that our present national debt and unfunded liabilities for Medicare, Medicaid, and Social Security are odious debts.

The incentive to cheat on much higher tax rates would be too great. And the sense that the necessary tax rates were confiscatory and immoral would cause the public to en masse conclude the tax code was the equivalent of an overly low speed limit that no longer need be complied with. Look at Europe to see a continent with overly high taxes and, predictably, massive tax cheating.

If income slows, tax assetsAs a result of losing yet another Supreme Court decision, FDR lost one seventh of his tax revenue one year. His solution: an undistributed profits tax on corporations.

What the heck is that? A tax on profits corpora-tions made in prior years that were not paid to the shareholders in the form of dividends. Dividends are taxable.

Corporations typically do not pay dividends because they feel the shareholders will be better off if they keep the money for financial strength and/or to take advantage of business opportunities. That is especially true when the federal government taxes dividends.

FDR’s undistributed profits tax essentially forced all corporations to live hand to mouth and render themselves unable to withstand additional financial shocks or to invest in new opportunities. Basically, he wanted them to spend all their money now to help him get reelected, or, failing that, give him their money and he would spend it to get reelected.

Financial repressionFinancial repression includes laws that restrict what you can do with your savings and checking so as to force you indirectly to put all your money into federal government bonds that pay below-market interest rates. Financial repression includes:

• government-mandated below-market interestrates on deposits, like Regulation Q

• abnormally high bank reserve requirements• government-directed lending (like many sub-prime loans made pursuant to the CommunityReinvestment Act or pressure from governmentofficials on FNMA/FHLMC and so on)

• forced conversion of gold, silver, or foreign cur-rencies to U.S. currency at below-market rates

• government-mandated minimum amounts andperiods for pensions and banks to hold in theform of government bonds

This is generally a post-World War II practice.For example, India limited bank interest rates

to 6.6% and 13.% in 1973 and 1974 when India’s inflation rates were 21.2% and 26.6%.

What Greece had to doGreece has similar deficit-to-GDP ratios to the U.S. But the world bond market reacted differently to Greek bonds. The market first insisted that Greece pay much higher interest rates then downgraded Greece’s bonds and finally refused to buy them at all.

Like most countries in financial difficulty, Greece had to turn to the IMF. Here is what the IMF de-manded Greece do. It is a preview of the sort of things the U.S. eventually will have to do:

• cut spending by 7% of GDP• raise revenues by 4% of GDP• lower deficit to less than 3% of GDP by 2014• run budget surpluses from now until 2020 anduse them to reduce the national-debt-to-GDPratio

• cut public-sector pay and pensions• raise retirement age• raise value-added taxes and excise taxes• deregulate labor and industry• privatize some state-owned industries• cut public investment• reduce tax evasion

The U.S. equivalent of this will be far worse because the bond market is letting us get away with Greek levels of debt for far longer.

Screw the foreignersGenerally, foreigners stop buying the country’s bonds first. They are more flexible and more alert to what’s going on and international alternative investments.

Citizens of the country in question feel they have



no choice but to buy their own country’s bonds. Most have never owned a foreign bond or currency.

Plus, with financial-repression laws, they are forced to buy their country’s bonds if they want to have local bank accounts and pensions. Capital controls prevent them from taking their money out of the country.

Foreigners who stop buying U.S. bonds would be like the rats leaving the ship: a bad sign of what is about to come.

For example, governments generally stiff foreign-ers before they stiff their own citizens (voters). For example, Russia stopped paying principal to foreign bond owners in 1998.

The book Manias, Panics, and Crashes had this delicate statement:

…the rule of law is more fragile in the in-ternational context.

Xenophobia and racismOne reason is the xenophobia and racism of citizens of old-world countries toward investors in other countries. Another aspect is there is no enforcement mechanism that crosses national borders. A century ago, U.S. gunboats might take over your country to collect money owed to Americans. No more.

On page 129 of This Time Is Different, they say,

Inflation during the year of an external default is on average high, at 33%. How-ever, inflation truly gallops during domestic debt crises, averaging 170 % in the year of default.

External means foreign. Domestic means the debt (bonds) owned by the citizens and institutions of your own country.

I would add that there is not a lot of difference between an explicit default of the kind these two sentences describe and the implicit default inher-ent in either 33% or 170% inflation. Whether the government says its decided not to pay back bond-holders or just “prints” so much money that when it does pay you back the currency is worthless, you’re screwed either way.

Financial repression often causes the citizens re-pressed to “earn” negative, real, after-tax returns. That is, they are, in effect, letting the bank, or indirectly, the federal government confiscate part of their life savings. As I write this in June 2012, we have that in the U.S.

Forced currency conversionsAnother form of financial repression is forcing citi-zens who hold foreign currency to convert it into dollars at a rate that is below the market exchange rate. This is almost identical to FDR’s Executive Order 6102 which forced U.S. citizens to take their gold to the nearest Federal Reserve Bank and turn it in for $20.67 per troy ounce, which was a below-market exchange rate.

When the government forces people to convert gold or foreign currency into dollars for less than the market value of that gold or foreign currency, the government is stealing the difference between the government-imposed conversion rate and the market value of the gold or foreign currency at the time. Everbank, which is the only U.S. bank that lets depositors have accounts in foreign currencies, warns in its boilerplate that they may be forced by the U.S. government to convert your foreign currency into U.S. dollars at exchange rates that may be unfavor-able compared to market exchange rates.

When a government forces it citizens to convert gold, silver, or foreign currency-denominated assets, the citizens are outraged and even more determined to get their money out of reach of their government.

Citizens of such countries ought to be outraged at all forms of financial repression, but they are too ignorant of money to understand other types of repression. Forced conversion at below-market rates they understand.

Borrowing to pay interestGenerally, one of the points at which almost all creditors say “no more” is when the borrower can no longer pay all the current interest each month.

With each passing month, our debt increases and as a result the ratio of national debt interest payments to tax revenues rises. In Fiscal Year 2009, the U.S. government spent $383 billion on interest on the national debt. Estimated total tax revenues in 2009 were $2.19 trillion. The average interest rate on the U.S. national debt in November 2009 was 3.32%.

Total interest in 2010 was $414 billion; in 2011, $454 billion.

A combination of an increase in the average inter-est rate and an increase in the amount of the debt could push the monthly debt to the point where interest on it matched or exceeded the total tax rev-enues. If the bond buyers have not already abandoned the U.S. treasuries by then, they will at that point.

You cannot tell by party or political rhetoric which party or president will be best for the economy.




Milton Friedman said Republican Richard Nixon was the worst president in his lifetime (1912-2006); Republican Reagan, the best.

Nixon first devalued the dollar versus gold then took the U.S. off the gold standard completely and instituted wage and price controls and increased tariffs. Reagan, on the other hand, backed Federal Reserve Chairman Volcker’s efforts, which included high interest rates that triggered a recession, to end inflation.

When hyperinflation hits or is expected, owners of currency flee the currency and try to go into other assets that they believe will not lose value, namely foreign currencies, commodities (e.g., precious met-als, petroleum products, natural gas), collectibles, real estate, and stocks, although the last two are adversely affected by the indirect, economy-depressing effects of hyperinflation.

Capital controlsGovernments who have inflation typically resort to capital controls. That is, they pass laws preventing money from leaving the country—a “run on the country” so to speak.

Those laws generally cover:

• transfer of bank accounts to other countries(international wire transfers)

• tourism, including restrictions on the amount ofmoney they can spend overseas

• purchases of imports• multiple fixed foreign currency exchange rates(disadvantageous for outflows and advantageousfor inflows from other countries)

• taxes on money being transferred out of thecountry

• tariffs on imports and other protectionist policies• forced repatriation of profits of foreign-based

U.S. companies• discouraging importation of luxury goods• price controls• import quantity controls• restrict foreign ownership of domestic assets• taxes on foreign-exchange transactions• mandatory reserve requirements which requirea foreign investor in the U.S. to put some ad-ditional money in interest-free deposits with theFederal Reserve

• total bans on certain transactions

In other words, these are some of the escape exits that the government is likely to slam shut when

people realize inflation has made owning dollar-denominated assets relatively unattractive compared to foreign assets.

The government wants to use inflation to steal or deceptively tax money from its citizens. If they allow people to flee from the dollar, they cannot take their money by inflation. Therefore, they frantically pass laws against fleeing from U.S. dollar-denominated currency.

In some cases during medieval times, countries sometimes demanded and got payment in currencies that had not been debased as much as the originally specified currency.

Apparently, the two countries in question took a moral rather than legalistic view of the debt and tried to repay in terms of purchasing power not in the currency stated in the agreement.

I am not aware of that happening more recently.A 1910 U.S. Supreme Court decision in Ling Su

Fan v. United States, 218 U.S. 302 (1910) upheld a Philippine law prohibiting exporting silver coins from that country. The Philippines were ceded, to-gether with Cuba, Puerto Rico, and Guam, to the United States for $20 million as a result of the 1898 Treaty of Paris. The Philippines became independent in 1946. This is still part of U.S. law even though the Philippines are no longer associated with the U.S.

Take over the stock marketIn July 1933, after the stock market had risen for some time, it fell again. FDR threatened to take control of the stock exchanges. I have no idea how he thought he had such authority. But it illustrates how men who perceived themselves to be powerful think and act when events embarrass them and/or threaten their power.

He did pressure the exchanges to adopt idiotic policies like banning short selling. (Banning short selling makes it impossible to create some hedges. Hedges are prudent and in many situations failure to hedge is incompetence or irresponsibility.)

On July 20, 1933, FDR ordered the commodity markets to close. In the sense that market prices are economic free speech—as Walter Wriston said—FDR was simply saying, “Shut up!” Again, I know not whence a president would derive such authority.On March 5, 1934, Depression diarist Benjamin Roth worried,

Socialism is now accepted calmly by min-isters, professors, etc. and it is amazing to me to see how calmly people accept the most



drastic government regulation.

On February 16, 2009, Newsweek published a cover story titled “We are all socialists now.”

The U.S. Interest Equalization Tax (1963-74) basi-cally made it hard for Americans to invest in foreign countries. It taxed foreign bonds that paid higher interest rates than U.S. bonds—a sort of tariff on imported interest. The Voluntary Foreign Credit Restraint Program was enacted in 1965 to close a loophole many Americans had found in the Interest Equalization Tax.

Equal to price controlsOne of the main reasons governments try to stop capital from leaving the country is to tax it. Another is capital controls which are, in effect, price controls on interest rates. Governments want interest rates low because they owe a lot of money, especially when their excessive borrowing has caused inflation.

Generally, in 2009, China was the only country with significant capital controls. The European Union generally required them all to be dismantled by June 1990. But expect all countries that inflate to reinstate them in the event of inflation.

A November/December 1999, St. Louis Federal Reserve Board Review article, “An Introduction to Capital Controls” by Christopher J. Neely said of Great Depression capital controls,

…their purpose was to permit countries greater ability to reflate their economies without the danger of capital flight.

As McKinnon and Oates (1966) argued, no government can maintain fixed-exchange rates, free capital mobility, and have an in-dependent monetary policy; one of the three options must give.

When the monopoly fiat currency stops working, that is, it is in extreme oversupply (inflation) or undersupply (deflation), the public will reject it and switch to a more stable or available one.

But the whole purpose of the government in delib-erately creating inflation is to steal from the citizens. So they cannot tolerate violations of the government’s currency monopoly.

They may also place restrictions on the ability of any government entity to print money beyond the growth of production of goods and services.

Some steps that have been taken outside the

U.S. include basing the local currency on foreign currencies that are perceived to be more stable and well-managed. Most frequently, the U.S. dollar has been the currency of choice, although Swish francs or Australian dollars or some such could be used.

Other currencies rely on dollarSince the dollar is the reserve currency of most of the world, it would not be feasible for the U.S. to prevent inflation by making its currency convertible at a fixed rate into another currency or even to use another currency physically as some foreign countries do with the U.S. dollar.

In 1933, FDR tried to pass the Industrial Control Act which was what it sounds like. Lawyer Benjamin Roth who kept a diary at the time called it,

…a radical excursion into the field of a “controlled economy.”

The Industrial Control Act did not become law, but the similar National Recovery Act (NRA) did. In July of that year, employers were pressured to raise wages and not cut prices and to cut hours per worker (not open-for-business hours). Those who did, got a card with a blue eagle NRA emblem on it. Consumers were urged to buy only from NRA members.

The NRA was repeatedly declared unconstitu-tional by the U.S. Supreme Court.

Political favoritismGenerally, the government tried to favor politically powerful organized groups like unions and farmers. One problem with that was that the government is inept. The statement, “I’m from the government and I’m here to help you” is reputed to be one of the three biggest lies ever told (“Yes, I’ll still respect you in the morning” and “The check is in the mail” being the others.)

The NRA produced more pages of laws in its first 12 months than the whole United States government had in its entire existence before the New Deal.

If I reduce the typical government, U.S. or foreign, response to inflation or deflation to one phrase, that phrase is,

price controls

Inflation and deflation hurt politicians. They embar-rass them. They anger voters. Voters demand action to stop the inflation or deflation. So governments essentially outlaw them!




Are market prices too high? Pass laws ordering them not to go any higher or back to where they used to be. Are market prices too low? Pass laws requiring them to go higher.

Buyers will not pay more than market during deflation and sellers will not sell for less than mar-ket prices during inflation. The market is infinitely more powerful than any government or even all the governments of the world acting in concert.

All price ceilings or floors designed to force trans-actions at below-market or above-market prices fail disastrously. To the extent that they are enforced, they actually outlaw economic activity because one side of the transaction will absolutely refuse to participate. It takes two to transact.

With rent control, it is a slow-motion disaster, because the landlords cannot move the buildings. But all other government price ceilings or floors that attempt to move the market result in overnight massive shortages and/or disastrous drops in, and rationing of, product or labor quality—in the case of inflation price controls—and gluts and waste in the case of deflation price floors. Black markets where goods and services are sold illegally at market prices arise overnight. Even slow-moving rent control has been described by Swedish economist and socialist Assar Lindbeck as “the best way to destroy a city other than bombing.”

Deflation price floorsAnother word for deflation is depression. During the Great Depression, President Franklin D. Roosevelt enacted his much ballyhooed New Deal. In fact, the Democratic New Deal, which was mostly a continu-ation of Republican President Hoover’s policies, was not much more than a variety of price-floor laws:

• crop price supports• pro-union laws• protectionism• government-authorized cartels of manufactur-ers and service providers to set minimum prices(National Recovery Act—later declared unconsti-tutional)

• government make-work projects where workerswere paid more than market wages, e.g., CivilianConservation Corps

• the minimum-wage law

Cato Institute economist William Niskanen said,

Trade barriers that keep out foreign goods are

the policies that nations impose on themselves during peacetime that our enemies impose on us during times of war.

Can’t-pick-your-chicken ruleOne of the rules of the New Deal’s NRA Code was that consumers could not pick which chicken they wanted at the grocery store. They had to take the next one that came up. Why? I guess to avoid the waste of throwing away ugly chickens.

Merchants quietly refused to follow the rule be-cause their customers would not tolerate it. One, a New Yorker named Schechter, was prosecuted and went all the way to the Supreme Court where he won.

When I say government and institutional reaction to hyperinflation and deflation are often comical, this is the sort of thing I mean.

The New Deal also required farmers to get licenses to farm and fined them $1,000 a day ($17,700 in 2012 dollars) for not doing so. Most farmers then were subsistence farmers, like my grandfather. That means they did not sell crops or livestock. Rather, they ate them. Government could not tax such “in-come,” so they taxed the farmers for existing.

During the Great Depression, FDR raised the number of IRS agents from 11,000 to 16,000. The Obama administration announced it was adding 15,000 IRS agents. Expect far more of that if we get into a depression or hyperinflation.

Demanded inflationIn the middle of the Great Depression, a number of groups—most notably cotton and other farmers—demanded that the government deliberately cause inflation. One request they made was to raise the price of gold to $30 per ounce. The farmers said that would restore pre-depression farm product prices. It did not. Not even a $33 per ounce gold price did. The government tried to create more inflation and indeed there was some considerable inflation during the mid 1930s.

In times of inflation, the government passes wage and price controls. That h appened d uring World Wars I and II and in the 1970s.

Star baseball pitcher Vida Blue had the extreme bad luck to have his best years during the federal wage and price controls of the Nixon Administra-tion. As a result, he was unable to get paid the high amounts his stellar performance would otherwise have earned him.

In New York City, the World War II federal rent controls ended with the war, but the voters there



replaced them with municipal rent control, which is still in effect over 65 years later.

If you control the price of milk below the market in a given jurisdiction, all milk will disappear from that jurisdiction within hours. The same is true of oil, shoe-shine services, car repairs, you name it.

As I said, wage and price controls are often used as an anti-inflation policy. They are sometimes eu-phemistically called an “incomes policy.” They are typically popular with the public initially, because the public consists of hundreds of millions of eco-nomic ignoramuses.

Controls are always disastrous and have to be ended rather quickly. Initially, they seem to work, but very soon, exceptions have to be made for products containing imported components and for goods and services that are subject to seasonal forces. Then you get exceptions for political favoritism, and so on.

Nixon controlsIn 1971, Nixon adopted wage and price controls to help him get re-elected in 1972. Apparently, those controls were a factor in his getting re-elected. That was the Watergate election.

But as always, controls soon collapsed. One event that led to ending the controls was a U.S. chicken hatchery drowning 43,000 baby chicks because with price controls it was “cheaper to drown them than to raise them.”

Rent controls in U.S. cities other than New York today are the direct result of and left over from the Nixon 1971 nationwide wage and price controls.

In addition to formal price controls, presidents have been big on voluntary price controls, moral suasion, cajoling, jawboning, pressuring, and shaming businesses into lowering prices.

President Kennedy did it famously and success-fully to U.S. Steel.

Fed Chairman Paul Volcker also tried to jawbone Wall Street with regard to interest rates during the Reagan administration.

Also, in 1962 during the Kennedy administra-tion, the president’s Council of Economic Advisers published wage-price “guideposts.”

Generally, none of this works, or it does not work for long. It is immoral and outrageous for the government to even try it. The problem is not private prices; it’s people losing faith in government monetary policy.

Lyndon JohnsonKennedy’s successor, Lyndon Johnson, did the same only more strenuously. Johnson also took market manipulating steps like ordering strategic reserves of aluminum to be sold to drive down aluminum prices.

That succeeded, although it also eliminated the na-tion’s strategic reserves of that metal, strategic reserves that were set up to make sure defense industries had the metal in an emergency, not to help the current president get re-elected.

Lyndon Johnson pulled every trick in the book to force prices down including accusing executives of being unpatriotic, libeling eggs (literally), sell-ing strategic stockpiles, limiting exports, ending tariffs, you name it.

It didn’t work, of course. Presidents think they are powerful. The market is so much more powerful than a president that he is essentially irrelevant when it comes to prices.

President Carter, trying desperately to make it look like he was in control during his re-election campaign, denounced excess consumer borrowing and begged the Fed to enact some credit controls—which they did on credit cards.

The combination threw the economy into a tail-spin. Visa lost 500,000 accounts in several months.

Gas rationingPresident Carter also imposed price controls on pe-troleum products which forced him to ration gasoline because it was too cheap. Again, I don’t know where the authority to control prices is in the Constitution.

He said inflation wasn’t his fault, but a moral affliction of the American people. He said we had inflation because we had lost our capacity to “sacrifice for the common good” and that it was “a myth that government can stop inflation.”

In fact, inflation stems entirely from government legal tender laws and fiat money.

During the Great Depression, President Franklin Roosevelt raised class warfare rhetoric to a high art. The New Deal did not work. When Roosevelt real-ized that, he switched tactics to blaming business people and “the rich.”

Barack Obama has followed that example but he did not wait until his policies did not work. Rather, in permanent campaign mode, he blamed his predecessor, greed, lack of regulation of greedy businesspeople, evil insurance companies, ATMs, voice mail, and so on for the nation’s economic woes.

Class warfare, of course, does not fix the underly-ing lack of adequate tax revenues and/or excessive




spending. Indeed, scapegoating makes things worse.The Great D epression e nded a rguably b ecause

FDR stopped the anti-business rhetoric and laws when he realized he needed business to win the war and when the Fed loosened the money supply for the same reason.

Prosecute businessmenIn financial crises, governments typically prosecute businesspeople whom the mob wants prosecuted or whom the top politicians want prosecuted, regard-less of guilt.

For example, FDR demanded that former Sec-retary of the Treasury (under Republican Hoover) Andrew Mellon be prosecuted. Mellon was famously rich and from a famously rich family. Congress tried to impeach him out of his Treasury Secretary job. He resigned and became U.S. Ambassador to England before the impeachment trial. He was later prosecuted for tax evasion. He was found not guilty by a jury.

There seems to be no evidence that Mellon was anything but a model citizen and Treasury Secretary. Legal action against him was pure party-in-power demagoguery.

In The Forgotten Man, author Amity Schlaes con-cluded, “The worst factor [in worsening the Depres-sion] was Roosevelt’s war on business. FDR would probably respond, “I got reelected three times—more than any president in history.” Politicians do not care what happens to the people or to the country, only to themselves.

When the government put itself in direct competi-tion with private industry, as in the TVA competing on generating and selling electricity in the Southeast, it used its power to harm the private businesses in question, and did harm them to the point of driving many out of business. Some jobs program.

In deflation, attack lendersDuring deflation—like the Great Depression and the subprime crisis of the 2000s, politicians and govern-ment officials prosecute high profile lenders in part to distract attention from their own responsibility for the financial crisis. When they are not prosecut-ing them in court, the politicians denounce them at every opportunity.

In 2009, the anti-Wall Street rhetoric reached a point where I feared for the lives of Wall Street workers. ACORN (Association of Community Organizations for Reform Now ) bused protestors to the homes of bank executives. Extra building and

body guards had to be hired.In 2011, some Occupy Wall Street protestors car-

ried “Eat the Rich” signs.Consumer Reports found that during World War II

price controls, 19 of 20 household-name candy bars were reduced in size by about 23%. Rent-controlled landlords were less responsive to maintenance re-quests of rent-controlled tenants. Rent controls also invariably triggered the paying of “key money”—bribes by would-be tenants to apartment managers to get a rent-controlled apartment.

In contrast, during inflation, the politicians blame retailers including supermarket executives, oil com-pany executives, car company executives, and so on. They criminalize charging market prices.

Argentina 2001The Argentine peso collapsed in value in 2001. The government reacted by ending the connection be-tween the peso and the U.S. dollar.

A leftist Argentine government enacted the Na-tional Reorganization Process in the late 1970s and early 1980s. The government borrowed, then wasted, huge amounts of money.

In the ensuing decades, inflation rose to 5,000% a year.

That caused the following:

• double-digit unemployment• creation of a new currency (the Austral)• real (after inflation) wages fell by 50%• nationalization of private companies• made the Austral convertible to U.S. dollars at afixed rate of 10,000 to 1

• value of Argentine currency relative to other cur-rencies fell

• kept in reserve U.S. dollars equal to value of allAustrals in circulation

• saw soaring imports and resulting drain of moneyto other countries due to relatively high value ofAustral

• failure of many Argentine companies that couldnot compete with cheap imports

• dramatic increase in tax evasion• provinces began issuing their own currencies• runs on banks and transfer of money abroad or tobuy hard assets

• government freezing of all bank accounts sodepositors could not withdraw and send moneyoverseas

• street demonstrations• riots



• rapid failures of one government after another• default on $93 billion of federal debt• government decreed that all U.S. dollar-denomi-nated bank accounts owned by Argentines wouldbe forcibly-converted to Argentine currency at abelow-market exchange rate

• many rumors that the government would forc-ibly convert all non-Argentine currencies to thehyperinflated Argentine currency at below-marketrates

• barter networks were overwhelmed and collapsed• tens of thousands of people eked out a living ascollectors of recyclable items like cardboard

• other countries began banning Argentine-grownfood or manufactured drugs because of lack ofconfidence in sanitary conditions

• in 2002, 57% of Argentines were below the pov-erty line

• Argentina’s national statistics agency producedunbelievable figures and the public lost confi-dence in them

In Germany during hyperinflation, property crime—theft—went up, but violent crime against people went down—probably because people could not afford to get drunk as often.

Deposit insuranceThere is not enough money in the FDIC or the Federal Reserve to allow everyone in America to simultaneously withdraw their money from their banks and bond funds. Deposit insurance depends on that not happening.

As long as only some depositors run on the bank, the FDIC can handle it. The correct solution, which was in place in banking to an extent when I was young, is to match maturities.

That is, offer various durations of deposits, like different bond terms with different interest rates for each term, and prohibit or penalize depositors from withdrawing money early. Remember the old tag line in bank ads: “Penalty for early withdrawal?”

Failure to match maturities means the various fi-nancial institutions are “borrowing short and lending long.” (Using demand deposits to make loans.) That is a classic road to loss of liquidity and bankruptcy.

RentenmarkHow, you may wonder, did Germany end their epic hyperinflation in 1923? By adoption of the Rent-enmark.

The Rentenmark was accepted by all government

offices as payments for taxes and other government fees.

No one else had to accept the Rentenmark, or ac-cept it at face value; in other words, it was not legal tender. The total amount of Rentenmarks printed was kept down to match the anticipated tax revenue backing it.

The public accepted shares of it and believed in it. End of hyperinflation.

Some subsequent legislation restored some value of German securities to those who appeared to have lost everything.

One thing you need to keep in mind about infla-tion and deflation: they are temporary. The public demands solutions and the politicians will do what’s necessary to keep their jobs, or they will be replaced by those who will. The problem normally is the public can’t be bothered. Only when there is a real crisis will they demand real solutions.

Bouts of inflation a nd d eflation ma y la st fo r a decade or more. The most famous hyperinflation—in Weimar Republic Germany—lasted about 1.3 years.

Duration of bouts of inflationInflation above 5% ends within one to three years about half the time. Here are some historical bouts of inflation in various countries and their durations:

• Angola 1991-1995 6 years• Argentina 1975-1991 17 years• Austria 1921-1922 2 years• Belarus 1994-2002 9 years• Bolivia 1984-1986 3 years• Bosnia-Herzegovina 1993 1 year• Brazil 1986-1994 9 years• Bulgaria 1996 1 year• Chile 1971-1973 3 years• China 1948-1949 2 years• Danzig 1923 1 year• Georgia 1994 1 year• Germany 1922-1923 1.3 years• Greece 1944 1 year• Hungary 1945-1946 2 years• Israel 1971-1986 16 years• Japan 1943-1951 9 years• Krajina 1993 1 year• Madagascar 2004-2005 2 years• Mozambique 1977-1992 16 years• Nicaragua 1987-1990 4 years• Peru 1988-1990 3 years• Philippines 1942-1945 4 years• Poland 1989-1991 3 years




• Romania 2000-2004 5 years• Russia 1921-1922 2 years• Turkey 1990-2005 16 years• Ukraine 1993-1995 3 years• United States 1861-1865 5 years

1916-1920 5 years1969-1982 14 years

• Yugoslavia 1989-1994 6 years• Zaire 1989-1996 8 years• Zimbabwe 2001-2009 9 years

Competitive marketsCompetition, for want of a better term, is good. Competitors compete by offering a better value. It prevents inflation and often causes actual reductions in prices as in computers and telecommunications in recent decades.

Competition among lenders to make loans has an inflationary effect on the value of capital assets because lower interest rates and lower credit standards cause asset bubbles.

Competition also produces innovations in mar-keting, manufacturing processes, prevents monopoly pricing of commodities, manufactured goods, ser-vices, and labor.

The things that lessen competition, like pro-tectionism, unions, cartels, price-fixing, industry-written laws and regulations that hurt competition, cause higher prices than competition would allow and they cause inflation.

For example, during the Depression, big airlines were put in charge of writing rules. They dramatically increased the number of years of experience required to be an airline pilot knowing their smaller competi-tors could not afford such pilots.

Government mandates and subsidies like CAFE (Corporate Average Fuel Economy) standards and ethanol subsidies also raise prices. Obama says his CAFE standards, which say the average new car sold has to get 35.5 miles per gallon starting in 2016 will add $1,300 to the price of the average car. That’s inflationary. It is also probably a barefaced lie that greatly underestimates the true cost.

A non-partisan group said it would add $2,200. Ethanol subsidies drive up the price of corn to the

point where there have been riots in countries where corn is a staple of their diet.

So the same government that is supposedly pro-tecting us from inflation through monetary and fiscal policy is simultaneously driving up prices through legislating anti-competitive laws and price-increasing mandates and subsidies.

It has been standard practice for the U.S. govern-ment to “suspend specie payments” during financial crises.

Suspending specie payments means suspending gold clauses and invoking the legal tender laws. In other words, any debtor can pay off his or her debts using fiat paper money, even if they promised to pay in gold or silver or other hard assets. The first time this was done was during the War of 1812.

It was always called a suspension for some emer-gency, but the suspensions typically lasted far longer than the emergencies in question.

Anti-hoarding campaignIn 1932, the Hoover Administration began an anti-hoarding campaign that urged Americans who had cash at home or in safe deposit boxes to buy U.S. government bonds. Ha! In hyperinflated 1920s Austria, government inspectors went door-to-door checking for any food, fuel, or other supplies exceed-ing the amount permitted by rationing laws. During World War II in America, having more than a small amount of any rationed consumable was illegal so Americans had to hide their stores from anyone who might rat them out.

‘Holidays’Another federal and state government stunt has been to declare bank holidays and/or general holidays. Bank holidays order banks to renege on their promise to give depositors promised access to their money on normal business days. Unlike normal holidays, bank “holidays” last many days or months or years.

Bank “holidays” are used to stop runs on banks by simply making bank deposit withdrawals illegal for the duration of the “holiday.”

General weekday holidays do the same for all businesses.

These are explicit defaults by private companies ordered by the government. They are supposed to be temporary, but in many cases they last longer than the government-ordered time period and as any bill collector can tell you, the more a payment is delayed the less likely it is ever to be paid.

Slow to return your callsCommissioned securities salespeople are almost always very fast to return your phone calls. In sales, “If you snooze, you lose.”

But not when they perceive a run on their firm—that is lots of people trying to withdraw their money from the firm—as happened on Wall Street in the



Great Depression and in the late 2000s subprime crisis. They also were slow to return the calls of the few shrewd buyers of credit default swaps during the subprime meltdown. Those firms were suppressing the news that the credit default swap buyers had been right in their belief that the subprime loans would default.

Dr. Michael Burry said in The Big Short,

This is a recurrent theme whenever the mar-ket moves our way. People get sick, people are off for unspecified reasons. Goldman Sachs [claimed they] experienced “systems failure.” Morgan Stanley had said more or less the same thing. And the salesman at Bank of America claimed they’d had a “power outage.”

Regarding Goldman Sach’s switch from being long in subprime mortgages (betting they would retain value or increase in value) to going short (betting they would decline in value), Michael Lewis said of their actions,

Goldman Sachs did not leave the house before it began to burn; it was merely the first to dash through the exit—and then it closed the door behind it.

The typical American laymen has great respect for, and trusts, these sort of Wall Street institutions. In-stitutions are scum. The word “fiduciary” with regard to large institutions belongs in the same category as Tooth Fairy and Easter Bunny.

Issuance of scripIn some cases, local, state or federal governments issue scrip in response to inflation or deflation. In war zones like Europe and the Pacific during World War II and in Vietnam when I was there, we were not allowed to have regular U.S. currency.

In those cases, it was because the local currencies did not have a market value that was what the govern-ment wanted them to be worth and U.S. currency did. The government wanted the local currencies not to have a Gresham’s Law effect (bad money drives out good, that is, bad money gets spent and good money gets hoarded) on the local currencies, so it issued scrip that was to be as much bad money as the local currencies.

Governments and others also issue scrip when the regular currency becomes near worthless.

When the public or foreign countries stop trusting currency, governments sometimes issue guarantees. For example, during World War I, the U.S. banks and citizens did not trust fiat money Liberty War Bonds because of their bitter experience with Civil War Greenbacks 50 years earlier.

So the government had to offer the Liberty Bonds as gold certificates. They give the bond buyer the right to be paid back in a certain weight of gold.

Did that work? Yes. Banks and the public bought the gold certificates, but the federal government reneged on them in 1933 when FDR took office.

On March 9, 1933, five days after FDR was inau-gurated, both houses of Congress passed a law giving FDR “war-time powers.”

In 2008, 2009, and 2010 politicians talked about granting “war-time powers” to the President.

In fact, there is no such thing as war-time powers in the U.S. Constitution. The phrase implies suspen-sion of some provisions of the Constitution.

The Constitution only discusses war with regard to who gets to declare it (Congress) and who is the commander in chief during it (president). Only one provision of the Constitution may be suspended during “rebellion or invasion” and that is the right of habeas corpus. Habeas corpus is the right to end unlawful detention in jail. Lincoln invoked that provision during a rebellion known as the Civil War.

In the unanimous decision against the federal government in the NRA Schechter chicken case, the U.S. Supreme Court said,

Extraordinary conditions may call for ex-traordinary remedies. But the argument necessarily stops short of an attempt to justify action which lies outside the sphere of consti-tutional authority. Extraordinary conditions do not create or enlarge constitutional power.

Lawyers and politicians who claim there are “war-time” powers cite convoluted arguments like the Trading With the Enemy Act of 1917 or the presi-dent’s general authority to enforce the laws.

Wikipedia says,

Starting with Franklin D. Roosevelt in 1933, presidents had claimed the power to declare emergencies without limiting their scope or duration, without citing the relevant statutes, and without reporting to Congress.

Congress attempted to end that behavior with pas-




sage of the 1977 International Emergency Economic Powers Act which lets the president

…declare the existence of an “unusual and extraordinary threat...to the national security, foreign policy, or economy of the United States” that originates “in whole or substantial part outside the United States.”

In other words, it only applies to stuff the president does to foreigners, not U.S. residents.

Executive ordersAn executive order is an internal instruction from the President to his subordinates telling them the details of how he wants laws passed by Congress to be enforced. However, executive orders have been treated as if the president were a dictator.

For example, Executive Order 6102 by Roos-evelt ordered Americans to turn their gold into the government. His executive order 9066 put 100,000 Japanese-Americans into concentration camps with-out probable cause or due process.

Here are summaries of other executive orders you can research more on the Internet:

• 11051 (1962) “times of increased internationaltensions and economic or financial crisis”

• 11921 (1976) control over, wages, salaries, creditand the flow of money in U.S. financial institu-tion in any undefined national emergency…whena state of emergency is declared by the President,Congress cannot review the action for six months

• 11490 (1969) control wages, prices, rents; pre-vent transfers of money; seize gold, silver, andstored food; withdrawal of currency and transferof deposits and share account balances; utilizationof excess and surplus real and personal prop-erty including the disposal of real and personalproperty; temporarily close securities exchanges;suspend redemption rights, freeze stock andbond prices; prevent flight of capital outside thiscountry

Other government reactionsIn 1792, the U.S. Treasury accepted customs receipts in post-dated thirty-day notes. In 1801, 1818, and 1819 the Treasury deposited money in banks that were in trouble to help them. In 1801, the federal government also suspended the rule that banks had to pay the Bank of the United States in gold or silver.

One of the Walter Bagehot rules for the lenders of

last resort is that the central bank should only make loans secured by collateral. Defining the collateral much less stringently is a way governments have re-acted to financial crises. It was done in the Subprime Crisis and resulted in the Federal Reserve being called the “Pawnbroker of Last Resort.”

There is also a feeling that initially, the central bank should let the bankrupt banks go bankrupt before acting, but not wait too long lest a panic sweep over and destroy the healthy banks as well. So how long the central banks wait to jump in to prevent panic is a variable in the way government reacts to crises.

Many governments have reacted to financial crisis by trying to push the relative value of the nation’s currency in a direction that will make the nation’s exports more competitive. That is, they try to push the relative value of their currency down. China has often be accused of this in the 21st century. Like other monetary policy tools, currency manipulation often fails or under- or overshoots.

Don’t overlook nepotism. There are and have been international banking families like the Rothschilds and the Warburgs. Nowadays, it would more likely arise among OPEC members with, for example, Saudi family members all over the world in the finance business.

Within the U.S., nepotism is now generally illegal as a criterion for making loans.

Deposit insuranceDeposit insurance is a guarantee. It was begun in the U.S. on January 1, 1934 to stop runs on banks during the Great Depression, which it did. The U.S. has not yet reneged on deposit insurance, but as I write this on February 12, 2012, the (FDIC) reserve fund is more or less empty.

Australia and New Zealand are the only 2 OECD countries that do not have federal deposit insurance. Nevertheless, I have money in both countries. They are far less likely to inflate their currency and the U.S. FDIC does not ensure purchasing power.

If there were a big enough run on U.S. banks, the FDIC would run out of money. The Treasury gives a $500 billion line of credit to the FDIC, but the U.S. Treasury has no money either. It has to borrow it from China, Japan, and U.S. citizens.

If the voluntary lenders stopped being willing to buy U.S. bonds, the government’s only alternatives would be to renege on the deposit insurance or to “print” money. “Printing” money would enable the banks to give you back your deposits, but the money



you received would have far less purchasing power than the money you deposited—absolutely no pur-chasing power at all if we have hyperinflation.

There is great incentive for countries to organize together in a sort of inflation cartel like OPEC. If one country refuses to misbehave in terms of infla-tion, all the money in the world will flow to that country’s currency.

Thus do we see recent meetings of leaders of the G-8 or G-20 nations in which Obama urges othercountries to adopt the same inflationary policies asthe U.S. In this context, “We’re all in this together,”means we rulers all have to screw our respectivecitizens the same.

Here’s a quote that proves the point, complete with political spin, from page 230 of In Fed We Trust by David Wessel:

Bernanke argued that a global crisis de-manded a global response and suggested that perhaps the Fed could cut rates together with other central banks. [Bernanke’s England counterpart Mervyn] King was sympa-thetic.

As with OPEC, if just one country produces more oil than the cartel wants, the whole cartel breaks down. Prices go to free-market levels. The purpose of infla-tion is to prevent the value of fiat currencies from going to free-market levels (in terms of, say, gold).

If the government allows any competing currency, like gold, to exist when it is inflating the official cur-rency, all wealth will flow out of government currency into the stronger currency or out of the country. That’s Gresham’s Law again. Thus the compulsion to confiscate gold and impose capital controls that pre-vent money from leaving the country and so on.

FDR and foreclosuresIn the 1930s, all home mortgages were interest-only with balloon payments due in three to five years, or they were callable at any time. That means the loans stayed outstanding until the lender said, “Pay it off now” with little warning.

When those mortgages came due during the De-pression, few banks could, or would, refinance the loans. In 1931, 1.4% of all U.S. homeowners lost their homes through foreclosure. Many were call mortgages that had to be paid off with 30 days notice.

In the second quarter of 2007, according to the Mortgage Bankers Association, 1.23% of home mortgages were in foreclosure.

President Roosevelt created the Home Owners’ Loan Corporation (HOLC). It refinanced homeown-ers in default. The HOLC loans were fully amortiz-ing over 15 years—no balloon payment. When the borrowers got into trouble even on the new loans, HOLC gave them counseling and budgeting help.

HOLC would only refinance up to 80% of current market value. Since the existing loans were typically greater than the market value of the house let alone 80% of the value, the original lenders had to forgive the amount above 80% of value if they wanted the refinance to happen.

Since the refinance, which left the original lender holding the new HOLC loan, was guaranteed by the government at 4% interest, most lenders agreed to the forgiveness of debt. They were better off forgiv-ing part and getting out up to 80% of home value.

HOLC only made loans from 1933 to 1936. It continued to service the loans it made until they were paid off. It was shut down in 1951 and actually made a small profit.

Hyperinflation is unacceptableThe only thing that stops governments from inflating their currencies is hyperinflation. Inflation—even double-digit inflation—is somewhat tolerable, but not hyperinflation. E ssentially, t he p ublic o f t he country in question mutinies and refuses to accept fiat money anymore for any purpose.

Foreign trade is akin to gold because U.S. legal tender laws do not apply to foreign countries. So when foreign trade occurs, it does so as a sort of barter with the currency of the inflating c ountry being beside the point.

The inflating government cannot allow this; otherwise every U.S. citizen would quickly become an exporter-importer in order to get good value for their goods and services. That is why capital controls and tariffs, along with suspension of gold payments, typically accompany inflation.

Self-destructively, demagogue politicians bash the nation’s best customers for our exports and best suppliers of our imports as our worst enemies, with predictable, devastating results to the economy if not to their re-election prospects.

Indirectly force you to buy below-market-interest-rate U.S. bondsOne way for the government to force Americans who do not want to buy U.S. bonds to do so is to outlaw all places Americans can put their cash other than




bank accounts that pay little or no interest—certainly below-market interest rates.

The public wants both safety and unlimited fast withdrawal and the government highly regulates such institutions. That position is ripe for abuse and results in financial repression.

For example, they could outlaw so-called NOW (negotiable order of withdrawal) accounts and mon-ey-market deposit accounts. They simultaneously is-sue bank regulations that say the banks can only hold U.S. Treasury securities. They would claim deposit safety is the reason. Bull! Indirectly, they are thereby forcing you and other citizens to put all your cash into U.S. government bonds that pay below-market interest. The first sentence in the Wikipedia article on financial repression is,

Financial repression is a term used to describe several measures that governments employ to channel funds to themselves, that, in a deregulated market, would go elsewhere.

Would the U.S. government ever do something that rotten and sneaky?

Do you remember Regulation Q? It was part of the Glass-Steagall Act of 1933. It prohibited banks from paying any interest at all on demand deposits (checking accounts) and limited the amounts of interest that could be paid on savings accounts.

It also said that savings and loans could pay 1/4% more than regular banks on savings accounts because savings and loans made mortgage loans which were thought to be worthy of encouragement.

When I was an Army officer from 1964 to 1972, military and federal government employees and employees of government contractors were pressured heavily to buy U.S. savings bonds.

At that time, they paid a below-market interest rate. No one bought them but out-of-it little old la-dies, parents giving them to their kids to teach saving, and the aforementioned bullied federal employees and contractors.

I refused to buy them or to allow my troops to be pressured into buying them. I told my superiors that they were acting like organized-crime thugs who collect protection money from small shop owners in New York City.

China todayIndia financially repressed its people in the early 1970s by putting low ceilings on interest rates—5%—and simultaneously inflating their currency—20%. In

other words, they stole or hidden-taxed the differ-ence between the market interest rates the savers would have gotten because of high inflation and the interest-rate ceilings.

China forces its citizens to keep their money in below-market interest rate accounts.

Other ways to financially repress the citizens in-clude directed credit (ordering deposit institutions to make below-market interest rate loans the govern-ment wants made) and requiring that pension funds be held partially or completely in the form of federal government debt.

The 2008 financial crisis in the U.S. had fairly widespread use of a government response that had previously only been used sparingly: bailouts. To one extent or another every big organization that got in trouble other than Lehman Brothers was bailed out by the federal government: Bear Stearns, FNMA, FHLMC, AIG, GM, Chrysler, etc.

A handful of small hedge funds were smart enough to bet against subprime loans. They made billions. But at a point, they were sweating bullets that Obama would bailout large numbers of individual subprime mortgage borrowers.

Who gets bailout money is usually public.If some of the banks or other financial companies

in a category, like the biggest financial institutions in the nation, do not take the money, depositors will move their money to those apparently healthier institutions. So the government forced all institutions in the category to take the bailout money to hide which were unhealthy.

But then they try to regulate the behavior of the institutions that did not need the bailout money just because they took it “at gun point.” The institutions need to wise up and stop taking the money if they do not need it.

Default not enoughThe U.S. is so deep in debt that defaulting on all types of bond holders, both foreign and domestic, would still not be enough to avoid large spending cuts.

It took Russia 69 years to get their credit fixed after they stiffed foreign lenders. Then they stiffed them again in 1998. Greece and Honduras were blackballed for 53 years each after they stiffed foreign lenders. And Greece recently stiffed them again.

Many things change over time, but not human nature, or, in this case, politician nature. That’s why you see approximately the same pattern repeated throughout history. Politicians want to spend money for various reasons. They always spend too much and



when they do they always try to pay their bills by “printing” money and causing inflation.

During the Great Depression, the Federal Reserve bought U.S. bonds in an attempt to increase the money supply and make credit easier to get. But the banks were afraid to make loans. Direct government loans, like the Depression-era Home Owners’ Loan Corporation, did seem to work much better than giving banks more money to lend.

Generally, government reaction to deflation and inflation is extremely destructive and makes the situation far worse. This is caused by incompetence and/or deliberate misbehavior that the politician in question thinks the voters will not recognize as such.

The problem in democracies is the voters are too ignorant of finance and economics so they support destructive, demagogic policies that intuitively sound good to the ignorant but which are well known to be wrong, like tariffs and price controls.

Bank/bank regulator reactionBank regulators often react to financial crises by looking the other way, “forbearance,” and easing up on the rules or allowing accounting that overstates the value of assets. Why? Sometimes there are too many bad banks to close all at once. The bad banks are too numerous to fail.

Many have said that Japan’s “Lost Decade” was due to just this behavior by Japanese regulators. They let the banks overstate the value of their bad loans so they would not fall below capital requirements. They had, in fact, fallen below them, but the Japa-nese regulators let the banks lie about falling below because they did not want to admit they had allowed so much overly risky behavior by the banks.

Japan seems not to have gotten away with this, but U.S. and other regulators have on occasion. It is not a wise practice. There should be a rule that can be invoked rather than deliberate lying by government and bank officials to handle the problems.

In 1873, banks stopped publishing financial state-ments to prevent panics. Well, that’s very reassuring.

In 1932, Dollar Bank in Youngstown, Ohio al-lowed checking accounts to be withdrawn in full, but you could only withdraw 10% of your savings account. Youngstown’s City Trust & Savings Bank initially let depositors withdraw 10% “when avail-able.” Then they changed the policy to only allowing $50 withdrawals.

Continental-Illinois Bank banned all withdrawals.Where does the bank gets the legal authority to

deny a depositor withdrawal of his savings account.

In 1933, the State of Maryland declared a bank “holiday” due to “excessive withdrawals.” That year the governor of Indiana gave its state Banking De-partment the power to limit withdrawals. I would like to know how that was constitutional.

Roth said many suits were filed testing the consti-tutionality of the restrictions. Roth, a lawyer himself, predicted they would be allowed on grounds of “pub-lic policy.” FDR claimed the authority came from the Trading With the Enemy Act of 1917. Say what!?

On February 27, 1933, without warning, 69 Ohio banks restricted withdrawals to 5% of deposits. Then the Ohio governor signed a law giving the state bank-ing department the same power as Indiana’s.

When Dollar Bank and City Bank of Youngstown, Ohio reopened their doors, they promised that new deposits could be withdrawn on demand even if old deposits from the same depositor could not. This reminds me of rent control laws which often have exceptions for new construction.

Then, after a few builders put up new apartment buildings, the city reneges and announces that they, too, will be rent controlled. To their credit, the people of Youngstown did not believe that new deposits would stay freely withdrawable.

Slowdown tacticsSince the 1700s, banks have reacted to runs by taking various dishonest steps to slow withdrawals. They count the money very slowly. They have accomplices get in the lines to make them longer. They pay in the smallest denomination coin or bill to make the counting take longer. The cohorts go around the back of the bank and give the money back then get in line and do it again. That was actually done by the Bank of England in September, 1720 during the South Sea Company scandal.

In his Depression Diary, Benjamin Roth said de-positors wishing to withdraw their money were often sent to an executive who demanded to know why. If the depositor did not have an answer the executive liked, he accused the depositor of “hoarding” which the Hoover and Roosevelt Administrations had de-nounced as unpatriotic behavior.

The answer to the question “Why are you with-drawing your money?” is “None of your business.”

Wished they had not listenedAlmost all who were talked out of withdrawing their deposits by the executives during the Depression, later regretted it because they lost their money. Do not trust a bank employee who is trying to stop a run.




They will tell you anything. They are like a drowning man and you are the straw they grasp at.

Benjamin Roth says many friendships and busi-ness relationships were destroyed either by a depositor who insisted on withdrawal of bank deposits or by failure to do so and subsequent loss of the money.

Predictably, because of the difficulty in getting money out of the banks, people who got new money stopped putting it into the banks.

Youngstown, Ohio banks offered to exchange bank stock for 25% of the deposits in frozen bank accounts if the depositors would also allow the banks to turn the deposits into time deposits that could not be withdrawn for one to three years. I surmise the depositors of Youngstown said thanks, but no thanks.

In 1933, Ohio and 30 states passed laws restrict-ing withdrawals from and loans against cash value life insurance policies. Typically, they ordered a $100 limit on such withdrawals.

Sometimes banks react to financial problems by creating “off-the-books” liabilities. In the subprime crisis, they created Structured Investment Vehicles (SIVs) which were allowed to be off the books if at least 3% of the SIV was owned by an unrelated party.

Before it went bankrupt, Enron had lots of SIVs which it owned 97% of. The other 3% was owned by Enron employees, Enron bankers, and so on.

SIVs allowed the banks that used them to hide liabilities and risk from regulators, depositors, and securities analysts and buyers. In a larger sense, they allowed the subprime crisis to occur.

Closing exchangesAnother oft-seen reaction to financial crises is stock and commodity exchanges closing. I do not know whether the exchange instigated the closing or the government ordered them to, but large quantities of sell orders have often resulted in shut downs.

In his Depression Diary, Benjamin Roth noted in his September 28, 1931, entry that both the German and British stock exchanges were closed.

The most recent example was the New York Stock Exchange closing for a week after September 11, 2001. Part of the reason for that was logical. NYSE communications facilities in the World Trade Center were literally destroyed by the terror attacks.

Sometimes governments order moratoria on mak-ing certain kinds of loans or on making payments on certain kinds of loans or moratoria on foreclosures etc. This hurts borrowers or lenders, ultimately both.

In 2008 and subsequent financial crises in the U.S. and Europe, government and/or exchange action was

taken or threatened against short sellers and hedge funds that purchased sovereign credit default swaps (CDSs). Sovereign credit default swaps are insurance policies that pay off if national governments like Greece’s default on their federal bonds. Although the ones who decide what constitutes a default—the International Swaps and Derivatives Association—are the insurers and they have indicated they plan to decide that various types of defaults are not defaults so they don’t have to pay off on the insurance they sold. This is counterparty risk. If you trust institu-tions to place your interests above their own, you probably also believe in the Easter Bunny.

Short selling and purchase of CDSs are moral, ethical, legal activities. Indeed they are necessary for prudent activities like hedging and they make the markets more liquid and provide important, relevant information to investors and businesses making other sorts of purchases and sales.

Public and politicians are longThe public relations problem is short sellers and CDS buyers profit from things going down in value. The majority of people in the market have the opposite, long positions, which profit from assets going up in value. Also, politicians generally are long in the sense that asset values going up make voters happy; asset values going down, unhappy.

So the governments and/or the exchanges outlaw or restrict short selling and purchase of CDSs. In April 1932, during the Hoover Administration, the Congress started investigating short sellers. In the fall of 2008, the Securities and Exchange Commis-sion banned short sales temporarily. So did foreign counterparts of the SEC.

There is some logic to regulating uncovered or naked short selling. Those are transactions where the short seller is speculating. But covered short selling means the seller is hedging by simultaneously tak-ing a long and a short position. That has the effect of locking in the current price and is responsible, necessary behavior. The SEC banned both kinds of short selling to pander to the mob of politicians and public looking for someone to blame.

PIIGS financial difficultiIn February 2010, the European governments agitat-ed so much about Wall Street types that many hedge funds got rid of their European sovereign CDSs. Generally they were betting that the so-called PIIGS (Portugal, Italy, Ireland, Greece, and Spain) would default on their national bonds—or that fears of such



defaults would increase the values of their CDSs.They were afraid that they would suffer loss of

goodwill from public attacks on them and/or that the governments would outlaw the transactions or restrict them such that good investments would have their profits outlawed and/or confiscated for political reasons by changing pertinent laws or rules.

Relying on a sound use of short selling or sover-eign CDSs may be hazardous to your wealth if they outlaw all or part of your transaction.

Some exchanges now have “circuit breaker” rules and daily limits on how much prices can change in one day that automatically stop some trading to force the market to “catch its breath” and have some more time to think and come to their senses.

The problem is sometimes, maybe most of the time, refusing to let people trade increases panic. Nowadays, there are lots of stock exchanges around the world and electronic trades so one exchange shutting down may not be enough to stop trading. It may only be enough to heighten people’s alarm.

Hanging by a thread of trustWhen authorities behave as though they think the public can’t handle the truth, the public starts think-ing the authorities are not telling the truth. That’s when trust breaks down, and trust is the only thing between the world and financial collapse.

Exchanges have specialists who make a market in a particular company or other security. Those spe-cialists, at times, simply stop trading the security in which they have an exclusive role until the balance between the buy and sell orders gets closer.

All of this adversely affects your liquidity because you have to rely on the exchange to sell.

Banks sometimes form local groups of banks to help fellow banks that are having trouble partly out of fear that the panic will spread to their banks if not stopped. These groups issue guarantees, make loans to the weaker members, arrange mergers, and so on.

The financial world is full of stories of banks that were saved by a temporary loan or delivery of cash or bank holiday. But it does not always work. And the histories do not tell how many depositors who needed cash to pay bills were ruined by their sudden unexpected inability to withdraw money.

Paying dividends out of capital is another way banks and other institutions sometimes try to hide what they hope are just temporary downturns in cash flow. Dividends are supposed to be all or part of the earnings for the period in question. Paying out more in dividends than the earnings for the period conceals

the lack of earnings. It’s an improper practice per se. It is Ponzi-esque.

Working without payPeople today tend to think government jobs are golden during financial crises. That was not the case during the Great Depression. Diarist Benjamin Roth said public school teachers worked without pay in his Youngstown and in Chicago.

When I was growing up in the 1950s and early 1960s, our parents’ generation was constantly rec-ommending that we get a teaching credential so we would have “something to fall back on.” So I was surprised to learn that teachers went unpaid, got laid off, and so on during the Depression. Heck, the high school down the street from where I live laid off about 30 recently-hired teachers in 2009.

Local and state governments need to balance budgets so they have to layoff, cut pay, work shorter hours, and so on. They cannot just run deficits like the federal government.

Other government employees were laid off perma-nently or temporarily or had their hours shortened or had to take unpaid furloughs. That happened in California in 2009, too.

A stitch in time saves nine. But politicians long ago learned that no one ever got re-elected by doing the legislative equivalent of the stitch that saves nine.

So politicians always wait until after the Nazi in-vasion of Poland or Pearl Harbor or 9/11 or the Crash of 1929 to act. Only when the public demands it will politicians take action to correct fiscal irresponsibility.

If you are waiting for Congress and the White House to come to their senses and head off the bank-ruptcy of the federal government, forget about it. The bankruptcy will take place and probably some new third political party will emerge to try to clean it up. The Greeks were in the process of rejecting their two long-term majority parties in March 2012.

Grading selves on the curveInitially, in financial crises, the public waits for the economy to return to “normal.” When the crisis lasts more than a couple of years, as the Great Depression did, people abandon hope of returning to the prior prosperity and begin to grade themselves on a curve.

That is, they are happy for any progress, no matter how pathetic. It is typical of government to point to any sign of progress as evidence of their effectiveness regardless of a big picture that shows the actions being undertaken are not working.

A classic example: the “Five-O’Clock Follies” daily




briefings in Saigon during the Vietnam War.We lost the war, but if you had attended and

believed the briefings, you would have thought ev-erything was going quite well.

Politicians and bureaucrats believe their good intentions and even the slightest sign of progress are a 100% substitute for actual results. This manifests itself in all government activities including their responses to financial crises.

Once a crisis lasts for a long time, the public for-gets that greater prosperity truly is normal and, be-cause of ignorance of economics, does not recognize that the prosperous normal is only absent because of increased government interference in the economy.

‘Big success’ white collarWhatever the reason, the public lowers their standards, goals and aspirations. When I gave my mother’s eulogy at her funeral, I said that she was a “big success” in the sense of accomplishing her goals. Her goals seem modest to modern Americans.

She wanted to graduate from high school with the typing and stenography skills that would enable her to get white collar work as a secretary or retail clerk, get married, become a housewife, have children, live in Collingswood (a more prosperous town near the City of Camden, New Jersey where she grew up).

I explained the modest nature of her aspirations by pointing out that she was 10 when the stock market crashed in 1929 and 13 at the bottom of the Depres-sion. Looking at the world from that base point, her aspirations were to her starting point what Oz was to Dorothy’s Kansas farm in the Wizard of Oz.

She achieved all her goals. So, she was a success.

Reaction to the reactionAlthough this chapter is about government and institutional reaction to financial crisis, I must also mention political opposition reaction to the govern-ment and institutional reaction. Generally, Republi-cans were outraged at Democrat behavior when the Democrats took power in 1931 in Congress and in 1933 in the White House.

Unfortunately for them, they turned bitter, shrill and ugly angry, thereby managing to make the ultra left Democrats look reasonable.

In Germany around that same time, the opposi-tion to Hitler scoffed at the notion that a political party who recruited all the local thugs and petty criminals could ever be a threat to the great culture of Germany. They did little to oppose the Nazis be-cause they did not take them seriously. Many Jews

refused to flee from Germany because they felt it was ridiculous to concern themselves with a bunch of hoodlums who had momentarily managed to win one election.

Doing this stuff since 235 A.D.The June 8, 2012 Mises Daily article was about Ro-man Emperor Diocletian and his predecessors. Here are the things the Roman government did then:

• uncontrolled spending…resulted in hyperinfla-tion

• economy awash in valueless coins• barter became the basis for transactions, furtherincreasing hardship

• Many Roman citizens fled the cities to [farm] inthe countryside…to eke out a subsistence-levelexistence

• cradle-to-grave care for the citizenry• gave welfare recipients [free] government bakedbread, salt, pork, and olive oil

• …the ranks of the unproductive grew fatter, andthe ranks of the productive grew thinner.

• …gold had disappeared from circulation duringthe…hyperinflation

• Soldiers were…paid in goods…• a wave of vast public-works projects• [emperor] created so many boards, commissions,and bureaus that every Roman with any preten-sions to political pull had a government job,while his less fortunate fellow-citizens were beingtaxed to death for the support of a benevolentbureaucracy

• …attempt to control prices… Diocletian’s “Edicton Maximum Prices” published in 301 AD

• …appealing to [poor people] envy “greed” [thewealthy] “wallow in the greatest riches”… [threat-en speculators] who hold back necessary kinds offood…when he has them.

• confiscating food from civilians• goods began to disappear from Roman markets• …nothing was offered for sale and the scarcitygrew much worse until, after the death of manypersons, the [Edict on Maximum Prices] wasrepealed.

• “resulted in complete regimentation under atotalitarian state”

That is how government reacted to hyperinflation 1,777 years ago. And as the time line above shows, governments did pretty much the same through history since. So don’t expect much different today.



27 Action Plan to Protectfrom Hyperinflation and Deflation

It could happen tomorrow so you’d better act todayFinancial crises like deflation or hyperinflation ex-plode when a tipping point is reached or a shock occurs. And once that happens, the escape exits rapidly slam shut. In some cases, the government slams them shut with financial r epression, capital controls, confiscation, and so on.

In other cases, they shut because too many people try to go through them at the same time. For ex-ample, is I write this on January 25, 2010, you can sell stocks for a fairly normal price. But if a Black “Monday” or Black “Thursday” or whatever occurs, millions try to sell the same stocks at once and the price plummets. You may get out, but with only a fraction of your pre-tipping-point equity.

So do not wait until it is too late. Once you decide you want to take the steps in this book, take them immediately. In the vicinity of a tipping point, he who hesitates is lost.

1. Create completefinancial stetementsFirst, figure out where you are now financially. To do that, draw up two complete financial statements:

• balance sheet (your assets and liabilities)• income statement (e.g., salary, business net in-come, interest, dividend, alimony)

These need to be complete. That is, you need to do a thorough inventory of your home and safe deposit box. If you have assets elsewhere, make sure you do not overlook those. Where might you have other assets?

• friend’s or relative’s house

• self-storage facility• second home• inside rental properties you own• on a boat that you own• at your place of business• in your car or truck• inventory and other assets of your business• in your RV

By the way, this inventory is also useful in the event of an insurance claim. Take photographs as you go to document the hard assets on the list. Indeed, as soon as you make it, you should show it to your insurance agent to make sure you are properly insured.

Loan informationWith regard to your loans, get the following infor-mation:

• balance• monthly payment• balloon payment date and amount if any• interest rate• annual loan constant• whether recourse or nonrecourse• whether lender has extraordinary legal powers• whether loan is dischargeable in bankruptcy• whether the loan is secured by equity that wouldotherwise be protected by your state homesteadexemption

2. Do a pre-bankruptcyplanning session witha bankruptcy lawyerin your stateAt this session, you will show the lawyer your finan-cial statements, including your inventory. He or she




will then advise you generally along these lines:

a. identify nondischargeable debts that youshould pay off now if possible

b. make sure you are taking full advantage ofall your state’s bankruptcy exemptions

c. withdraw any cash from banks to whom youalso owe money

d. consider moving to a better state if yourslacks generous pension and/or homestead ex-emptions that you need

After he or she advises you, eliminate nondischarge-able debts where possible, shift assets to the bank-ruptcy exempt categories until you have reached the limit in each, and make sure you have no money in banks to whom you owe money.

3. Pay off dischargeabledebts in a smart sequence

a. recourse secured debts with balloon pay-ments coming due (paying off balloon pay-ments is a bankruptcy prevention measure)

b. self-amortizing recourse secured debts andsenior liens recorded against you

b. unsecured debts in order of highest constantfirst; when the constants are the same, theone with the highest interest rate first

c. nonrecourse debts if you have equity in theproperty beyond what is protected by a statehomestead exemption

Remember, dischargeable debts means those you can eliminate in bankruptcy. The reason to pay them off is your are not about to go bankrupt and you want to pay them off to reduce the probability that you may later be forced to go bankrupt.

No balloonsSelf-amortizing loans are those where you make the same payment every month until the loan is totally paid off. The alternative is a balloon payment loan where you make relatively small monthly payments followed by one or more relatively large one-time payments. Balloon payment loans are extremely dangerous to your liquidity, that is, your ability to pay all your bills each month on time. Margin calls are worse. They are a sort of unscheduled balloon payment.

A non-recourse debt is one where the lender can foreclose on or repossess the asset pledged as security

for the loan—typically a home or vehicle or boat—but cannot come after your other assets or income if the proceeds of the foreclosure sale are not enough to pay off the entire balance of the loan and late fees, etc.

Secured means a loan for which you have pledged an asset as security or collateral for the loan.

Senior liens are liens against property you own that take precedence by law over subsequent liens. Typically, delinquent property taxes and water bills are liens against the real estate in question and get paid off before voluntary liens like mortgages and judgments.

RecourseRecourse debts are secured by property, but the lender can not only foreclose or repossess the property in question, the lender can also seize other assets and income of yours if the foreclosure auction of the as-set does not produce enough money to pay off what you owe in full. Recourse debts become non-recourse as a practical matter if you are bankrupt. Do NOT make the mistake of using assets that are exempt in bankruptcy to pay off debts that are dischargeable in bankruptcy.

ConstantThe constant is the current annual loan payments total divided by the current loan balance. On long-term loans like 30 year mortgages, the loan constant and the interest rate are very similar.

For example, on a 30-year mortgage for $100,000 with a 5% interest rate, the monthly payments are $536.82. 12 x $536.82 = $6441.84. $6,441.84 ÷ $100,000 = 6.4%. That is the loan constant on this mortgage. The interest rate, in contrast, is just 5%. The other 1.4% is paydown of the principal or mortgage balance.

Constant goes up every monthWhen that mortgage is paid down to, say, $20,000, but the payments are still the same, it has a constant of $6,441.84 ÷ $20,000 = 32.2%. It still only has a 5% interest rate. Short-term loans like credit card and car loans have very high constants compared to mortgages. A high-constant loan diminishes your liquidity more.

Many people quickly say they cannot pay off all their debts. Well, theoretically, if your net worth exceeds your debt, you can pay off all your debts. Actually, the formula would be you can pay off all your debts if your net worth plus the amount you need in liquid form to pay all your bills on time



exceeds your debt, you can pay it off. And note that each debt you pay off reduces your need for liquidity.

Renting a place to live is an optionRemember that renting a home or apartment is an option when it comes to paying off mortgage loans. Generally, the only reason to own rather than rent is tax benefits and future appreciation. But loss of those is a mere mild regret compared to the possibility of being forced into bankruptcy by depression/deflation combined with a fixed-rate mortgage that exceeds the value of your property and/or on which you cannot afford the monthly payments.

4. Liquidate bad infl tion/deflation assetsIf you own assets that are not two-way indexed, convert them to cash to pay down debt, to provide liquidity, and to make advance purchases.

Assets that are not two-way indexed include:

• common stocks• foreign currency• foreign bonds• other foreign assets• bonds• long-term contracts in which you are the payee• cash-value life insurance• college savings accounts

Assets that are currently inside pension or other ac-counts that restrict withdrawals require a cost-benefit analysis as to whether it is worth it to incur penalties or taxes. Generally, where you cannot economically withdraw such assets, you should roll them over into FDIC-insured MMDAs.

If you are stuck in a long-term contract, try to get it two-way indexed to a real-time price index like a commodity price index.

5. Minimize or diversifycounterparty riskIf you have entrusted assets to counterparties, with-draw them and retain possession. When you must use a counterparty, as with a MMDA, diversify so you do not have all of your money in one institution.

As stated above, assets that are currently inside pension or other accounts that restrict withdrawals require a cost-benefit analysis as to whether it is worth it to incur penalties or taxes.

6. Ensure you haveadequate liquidityIf you cannot pay your bills on time, having a sub-stantial net worth will mean nothing and you will lose all or much of that net worth when creditors seize control of your assets and income because of your default.

How much liquidity do you need? Enough to pay off your known bills that are coming due in the future plus an extra amount for unforeseen future events. Roughly speaking, the amount you spent paying your debts and bills in the recent past is the amount unless there is some reason to believe it will go up or down. Reasons for it to go up or down could include a coming balloon payment, possible margin call, child starting college, increase in health-care expenses of an aging family member, and so on.

Most are illiquidMost people have too little liquidity. Most small busi-nesses that fail do so because of too little capital or operating funds. Those words mean the same as lack of liquidity. Have you ever heard of anyone failing because they had too much liquidity?

The worst that can happen to you if you have too much liquidity is you earn a percent or two lower re-turn than your irresponsible fellow businesspeople. If you see that as a greater danger than going bankrupt from lack of liquidity, you need to see a psychiatrist or a middle-school math teacher.

Cash-flow scheduleThe document you need to make sure your liquidity is adequate is a cash in- and out-flow schedule. List all the bills you will need to pay in, say, the next five years. List for each the source of the cash you will use to pay them off. Be sure to put in an extra amount for contingencies, that is, unforeseen expenses like a new air-conditioner compressor or expensive medical procedure, as well as foreseen “one-time” expendi-tures like replacing a roof or car.

Remember, no one ever went bankrupt because of too much liquidity. Zillions of solvent people and businesses have gone bankrupt because of inability to convert hard assets to cash fast enough to pay all their bills on time. Once you’ve liquidated assets,

a. Put half of your liquid assets in FDIC-insured money market deposit accounts(MMDA) and

b. the other half in relatively liquid hard as-sets and other assets of relatively small ($1 to




$20,000) denominations

The MMDA is for liquidity in the event of depres-sion/deflation; the relatively liquid hard assets, in the event of hyperinflation. An MMDA may work in both depression/deflation and hyperinflation. But I cannot say that now because such accounts never existed during past depression/deflation or hyperin-flation periods.

7. Advance purchase and salea. Immediately sell everything you own thatyou no longer need.

b. Buy everything you will ever need in thefuture without incurring any debt to do so;when possible, prefer items that can be usedeither for your own use or for barter.

8. Consider financialengineering if you havean infl tion/defl tion riskthat you have no other wayof protecting againstMainly this means loans that are dangerous in defla-tion and that you cannot pay off.

9. Keep your insurancepolicy limits up to dateMonitor all of your insurance policies to make sure your policy limits are adjusted promptly to reflect inflation and deflation.

Black Swan fundNassim Nicholas Taleb wrote the best-selling book Black Swan. It is about big unexpected events, both good and bad, that cause investors to make or lose a lot of money.

Universa Investments is a hedge fund associated with Taleb. In 2008, their funds gained 100% amid a falling stock market. Taleb does not own Universa but advises it and invests in it.

Black Swan Protection Protocol-Inflation FundA new fund, the Black Swan Protection Protocol-Inflation Fund, announced at the end of May 2009 that it will bet that stimulus actions by various governments around the world will cause hyperinfla-tion. The details of the fund are that it will invest in options on commodities like corn, oil, and copper, and stocks of commodity finders like oil drillers and gold miners. It will also bet that U.S. government

bonds will drop in value because of inflation-induced higher interest rates.

A previous Taleb fund—Empirca Capital closed in 2004 after ten years of unimpressive returns. I would not recommend a fund making such bets. But it is useful to illustrate how one might set up a sort of securities-based insurance policy. The idea would be not that commodities options will go up in value for sure. Rather, it will fit the age-old insurance admonition that it’s better to have it and not need it than need it and not have it.

Basis riskThere is a lot of basis risk in Taleb’s approach. Basis risk is the risk that the security A you are using to protect yourself from an adverse movement in an-other security B does not move in opposite lockstep with the security B. To the extent A and B move the same direction or A does not move as far as B when they move in opposite directions, the hedge will fail.

He is insuring against hyperinflation, i.e., the CPI. If you do that with CPI futures, you have no basis risk. If not, you do.

Financial risk managementFinancial risk management is not intuitive. You have to study it and artificially override your instincts. The basic problem, which I discuss at length in my chapter “Bad instincts for investing” in my book Best Practices for the Intelligent Real Estate Investor is that our evolution during caveman days only prepared us for natural risks like attacks by mammoths or enemy tribes, or falling off a cliff, or poisonous plants.

Herd instinctFor example, we have a herd instinct. That’s great for hedging against the danger of attack by another tribe of humans. But with regard to, say, hyperinflation, it would tell you to do what most other people are doing. That is a very bad idea.

Since the inflation-protection strategy of most people is to hope it will not happen, the herd instinct ill serves you with regard to the hyperinflation risk.

We must override our caveman instincts when it comes to finance.

Fiat money value risk managementThe subjects of this book are management of the risk of your losing purchasing power because of the effect of hyperinflation on your dollar-denominated assets or because of the effect of deflation on your



dollar-denominated liabilities.Ostensibly, it would appear that you must either

bet on inflation, deflation, or neither. Most people currently have their financial affairs arranged based on the assumption that the 1985-2009 ’flation situation, neither hyperinflation nor deflation, will continue.

If they are wrong, they will be very sorry. The purpose of this book is to get you out of that group.

Net borrower or net lender/saver?In this book, I am telling you how to protect yourself from both hyperinflation and deflation.

A net borrower is someone who has more dollar denominated debt than dollar-denominated assets on their balance sheet. Net lenders/savers are people who have more dollar-denominated assets than dollar-denominated debt on their balance sheet. Ostensibly, you have to pick whether to bet on hy-perinflation or deflation.

Net borrowers love inflation because it directly lowers the real value of the amount they owe. And net borrowers hate deflation because it does the op-posite, that is, it raises the real value of the amount they owe.

Types of protectionThere are four ways you can protect yourself from hyperinflation and deflation:

• two-way-indexed assets and liabilities

• stop-loss option (prevents the ’flation in questionfrom hurting you by setting current purchasingpower as strike price—put option to sell hardassets to protect from deflation and call option tobuy U.S. TIPs to protect from inflation)

• one-way inflation index

• hedge that earns compensating profit against ad-verse ’flation effect on hard assets or dollar assets

Ideally, you want assets whose dollar value goes up during inflation and hyperinflation but goes no lower than original purchase price during deflation. There are few, if any, such assets.

Not TIPs bondsTIPs bonds are that for moderate inflation before tax and deflation, but they adjust too slowly to protect

you from hyperinflation. Indeed, in the event of hy-perinflation, your TIPs bonds will likely be worthless in terms of purchasing power and preserving purchas-ing power is their reason for existence.

After tax you lose the portion of the inflation protection taken by taxes.

Two-way indexed second bestThe second best asset or liability would be one that is two-way indexed. That means you neither gain nor lose purchasing power in the event of hyperinfla-tion, inflation, or deflation. A true two-way indexed debt—where the principal amount was fully indexed to a real-time price index—similarly would keep the purchasing power of the money you had to pay each month constant. As far as I know, no such debt exists. It may be illegal and it would likely be taxed unfairly during hyperinflation—treating upward principal adjustments as capital gains.

Real-time indexed loanIf you could solve possible legal problems with regard to usury and taxation of non-gains, you and another party could agree on a two-way, real-time indexed loan. In that case, neither the borrower nor the lender should have to worry about inflation or deflation. It would be like a loan of commodity that had to be paid back in terms of that commodity although that commodity probably would not move the same as the CPI.

A put option to sell hard assets to protect from deflation is like a stop-loss order and limits but does not prevent, your losses due to deflation. A call op-tion similarly locks in a dollar price now and would make a profit if there were inflation or hyperinflation during the option period.

Just say noThe following advice is illegal, but it is what the peo-ple of Germany did in the early 1920s and what the people of California did in the middle of the 1800s:

refuse to accept fiat money as return of savings or payment of debt.

Like I said, it’s against the law—legal tender laws to be precise—but when enough people do it, the government cannot do anything about it. Remember that legal tender laws are immoral. Refusing to accept legal tender may be illegal, but it is not immoral.




Macroeconomic solutionThe macroeconomic solution is repeal of the legal tender laws, the government monopoly on creation of money, and bans on gold clauses. “Separation of money and state” is what author Thomas Greco likes to call it.

Without government fiat money, people can use whatever they want for money—as long as the seller will accept it, and vice versa. The market will then fix the inflation/deflation problem almost overnight the way the gas lines went away overnight in 1978 when the government stopped interfering with the market.

Melt downWhen the market is no longer willing to accept the current fiscal mess, the government financial system will melt down. Initially, Congress and the President will try to monetize the debt (inflation). That will probably cause hyperinflation against which the public will promptly revolt.

Then, the government will be forced to do that which it should have done long ago:

• cut spending, probably by means-testing the vari-ous entitlements

• raise tax rates if that will not reduce revenuesbecause tax rates are already as high as they cango—broadening the base will no doubt be neces-sary—that means taxing people at all incomelevels, not just “the rich”

• defaulting on part of the debt

All of that will be extremely painful to all Ameri-cans.

Greco says the rules should be

• Buyers and sellers can use any medium they agreeon to pay for a transaction including non-govern-ment currency.

• Only the issuer of a currency should be requiredby law to accept it undiscounted for payment; forexample, if there is non-mandatory governmentcurrency, only the government should be com-pelled by law to accept it as payment for federaltaxes and such.

• Government currencies, if any, should be denom-inated in objective units like so many grains ofsilver; problems with insufficient money supplywould not arise because the public would be freeto use non-government currencies, too.

Makes enough sense to me that it ought to be tried.

If the hyperinflation hits the fan, I expect ideas like this will be tried.

MovingI was surprised to find as I researched this book and thought about how to protect oneself from hyperin-flation and depression that moving to a new location kept coming up.

I suspect most of my readers are like me. They do not want to move. But the fact is moving can make all the difference for a number of reasons.

Also, some readers of this book may already be planning to move.

Either way, a decision to move should include the hyperinflation/depression considerations below.

Job opportunitiesDuring the Great Depression, many left rural areas for the big city. Some left the Dust Bowl in the South-west for greener farms in California. John Steinbeck’s novel Grapes of Wrath told a fictional version of that story. The iconic images of that exodus, trucks full of family and furniture, were certainly pictures of people moving.

Moving mindlessly can make things worse. But moving to well-researched better job opportunities can change your life for the better.

TaxationThe tax burden in each state varies considerably. The differences may be so great that it would be worth the cost and trouble for you to move. The worst ten states are, in order:

• New Jersey 11.8%• New York 11.7%• Connecticut 11.1%.• Maryland 10.8%• Hawaii 10.6%• California 10.5%• Ohio 10.4%• Vermont 10.3%• Wisconsin 10.2%• Rhode Island 10.2%

The best ten are:

• Alaskans 6.4%• Nevada 6.%.• Wyoming 7.0%• Florida 7.4%• New Hampshire 7.6%



• South Dakota 7.9%• Tennessee 8.3%• Texas 8.4%• Louisiana 8.4%• Arizona 8.5%

You have to analyze it more carefully than just look-ing at overall tax rates. That’s because there are many different types of tax. Which state is best for you depends on what sorts of income and assets you have.

Tax types include:

• sales• fuel• cigarettes• personal income tax and deductions• property• inheritance

There is a website that gives details on each state’s tax laws so you can figure out the best one for you: http://www.e50plus.com/public/262.cfm.

There is one state that is best for you with regard to bankruptcy exemptions, taxes, climate, career, and so on. Calculate how much better it would be for you then decide whether that number is worth moving to achieve.

Work harder, cut expensesIn The Great Depression: A Diary, Benjamin Roth said of the way to survive during the Depression:

There is nothing to do but work harder and cut expenses to the bone.

I chuckled when reading A. Gary Shilling’s book Deflation: How to Survive and Thrive in the Coming Wave of Deflation.

Did not come trueFirst off, he wrote it in 1998. There was no defla-tion from 1998 to 2008. There was minus 0.34% inflation or 0.34% deflation in 2009. Is that what Shilling was writing about in 1998? No. He just did not know what he was talking about. So much for financial geniuses forecasting deflation or inflation.

I also chuckled when I read his final two chapters which purport to advise businesses and individuals what steps to take to protect themselves from the coming deflation.

I kept writing “always” in the margins because the “protect yourself from deflation” advice was the same

advice you should always follow. Here are some of Shilling’s gems of deflation preparation:

For business

• cut costs and improve productivity• avoid excess capacity• sell more products or services• stick to businesses you know• emphasize service to customers

For individuals

• save more• add value for your employer• work for successful companies not unsuccessfulones

Actually, both Roth and Shilling are right, in part, that old-fashioned virtues like you would read in Poor Richard’s Almanac (Benjamin Franklin’s magazine that offered advice like “A penny saved is a penny earned”) are keys to surviving a financial crises when the overall economic pie shrinks significantly. There are few smoke-and-mirrors tricks for finessing your relationship to a nation of 300 million poorer people.

Maximize revenue and minimize expensesAs I researched this book, it became more and more apparent to me that the standard advice—often ignored during boom times—to maximize revenue and minimize expenses becomes more important during hard times.

Basically, we tend to acquire bad habits dur-ing booms. I once wrote an article titled “Positive cash flow makes you lazy.” I later wrote one titled “Negative cash flow makes you grouchy.” The latter warned you not to start lashing out at those around you during hard financial times. It is almost certainly not their fault.

Business best practicesGenerally, the business best practices to which you need to rededicate yourself, the basics you need to get back to, are:

• maximize revenue• minimize expenses• minimize capital expenditures that do not pro-duce adequate after-tax, real returns

• maximize inventory turns per year during defla-




tion• wait until the last minute to buy anything duringdeflation

• sell everything as fast as possible• maximize use of leverage whenever you can earn ahigher after-tax, real rate of return on the capitalthan you have to pay to “rent” it

To protect yourself from hyperinflation and depres-sion (deflation), you need to modify those rules somewhat, but the rules against wasting time or money always apply.

Lamentations against failure to save when times were goodAfter the savings and loan debacle-related real estate crash in Texas in the 1980s, the following bumper sticker appeared:

Lord, please give me just one more boom. I promise I won’t piss it away this time.

Writing on August 26, 1936, when the Great De-pression was about to fall into a second phase after appearing to be over, Benjamin Roth said,

I see now how very important it is…to build up a surplus in normal times. A surplus capi-tal of $2,500 [$38,585 in 2009 dollars] wisely invested during the depression might have meant financial security for the rest of his life. Without it he is at the mercy of the economic winds.

Prevent extremesWhile writing this section, I saw a TV documentary about the Colorado River. It has two big dams—Hoover and Glen Canyon. Their purpose is to make the flow of the river downstream from the dams constant and to supply a steady stream of electricity and irrigation water and to prevent floods.

Before the dams, the river was a raging flood one year and near dry the next depending on the precipi-tation that year upstream.

Failed to save during good timesWhat Roth and his contemporaries were lamenting is their failure to store some value during the good times and the preventable pain they felt, as a result, in the bad years—ten in a row during the Great Depression.

In many cases, in the Great Depression, failure to

prepare resulted in a life-changing financial disaster from which the unprepared never recovered even after the economy did.

The temptation during boom times is to:

• consume more• expand your business by buying additional assets• go deeper in debt

Those who lived through the Great Depression would yell “Stop!” if they saw you doing any of those things. Those w ho l ived t hrough Weimar h yperinflation would yell “Stop!” if they saw you saving dollars.

Roth not fully thinking through inflation dangerRoth mentioned inflation fears a lot in his book, but he never experienced hyperinflation and was unable to think through what exactly inflation meant and how to prevent falling prey to it. (He heard about hyperinflation in Germany which had occurred about ten years before the Great Depression.)

The main thing Benjamin Roth would learn from this book if he were still alive to read it is that both deflation and hyperinflation were possible. He spoke often of inflation, b ut g enerally o nly experienced deflation, and did not think through inflation protec-tion strategies. (There was some inflation during the Great Depression in 1934, 1935, and 1937.)

His phrase “wisely invested” is not thought through to both its inflation and deflation ramifica-tions. He seems to mean buying U.S. and high-grade corporate bonds which were good for deflation back then but probably not now, plus they were no good for hyperinflation.

Be careful about increasing consumption during good timesThe common mistake during good times is to as-sume they are “the new normal” and to increase consumption including by borrowing. The m ore prudent course of action is to strengthen yourself financially by following the advice elsewhere in this book. Mainly, that means owning the two-way-indexed assets you will use yourself or that are quite liquid and can be quickly sold if necessary. And it means avoiding debt.



New laws create new opportunitiesMy football-coaching book The Contrarian Edge for Football Offense says coaches get great benefits from being different from other teams’ offenses. The defenses lack experience against them if they are different.

One great set of examples of that is when the rules of football were changed. In every case, some coaches embraced the new rule and tried to take advantage of it. Most coaches were “old school” and grumped and complained about the new rule and ignored it.

The forward passThe best example of that was the liberalization of the forward pass rules in 1906. A handful of coaches—Eddie Cochems of St. Louis University, Jesse Harper (not Knute Rockne) of Notre Dame, Amos Alonzo Stagg of the University of Chicago—emphasized forward passes immediately, and they blew their opponents away for a number of years.

As a result, I put a whole chapter on being differ-ent by taking immediate advantage of rules changes in my Contrarian Edge football book.

Financial crises cause new lawsFinancial crises typically result in new laws. Most are probably bad ideas, but they almost all create new opportunities. You can work to help enforce them or fight against them.

Not all of these opportunities are in government employment. Fighting against the law is obviously not a government job. Plus, many such laws create new civil causes of action which creates new oppor-tunities on both sides of those lawsuits.

Not just lawyersThe opportunities are not just for lawyers. New laws also need investigators, and advisors on how to avoid running afoul of the new law. For example, the Americans With Disabilities Act of 1990 created jobs for builders of ramps and investigators who locate non-compliant buildings and businesses.

I am not advocating switching careers because there are opportunities. It depends on your goals and strengths and weaknesses and alternative op-portunities. It may or may not work for you. See my Succeeding book for more on matching your unique combination of strengths and weaknesses to a career opportunity.

Roth’s solution to the DepressionRoth tried to figure out the right investments that would have prevented you from being hurt in the Depression. He decided the keys were:

• controlling risk• maintaining liquidity• protecting principal

I agree, although there is more to it. He was only looking at the Depression which is deflation. Also protecting yourself from hyperinflation changes the rules somewhat.

‘Everybody wants a change’Roth’s diary says three months after Roosevelt’s in-auguration,

…it seems that the U.S. has traveled a long way toward some form of socialism or man-aged economy.

He also said just before the 1932 election that elected Franklin Roosevelt president,

It looks as though the Democrats will win because everybody wants a change.

And this entry from June 5, 1931:

Dictatorship, Communism and Socialism might rear its head in Europe but we were sure in [the Roaring Twenties] that none of those things could come to America.

Sound familiar?

What if I’m right?Because of your upbringing, experience and advice you have received from financial planners, you may think my advice is too radical to follow. If I am right about hyperinflation or depression happening in the near future, and you do not follow my advice, you have a good chance of being wiped out financially.

What if I’m wrong?On the other hand, what if I’m wrong about the hyperinflation or depression being imminent and you DO follow my advice?

Little harm will be done. So you have a lot of shampoo and no debt. There may be some oppor-




tunity cost of not having more in an interest-bearing account or a stock that went up in dollar value.

That opportunity cost is the “premium” for the peace-of-mind “insurance” against hyperinflation and depression. It is a good value and a wise invest-ment.

Not following my advice may cause you great harm. Following my advice may cause you minor regret. There is an enormous difference between harm and regret.

It is better to have that protection against hyperin-flation and not need it than to need it and not have it.

For more information about John T. Reed books and newsletter, go to www.johntreed.com

I have written 35 books and a newsletter on real es-tate investment called Real Estate Investors Monthly.

http://johntreed.com/products/john-t-reed-s-real-estate-investor-s-monthly-newsletter

I have 20 real estate investment books. The first one I self-published is now in its 19th edition and is probably my best well-known one: Aggressive Tax Avoidance for Real Estate Investors.

http://johntreed.com/collections/real-estate-investment/products/aggressive-tax-avoidance-for-real-estate-investor

You just read two chapters of my book on hyperinfla-tion & depression protection:

http://johntreed.com/products/how-to-protect-your-life-savings-from-hyperinflation-and-depres-sion

I also have 8 books on football coaching, one of which, Football Clock Management, changed the way the game is played in the NCAA and NFL.

SucceedingThe book I now sell the most copies of is Succeeding. It is about how to pick the right career and the right spouse and the right path to achieve the goals you set based on thorough knowledge of your strengths and weaknesses, as well as a more realistic knowledge of the real adult world than you get in high school or college. For example, the structure of where you work—self employed or work for others, for-profit or non-profit, big company or small company, results-based compensation (e.g. commission, contingency lawyer fee, head of profit center) or salary—is far more important to your happiness than the subject matter—e.g., chemistry, literature, mechanical en-gineering, physical education.

http://johntreed.com/products/succeeding

I have written two books on coaching baseball.

http://www.johntreed.com/collections/john-t-reed-s-baseball-coaching-books

One of my testimonials for this baseball book said the reader had read every book on the subject and mine was better than all the others combined. You can see links to my various books’ reader success stories at the home page for each book and you can get to those book home pages from my main home page www.johntreed.com.

Self-publishing bookInevitably after writing and publishing 35 titles—over 100 books if you count editions—I wrote a book on writing and publishing books. It is temporarily sold out.

http:// johntreed.com/products/how-to-wri te -publ i sh-and-se l l -your-own-how-to-book?

My first novelAnd perhaps equally inevitably, I finally wrote my first novel The Unelected President which came out in September 2016, just in time for comparison with the most unexpected president ever. The Unelected President—“Mike Medlock” is much more of an outsider than Trump and yet he is bolder in spite of having not a single member of his party in Congress. He is a libertarian. Below is a big enough version of the cover that you can read the subtitle.



Iconoclastic books onlyI only write books that are iconoclastic. My crite-rion is that I do not write a book unless the existing literature on the subject in question is incorrect or incomplete.

For example, after my Aggressive Tax Avoidance for Real Estate Investors sold over 100,000 copies, two dif-ferent editors from Simon & Schuster independently tried to get me to write a book titled Aggressive Tax Avoidance for Everyone. I declined on the grounds that the subject was already well covered by books like J.K. Lasser’s annual Your Income Tax.

I was actually in their New York offices when I said that and they took me down the hall to meet the lawyer in charge of J.K. Lasser’s Income Tax.

He was very nice. I pointed out an error in his book with regard to a real estate issue. They were not wrong so much as omitting a controversy between the IRS and the courts about the item in question. But I also reaffirmed that Your Income Tax was sufficiently correct and complete that there was not enough reason for me to write a competing book.

When you write iconoclastic books, you have to identify the widespread misconceptions about the subject—for example, the aversion to deducting a home office based on an old wives tale about it in-creasing your probability of being audited.

Then you have to give lots of evidence to prove that notion is wrong. My books that cover legal matters in real estate, writing, and hyperinflation, are almost unique in that I give legal citations—stat-ute numbers, regulation numbers, court decision names—while still writing the books in ways that layman can understand. When their accountant or lawyer doubts the legality of the advice in question, the reader can point to the citation. The typical response to that is the professional looks it up and says, “I’ll be damned. Reed’s right about that.” My IRS auditor said that to me once.

Then I explain the right way and why it’s the right way. Finally you have to motivate the reader to do it the new, right way.

Best wishes,John T. Reedwww.johntreed.com342 Bryan DriveAlamo, CA 94507925-820-6292




Documents

Hyper-Inflation-Deflation - Amazon S3 · inflation & Depression. I added depression to the subject because depres-sion is largely deflation and it’s hard to write a book about inflation