We have today a monetary world without precedent.
Never before in the history of the modern world has runaway inflation occurred on a global basis. Importantly—prior to the present generation, monetary inflations have always been on a nation-by-nation basis, with runaway inflation occurring perhaps in one, two, three, or four nations simultaneously. And never before in history has it occurred on a coordinated basis where there was one kingpin fiat currency that tied it all together in an accelerating and irreversible trend toward a simultaneous, worldwide hyperinflation.
Two underlying and ongoing developments of the past decade require this terminal result within the next decade. The first is the rampant growth of statism, in the guise of welfarism, in the Western nation-states—especially in the United States. The second development is the transition of the U.S. dollar from a metallic-backed, redeemable currency to an irredeemable fiat paper nothing.
It takes a very long time to establish a good currency—to get it widely accepted as money—and relatively little time to ruin it, then even less time to destroy it. Any adult reading this can remember when real money—silver, and silver certificates redeemable one-for-one for silver—still circulated in North America. We remember when the dollar was as "good as gold," internationally, at least. We remember when the dollar was money.
Since silver certificates were repudiated in 1968, there has been no money circulating domestically in North America. Since the Nixon declaration of international dollar default in 1971, there has been no money circulating internationally. With these changes, the U.S. dollar and other national currencies have become counterfeit.
Genuine paper money has the value of the money it represents because it is redeemable; counterfeit money does not have the value that it purports to represent because it cannot be redeemed or converted. Its only value is its value as scrap paper; it actually is not even worth what it cost the counterfeiter to produce it.
Counterfeit paper money comes into existence in two ways: (1) fraudulent issue, (2) fraudulent removal of the actual money backing the paper money after the paper money is issued. All of the national currencies in circulation as of August 16, 1971, became counterfeit monies of the second sort while all national currency notes issued since that time are counterfeit notes of the first sort. The important fact, regardless of the date of issue, is that all national paper currencies today are 100 percent counterfeit, 100 percent inconvertible, 100 percent fiat money and, as recognition of their fraudulent natures and actual valuelessness sinks into the public awareness, their exchange value in the marketplace will sink, erratically to be sure, to, or very near to, zero.
Conventional, empirically derived monetary and business-cycle theory is not broad enough to encompass the world monetary situation and it cannot accurately anticipate the future because the situation today is unprecedented.
There are no historical precedents for:
(a) Global fiat national currencies—all national currencies in the world being irredeemable fiat paper (de facto since 1968; de jure since 1971).
(b) Global accelerating inflation—virtually all national currencies being simultaneously inflated at generally accelerating rates for over a decade (excepting the Swiss franc since 1971, and to a lesser extent the Deutschemark and the Dutch guilder).
(c) Continuous global monetary crisis—a decade-long series of increasingly frequent international monetary crises melding into one overall, continuous international monetary crisis with none of the major trading nations attempting the traditional deflationary remedy and no effective international monetary cooperation (except at inflating).
(d) Global "floating" exchange rates—all national currencies "floating" against others with no serious commitment by any nation to maintain a fixed exchange rate to gold or even to other national currencies (since 1973).
(e) Global irredeemable fiat dollar reserves and world trading currency—a world in which one irredeemable fiat national currency (the dollar) is the major component of the "monetary reserves" of other nations and is the major international trading currency.
(f) Global issue of fiat, irredeemable "Special Drawing Rights" (SDRs) as reserve units and as "aid" largess—a world in which there is an international agency (the International Monetary Fund), empowered by common assent of 128 nations to issue an internationally accepted irredeemable fiat paper "reserve asset" (SDRs) in practically unlimited amounts to dispense foreign aid to the oppressive rulers of needy nation-states.
(g) Global runaway transfer payments—a world in which the largest item in the budget of most major nations is "welfare" payments that are accelerating and for which the commitment is open-ended. (This, in conjunction with reelection-inspired spending legislation, is perhaps the principal engine of inflation.)
(h) Global record, accelerating, unpayable debt—a world in which debt amounts of all sorts, but especially national and international debt levels, have grown so large in relation to assets and revenues that there is no realistic prospect of debt retirement except by default, either through bankruptcy or, the easy way, through fiat money inflation.
(i) Global record taxation—a world in which, the only method open to the State for further increases in its seizure percentage is through the hidden tax of increasing paper-money inflation. For the long period of recorded history prior to this century, no nation-state has ever succeeded in directly taxing its citizens for more than about 25 percent of their incomes without provoking a revolt. Since World War II, the overall direct tax in the major industrial nations has climbed from an average of about 20 percent of national production to about 40 percent, while the printing-press-inflation tax has increased from an average of 1 to 2 percent to a range of 10 to 30 percent, with the total confiscation in the United States, for example, amounting to nearly 50 percent of domestic production.
The empirical economists (e.g., the Keynesians, the Friedmanites) cannot cope with the monetary and business-cycle aspects of either the national or international economic situation today. Their theoretic concepts only deal, incompletely, with situations for which there are precedents. Such limited concepts are wholly inadequate in the face of the aforementioned numerous unprecedented conditions, and they have no reliable method for extending their analyses.
The Austrian economists' monetary and business-cycle theories, too, may be inadequate in their present state to deal completely with all the ramifications of the unprecedented situation. There is a vital advantage in the Austrian approach and scheme of thinking, however. The Austrian theoretic structures, built up from self-evident propositions concerning acting man, can be expanded by the same a prioristic methods to analyze and potentially to explain human conduct under any conceivable set of circumstances.
Without even attempting in this short analysis to apply the Austrian methods to the present situation, this much is immediately obvious: Every one of the above unprecedented elements, (a) through (i) above, is fundamentally, specifically, and irreversibly biased toward hyperinflation!
Through a long series of perverse modifications of rules and practices since 1913, the industrial nation-states' national and international monetary systems have eased all of the machinery into place for the inflationists' impossible dream: a world of 100 percent fiat currencies, paper backed by nothing.
What remains is for the inflationists to make this "system" work for more than a historical twinkling. They cannot. It must accelerate inflationary trends again and again; it must end in a world hyperinflation. There are both fundamental and concrete reasons why this is so.
Fundamentally, the principal reasons are that a fiat currency can circulate only as long as two necessarily temporary conditions prevail. First, because of habit and memory, people must generally have confidence that the currency will again become convertible into real money or, simply because of mass inertia, they must continue for a time to act as though the currency is still redeemable. Second, the monetary authorities must exercise restraint in making further issues of the fiat paper money.
As to the first condition, as time passes, praxeologically it is in the nature of acting men to lose confidence in a promise long unfulfilled. As to the second, as time passes, it is in the nature of acting thieves to be emboldened by their past success to attempt larger and more frequent thefts.
There are also concrete reasons why the inflationists' impossible dream will fail, three of them mentioned before: runaway transfer payments; record size, accelerating, and unpayable debt; and record taxation rates.
All of these fundamental and specific factors must inevitably lead to inflationist failure: another reason for the coming currency revolt. This is a function of mass psychology. People revolt against taxes when they will no longer bear them or can no longer afford them; they revolt against currency depreciation, and the currency, for the same reasons.
Overall, of course, runaway inflation is fueled by runaway Federal spending of all sorts. I am narrowing the discussion of runaway spending down specifically to welfare spending, however, because: (1) this category of spending is accelerating most; (2) it has become the largest single area of "government" spending (at all levels); and (3) it is addressed directly to an insatiable and illimitable demand (i.e., the political demand for something-for-nothing).
Welfare transfer payments are doubly damaging; they penalize enterprise and production and reward idleness and consumption. Thus, even when fully covered by direct taxes, they push prices up by decreasing the supply of goods and services while increasing demand. When financed by deficit spending of inflationary counterfeit dollars, they are triply damaging because they pit still more nominal demand against the decreased supply, boosting prices (i.e., depreciating dollars) even more.
Welfare spending increased steadily in the 1960's. In the 1970's it is exploding. In 1970 it had risen to $77 billion. As recently as 1972 it amounted to $119 billion, taking 33 percent of total Federal spending. In 1975 it jumped to $159 billion, consuming 48 percent of total spending! This fiscal year (ending October 1977) it is expected to reach $200 billion and devour over 50 percent of total Federal spending.
It is impossible for this trend to continue without leading to a hyperinflationary crackup within a few years. Yet the overall trend must worsen. All of the various programs tend to be self-accelerating. The total about doubled in the decade of the 1960's. Next it about doubled in the 1970-75 half-decade and will double again in the next two to three years; then again in the following one to two years? Then in less than a year? Then…?
Officially, in the absence of a "truth in borrowing law," the published Federal debt is $620 billion. This is in fact a tiny part of the true unpayable total, however. According to the National Taxpayers Union:
"The so-called 'national debt' represents a small fraction of the total future financial obligations of the government. It is like the tip of an iceberg floating in a sea of red ink. Consider these official Treasury Department figures:
Other Fiscal Liabilities—$ 69,000,000,000
Social Security Obligations—$2,710,000,000,000
Unadjudicated Claims—$ 10,000,000,000
"This isn't even a full list of the federal government's debts. National Taxpayers Union recently completed a computation of the unfunded liabilities of 21 of the federal government's 60 employee retirement plans. This computation shows that taxpayers will pay out $499,155 billion in pensions, even if there is no inflation for the rest of the century [emphasis added]. A small inflation rate for a few years would astronomically increase these pension obligations.
"Last year alone, twelve dollars in unfunded financial obligations were created for every dollar of deficit spending. While the 'national debt' increased by $84 billion in 1975, the inflation created by deficits raised the future obligations of government at a rate of about $83 billion per month. In all, more than $1 trillion in future obligations were created.
"Unchecked, this can mean nothing but disaster. A vicious cycle of deficit spending and inflation is underway. Each new deficit causes greater inflation, which causes greater deficits, which cause still greater inflation."
Deficit spending increases the debt burden in two ways. First, it increases the Federal debt upon which interest must be paid. Second, it pushes interest rates higher for everyone.
Just since 1972, in only four years, interest on the official Federal debt has doubled from $20.6 billion to $41.3 billion (estimate for 1976) and now takes over 10 percent of the Federal budget. With record Treasury borrowings this year and next, with the outlook for interest rates to soar again later this year, and with Treasury debt issues being mostly short-term, we can expect that the next doubling, to $80 billion or more in interest burden, will come within two years; the next doubling in about one more year. Then…?
Then hyperinflation, but perhaps sooner. Hyperinflation is not only the easiest way for the nation-state to handle its debt in the future—it is the only way.
People rebel against a paper money that is in fact losing its purchasing value at a rapid rate for the same reason they rebel against confiscatory taxes—they cannot afford not to.
Once this phase begins, it proceeds like a whirlwind, and in a matter of months—perhaps only weeks—the currency is worthless. Once this phase begins, it is too late to take defensive measures to protect one's savings from destruction. All of the elements for this to begin are already in place in 1977; I think it may actually begin as early as 1978. Every informed person should take defensive measures now, ahead of the actual beginning.
That is why I am sticking my neck out now, even though I may be way off on how soon inflation will actually reach this terminal hyperinflation stage. If I waited until I was sure of the timing, the information would be too late to help you.
One of the most remarkable aspects of human behavior is the lack of thought and care most otherwise intelligent people give to investment decisions concerning their personal savings. Largely this probably reflects their concentration on their own particular professional concerns to the relative exclusion of other things. But much of it is also due to their failure to understand the vital nature, function, and purpose of savings.
Conceptually, at the individual level, savings can be looked upon as the accumulative embodiment of the surplus of one's life effort (human energy) plus retained profits from exchanges. When an individual provides a service and voluntarily exchanges it for payment received, that payment represents a part of his life that is forever lost through the act of providing the service. Life's effort, a passing thing, is traded for a medium of exchange, which, when sound, is durable and can be used at some future time. Thus, when the parasite State confiscates savings through monetary inflation and destroys the medium of exchange, it is in reality stealing stored-up human energy, a portion of your life, for its own sustenance and growth. It is committing mass murder.
The simple act of destroying most of the value of the U.S. dollar (now about 20 percent of its 1940 value) has unleashed powerful and far-reaching forces of economic, political, and social destruction. These forces of change will increasingly exert themselves in international markets and in U.S. domestic markets, including the stock market. The fundamentals of the world economy or the U.S. economy can in no way be compared to the period of the last bull market in shares from 1949 to 1966. We are in a new period of disorder which calls for new criteria and new methods in investing.
No formula advice suits everyone, but there are some guidelines that everyone should observe. Factors to be taken into account are safety, liquidity, tangibility, profitability, leverageability, stability, and suitability.
(1) Safety doesn't need much comment; it should always be the first consideration for any investor. It will not be found in an asset that is continually depreciating, which any dollar-denominated asset is by reason of the fact that the rate of monetary depreciation is higher than the interest rate on most debt instruments and all bank accounts. Such "investments" are guaranteed losers.
(2) Liquidity. The investment one should be seeking is in something that is regularly and widely traded, preferably on a daily basis and in many different markets.
(3) Tangibility. It must have a value in and of itself, one not dependent upon the "full faith and credit" of any particular government. Given the political, monetary, and economic outlook in the world today, the "full faith and credit" of the government of the United States and that of the other major nation-states isn't worth the paper it is printed on.
(4) Profitability. This is purposely ranked number four. One should have sound economic reasons to expect a profit, independent of the inflationary factor itself.
(5) Leverageability. This is simply the use of margin and borrowed money to take the fullest advantage of price changes. When the other factors are present, I recommend the conservative use of margin to multiply the potential of both the real profitability, from an economic standpoint, and the nominal profitability from an inflationary factor standpoint.
(6) Stability. This refers, not to the investment itself, but to the safety and permanence of the markets and the institutions involved in investing. (In the bear stock market of recent years, particularly in the low-volume, 300-point drop in 1974, many brokerage houses went under or were forced to merge.)
(7) Suitability. One should consider one's own personal situation, objectives, and perspective vis-a-vis the intended investment. Most people lose on short-term trades because they fail to do this. Long-term investments which feel comfortable are much better for most people.
These guidelines for investments in an inflationary depression are not the only ones that could be listed. I think, however, that they are the most important ones. They can be applied to any investment you may be considering.
As the 40-year-old inflationary super-cycle reaches its climax over the years immediately ahead, a hard-money-oriented investment portfolio will be important. In my judgment, it should consist principally of the following (in order of importance):
(a) Silver bullion: 40 percent to 50 percent, in a Swiss Bank;
(b) Silver coins: 5 percent to 10 percent, in personal possession;
(c) Gold bullion: 20 percent to 25 percent, in a Swiss Bank;
(d) Gold coins: 10 percent to 15 percent, one-half in a Swiss Bank, one-half in personal possession;
(e) Swiss francs: 15 percent to 20 percent, three-quarters in a Swiss Bank, one-quarter in personal possession.
These percentages are given in ranges and are only approximate, because personal circumstances and preferences vary widely and must be taken into account individually by each investor. In general, the percent ranges given are suitable for five-digit hard-money portfolios—smaller ones should favor coins more heavily; larger ones should favor bullion and Swiss franc deposits more heavily. Further, whether hard-money investments should represent a major or minor portion of one's total portfolio also depends upon individual factors, particularly the magnitude of the total amount of one's financial assets. No "model portfolio" suits everyone.
As a final word, there are also some dangerous traps to avoid. The most serious trap is having dollars locked in interest-bearing term deposits. Another serious trap to avoid is being a lender against mortgages. Further, although the equity markets may rise strongly this summer as a result of government-inspired, artificial interest-rate reductions over the past year and increased consumer and business spending this year, the stock market will halt in its tracks and reverse its course as soon as double-digit inflation clearly reappears, which I expect will be soon after mid-year. For a precedent, one need only recall that double-digit price inflation in 1974 drove the Dow Jones Industrial Average down to 627, its lowest closing level in 12 years—and, in real value terms, its lowest in 17 years.
This picture of hyperinflation is not a pessimistic outlook. The great damage—the ravaging of people around the world—occurs during the course of rampant statism and runaway inflation. When hyperinflation takes over, it means that people are spontaneously throwing off the monetary yoke of systematic looting with which their respective nation-state hierarchies have bled away their substance. It means danger, but it also means opportunity.
At that critical juncture, which means the total destruction of nation-state paper currencies, the way will be prepared economically for a new and unprecedented era of prosperity and progress—provided that there exists enough economic understanding for markets to be left politically free to competitively provide sound money along with various other market services.
Indeed, herein lies the reason for long-term optimism. For this emerging depression can be best understood as the triumph of the orderly, harmonious, natural laws of human behavior and economics over the disorderly, coercive, capricious "laws" of the State. It has been so with all runaway inflations throughout history, although in the past, few of the participants had much comprehension of the laws governing human action.
In the present inflation, however, for the first time in history, there is comparatively widespread and growing, economic understanding of appropriate solutions, especially in the vital field of monetary economics. It is contained in that body of economic knowledge called the Austrian School. No other economic theorists are able to apply their theories so completely to practical life.
The Austrian economists cannot presently hope directly to influence either the President or Congress. However, more importantly, their theories and analyses have influenced a large and growing number of private individuals, particularly during the past decade. These individuals' increased understanding of the economic situation has proven immensely profitable for some of them as investors in recent times, while the past decade has not kindly treated others who have ignored the Austrian analysis. This understanding can be expected to spread and to broaden its impact in the future and eventually to have a dramatic beneficial effect on overall economic and social well-being.
We are rapidly approaching a time when the dollar will be rendered worthless, when the precious metals will again be recognized as money—yea, when free competitive markets may well foster an even better money and money system. For those able to protect themselves and their assets, there are manifold opportunities to disseminate the ideas which can slowly move society in a new direction—away from statism and stagnation and toward freedom and prosperity.
Jerome Smith is editor of World Market Perspective and founder of Economic Research Counselors. This article is based on material from his forthcoming book, Understanding Runaway Inflation: The Coming Currency Collapse.
This article originally appeared in print under the headline "Here Comes Hyperinflation!".