Most economists agree that a little inflation – in the 2 to 3 percent range – is acceptable and indicative of a growing economy. When the inflation rate creeps up, economists become alarmed and the Federal Reserve steps in to cool off a potentially overheated economy. It does not work that way in every country and when inflation spirals out of control, hyperinflation sets in. Those who are prepared can weather the storm, but nevertheless, everyone gets hurt. Just because it hasn't happened in the U.S. yet, does not mean it couldn't.
By consensus, hyperinflation occurs when the inflation rate crosses 50 percent per month. At that rate an item that cost $1 at the beginning of the year would cost $130 a year later. Germany between the world wars experienced inflation that reached 322 percent per month. Hungary incurred 19,000 percent inflation briefly after World War II, and more recently, Zimbabwe's inflation rate peaked at 231 million percent. In every instance, inflation was caused by the government printing too much money, either to provide social services that it could not afford or to pay off debt – war reparations in the case of Germany.
The Mechanics of Hyperinflation
When a government wishes to spend money that it does not have and cannot raise in taxes, it resorts to printing paper money, a practice that leads to its devaluation. Once the process starts, it is extremely difficult to stop. As citizens become aware of the government’s action, they begin to spend their money more rapidly before its value drops further. The declining value of money obligates the government to increase the rate of money growth in order to pay for its ever-more expensive spending habits, and the growth rate spirals out of control. Economists consider excessive inflation to be a “tax” on purchasing power. People with money will unload it as quickly as possible. In Germany, workers were paid twice daily and given time off to shop because the money they were paid in the morning was worthless by evening.
Financial Protective Measures
If you fear that currency will be debased, you must find alternative ways to store value and stockpile assets that will hold value. Items such as jewelry, fine art and antiques are excellent ways to protect wealth, but they are not readily tradeable if you need to barter for food and necessities. Precious metals such as gold and silver are excellent assets to hold, but be sure to have some in small increments for modest transactions. Other barter items could include liquor, chewing gum, cigarettes or flashlight batteries. You might wish to hold a quarter of your assets in an offshore account – Canada or the Bahamas would be convenient choices.
Physical Protective Measures
Depending on the severity of a hyperinflation, survival may become an issue. People who live in cities and have no food source other than what they can buy with currency, which rapidly becomes worthless, have a serious problem. Maintain a three-month supply of food, medical supplies, toilet paper and a reliable way to cook in case there are power outages. A scooter or motorcycle – even a bicycle – provides reliable and inexpensive transportation. A portable shortwave radio can keep you in touch with the world. If your income allows it, buy some farmland. Even several acres can produce food much cheaper that you would find at hyperinflated prices at the grocery store.
Thomas Metcalf has worked as an economist, stockbroker and technology salesman. A writer since 1997, he has written a monthly column for "Life Association News," authored several books and contributed to national publications such as the History Channel's "HISTORY Magazine." Metcalf holds a master's degree in economics from Tufts University.