Friday, January 19, 2018

When money becomes worthless


I was reminded of my younger years when reading this article about inflation in Venezuela.

A friend recently sent me a photograph ... [of] the detritus left behind after a store was looted last week in San Felix, a city in the country’s southeast ... strewn about in the trash are at least a dozen 20-bolivar bills, small-denomination currency now so worthless even looters didn’t think it was worth their time to stop and pick them up.

. . .

Hyperinflation is disorienting. Five or six years ago, the 500 bolivars on the floor would’ve bought you a meal for two with wine at the best restaurant in Caracas. As late as early last year, they would’ve bought you at least a cup of coffee. At the end of 2016, they still bought you a cup of café con leche, at least. Today, they buy you essentially nothing ... Prices are now rising more than 80 percent per month, according to the opposition-led National Assembly’s Finance Committee. (The government itself stopped publishing official inflation data long ago.) At that rate, prices double every 34 days or so. Salaries lag far behind, leaving more and more of the country to face outright hunger. Thus, the looting.

Rule No. 1 of surviving hyperinflation is simple: Get rid of your money. Given the speed with which money is shedding its value, holding on to it means you’re losing out. The second you’re paid you run out as fast as you can to buy something – anything – while you can still afford it. It’s better to hold almost any asset than money, because assets hold their value and money doesn’t.

. . .

Under hyperinflation, money no longer works. It doesn’t store value. It just stops doing the basic things people expect money to do. It stops being something you want to have and turns into something you’ll do anything to avoid having: something so worthless you won’t even bend down and scoop it up off the floor while you’re looting.

There's more at the link.  Recommended reading.

In South Africa, during my formative and young adult years, inflation was running at a steady 10%-20% per year.  As a result, one's wealth eroded steadily, but in a way that was more or less manageable.  One's salary increases every year had two components;  one to compensate for inflation, and the other to reward performance.  It wasn't unusual for people to get at least a 10% increase every year (at least, in the commercial sector).  Top performers might double that, and get a bonus on top.  Workers in the mines or in agriculture, occupations largely reserved for races other than white, were worse off, getting little or no increase to compensate them for inflation.  As a result, their already appallingly poor standard of living eroded steadily, adding to the social and political unrest sweeping the country.  It was one of the factors that brought an end to apartheid.  Those policies had simply become unaffordable.

Just to our north, in Zimbabwe, hyperinflation arrived during the late 1990's.  It's a well-known story, so I won't go into it here.  Suffice it to say that "Zimbabwe's peak month of inflation is estimated at 79.6 billion percent in mid-November 2008".  Those figures are, of course, meaningless.  Once one's dealing with billions of percent, one's basically guessing, sucking the numbers out of one's thumb.  There are no economic measurement systems adequate to come up with hard and fast numbers, and monetary systems become meaningless.  To illustrate, the banknote below is from the third series of Zimbabwean dollar bills, issued in January 2009.  It has a face value of one hundred trillion Zimbabwe dollars, but was equivalent, at the time of issue, to only about thirty US dollars at the official exchange rate - and only $1.40 on the black market.  This, in a currency that in 1983 traded at par with the US dollar (i.e. one-for-one).




Another well-known example of hyperinflation is Weimar Germany.  Venezuela is merely the latest country to go down that path.  It likely won't be the last.

The frightening thing, to me, is the number of governments (including our own) that are deliberately understating the rate of inflation for their own purposes.  If the US government accurately calculated the rate of inflation, it would have had to raise inflation-linked payouts such as Social Security, etc. by up to 10% every year since the 1980's.  That's why it doesn't calculate it accurately, of course.  It can't afford to pay out that much - so it deceives the electorate by lying to it.  Don't let anyone tell you otherwise.  The facts speak for themselves.  I discussed them in a two part article in 2016.  Follow those two links to learn more.  It really is worth your time to do so.  The second part of that article discusses how to cope in a high-inflation environment.  It dovetails neatly with what's happening at present in Venezuela.

Hyperinflation creeps up on us unawares.  I'm sure those currently experiencing it in Venezuela would never have dreamed, ten years ago, that they'd be in this situation today.  I'm equally sure that in Zimbabwe, no-one saw it coming - certainly not my friends and former comrades-in-arms.  In South Africa during the 1970's and 1980's, we all complained about double-digit inflation, but no-one thought much about what it would mean if that continued over an extended period.  Today, it's all too clear.  To illustrate:
  • My monthly starting salary when I entered the workforce in the 1970's - a salary on which, at the time, I could afford to own a motorcycle, and pay all my routine expenses - would today be sufficient (but only just) to buy me four entry-level burgers and fries at a South African restaurant, with a soda - nothing special, just cheap burgers without toppings.  Call it one meal per week.  There'd be nothing left over for other expenses.
  • In my top earning year in South Africa, in the late 1980's, when I'd just been appointed as a director of the small company I worked for, I made a little over one hundred times more than that 1970's entry-level salary.  Today, that same amount, in the same country, would be considered a lower-middle-class level income - probably a supervisor-level salary.

Inflation that bad hasn't struck here, yet, but it might.  It's bad enough as it is.  To take just one example, let's price the Ford F150 XL regular-cab pickup - the entry-level base model, to compare "apples to apples" - over the past 20 years.  According to Motor Trend, in 1998 the manufacturer's suggested retail price was $15,865.  Ten years later, in 2008, it had increased to $17,900 - a rise of just 12.8% from 1998.  However, this year, 2018, the manufacturer's suggested retail price is no less than $27,380 - an increase of 53% from 2008, and of 72.6% from 1998.  That illustrates how inflation in vehicle prices over the past 10 years has become significantly worse than during the previous decade.  The rate of increase is accelerating (you should pardon the expression).

I've challenged my readers before to compare the cost of your typical weekly grocery shopping bill in (say) 1998, and in 2008, and today in 2018.  If you kept accurate records, I think you'll find that grocery and household goods prices doubled every decade.  If your expenditure didn't go up that much, it was probably because you became more frugal in your buying habits, and bought less of what you really wanted, because you could no longer afford as much.  Go on, try that price test for yourself, and let us know in Comments what you found out.  The results should be interesting!

Peter

21 comments:

Anonymous said...

For hyperinflation, the rules for surviving are simple. Leave the country if possible. If not possible, get rid of all your current currency, exchanging it for food. Food is everything in a societies collapse. Having it will make you target if others know about it.

Anonymous said...

My boyhoood stamp collectio included Weimar Republic stamps with face values up to 100 million Marks.

AndI remember starting work at a bank in 1958 and being told that my £300 a year would increase with experience, so if I was good at the job I might even become a branch manager on £1,000 a year. That's 20 times lower than even a low-paid bank clerk now.

McChuck said...

I know for a fact that food prices have doubled in the ten years I have lived in my current house. Part inflation, part the price of oil, part burning food instead of eating it.

Toastrider said...

This seems to be a common pattern in fiat currency. Invariably, governments cannot keep their hands off the scales.

Anonymous said...

Comparing vehicle prices may not be the best choice. The main reason is that the base F150 of today is a vastly different vehicle, with very expensive safety features and fuel use features that are all state mandated. The luxury level of the base model is much higher too.

We have seriously DE-flationary pricing in technology as a partial counter. I paid $1500 for my first cell phone. I can get one free now, or for a token payment, that has much more capability. Ditto with computers. Remember all the hand wringing articles in the PC press wondering if we'd ever get "sub-$1000" laptops?

There are some good charts online of dollar vs gold, that show almost all the buying power of the dollar has been inflated away. For a normal commodity, you need something that hasn't been deflated by tech improvements, or inflated by .gov mandate, isn't subject to 'manias' and price bubbles. Not sure what a good choice would be. Other economists use a cheeseburger or restaurant meal. Maybe bottle of beer?

Anyway, there is no doubt that inflation, even the Fed's nominal 2% is a constant theft and drain of our savings and reduction of our earning power.

I was talking with my wife about the amount of stored food we have on hand, esp. in light of Venezuela. She had no conscious idea of how QUICKLY it deteriorated, and yet from day to day, there was never the "OH SH!T" moment when the need for drastic action was obvious. They went from 'times are tough' to killing cattle with rocks and tearing them apart in the field in TWO YEARS.

That's pretty quick. People's accumulated savings disappeared even faster than that.

This should be a wakeup call for any "prepper" who says "you can't eat gold" or some other similar phrases, because you can't eat with bolivars, but you can certainly turn gold into whatever food IS available.

nick

Peter said...

@nick: I don't agree about using a vehicle as a yardstick. If you recall, I specified the cost of a base-model, entry-level pickup truck. That remains a constant - the cheapest pickup truck one can buy in the model range. It matters not whether it has this or that or the other bell or whistle; it remains the cheapest in the range. If a buyer wants a work truck, that's the minimum he'll have to pay for one. Therefore, I submit it's a valid measurement of inflation. Sure, some of its price might be due to more advanced technology, but the same can be said of electronics and a bunch of other things. The main factor is, it's the lowest-priced alternative in each of the years I sampled.

As for gold, I'm of two minds. Yes, it holds its value; but you can't eat or use it. I suspect those in Venezuela today who have gold are kinda stuck with it, because they can't offer anything useful in trade for something useful to them. If I offer soap, or toilet paper, or feminine hygiene necessities, in exchange for food, you can be sure I'll find takers, because people need those things. A gold or silver coin? Not so much. I agree, precious metals are a good store of value, but not so good a medium of exchange under circumstances of dire need.

YMMV, of course.

Roger Ritter said...

I have to agree with @nick. The pickup's price increase is partly due to additional features, and partly due to inflation, and there's no way to figure out how much of the increase should be allocated to each. A better gauge would be the price of something that hasn't changed, so that the price increase is almost entirely due to government mucking about. Say, the price of good booze (although even there you'd have to check for changes in the tax laws, since the alcohol taxes are pretty much hidden).

Gold and oil are too much affected by outside influences to be reliable. The best way might be to get the government's "basket of consumables" that they use to calculate inflation. Use the one that was used several decades ago, and calculate the cost in the same way that it was calculated back then. That should factor out the various changes that the gov't. has used to try to hide inflation (since they keep changing what's in the basket and how the calculations are done).

JNorth said...

Speaking of metals, I have far more silver then gold because I can measure out a chickens worth of silver but that's way too small for gold. Of course, I have orders of magnitude more copper, brass, and lead then gold, silver, or plat.

JNorth said...

Thinking about it a bit more, the inflation rate seems to be rather varied, depending on what you are talking about. For example, back when I got out of the Navy (~98) a Jack and Coke was about $4.50. At the same place today they are around $6. That is a 1.7% inflation rate. On the other hand, when I was a kid bagging groceries, a candy bar was $0.35 and now they are around $1.50, for an almost 11% inflation rate.

Anonymous said...

While I agree that the pickup isnt a good measure, I think there are other reasons. 20 years ago pickups were more work vehicles. They were popular because they were cheap, not having to meet passenger car standards and not being taxed the same; cheap to build, cheap to buy. Then they became very popular as passenger vehicles, which upped demand for luxury options. Automakers had struck the motherload; cheap to build, expensive to buy, they have been making huge profits on these bordello wagons. There has been talk of taxing them and standards comparable to passenger cars since thats how they are being used, but I dont know how much that has happened lately.

Better choice might be to compare entry level sub compacts as the demand hasnt much changed over the years and the fundamental content hasnt either.

Sherm said...

Forty years ago we bought our first television after we got married. It had a 19-inch screen and was about $300. Channels were changed by hand. When we replaced it ten or fifteen years later the new television was about $300. The screen size was about the same but we had a remote and the color was sharper. Last year I bought a new television. It was about $300. Screen size was somewhere north of 30 inches and we could hang it on a wall.

Based on televisions we've had negative inflation. Perhaps using a single item is not the best way to measure how prices have changed.

Peter said...

@Sherm: See the Chapwood Index, discussed in the first part of my two-part article linked above. Its methodology is described here:

http://www.chapwoodindex.com/solution/

The 500 items it prices every six months are listed here:

http://www.chapwoodindex.com/chapwood-index-items/

By analyzing 500 items, not just one or two (or even one or two dozen), the Chapwood Index accurately analyzes a complete basket of the typical American family's purchases. It's about as accurate as you can get.

Leonard Jones said...

I actually have one of those notes. I bought it on Amazon for
next to nothing. Imagine a 100 trillion dollar note that could
not buy a cup of coffee in America. Living proof that one should
never allow a Marxist anywhere near a national economy.

When P.J. O'Rourke traveled to Nicaragua, he commented on the
value of their currency. He said one had to study economics
at the Patrice Lumumba University in Moscow two times to make
currency worth this little!

Anonymous said...

@McChuck, I assume you're referring to ethanol derived from field corn. While one can debate the merits of ethanol it doesn't divert food to fuel. After yellow dent corn goes to the ethanol plant it doesn't disappear from the food supply. It comes out as dried distillers grain which in turn gets fed to cattle and other livestock just as the corn has. Furthermore the price of corn has very little to do with the price of your corn flakes or pretty much anything else in the supermarket and the farmer sees a fraction of a fraction of a cent of that 6 buck box of corn flakes.

Right now corn is selling for less than it takes to produce it. 3.30 a bushel locally and the just break even point is realistically somewhere over 4. Profitability is way over that. Most of last year's harvest is sitting in bins because farmers can't afford to sell it. Your grocery bill gone down? Mine hasn't. That 3.30 corn is what it sold for in the 1970s not adjusted for inflation and the price of inputs and equipment are extremely high. Speculators, middlemen, agrigiants and the government are keeping farm commodity prices at absurdly low levels. Why that's being done is another discussion.

deborah harvey said...

Peter, i am interested in the 'other discussion' noted directly above. could you do it?
as to prices; when we moved here 10 years ago, i rarely spent 100$ per week at the grocery store unless we had need of something special.
now i spend 200 easily and i buy very little meat. not buying luxuries.
do have a few pricier food items due to allergies- lactose free milk and almond milk for example.
sometimes we spend more that 200 per week.
our income has not increased.
and as we age the pharmacy bill has increased. it is so frustrating.
as commenter above have said, if it hits us like it did argentina and germany thousands of us will die. canada and mexico cannot absorb a hundred million people, especially not indigent ones.
canada is busy destroying itself with 'immigrants' who are diseased and indigent.

Will said...

In So. NJ about '72-73, I lived in a cottage across the parking lot from a supermarket. I would roll a full size cart to my front door, full of those typical paper shopping bags. That's at least 4 bags. It never cost over $20, and included steaks that I shared with my cat. (She insisted) (I got her at the supermarket, too!)
Try filling just one of those bags for $20 today.

Anonymous said...

For decades, I've measured inflation with the Tomato Chicken Index. In 2008 a can of Campbell's chicken noodle soup or tomato soup sold for $0.50 - on sale for $0.44. Lately, either has a "normal" price of ~$1.29, on-sale $0.89 to $1.00. In the early '70s, the same product sold for ~$0.10.

It's unwise to measure inflation on products that depend on the state of technology. As a couple of contributors pointed out, new cars are generally superior to those of the '50s, '60s, and '70s. Nevertheless, a 1969 Mustang base price was about $2700.00, now it's about $27,000. Pretty much what I've experienced overall. Gasoline: 1966 - $0.27; now - $2.17 (and up). Note, the price of gasoline was fairly stable for nearly 20 years, 1949 to 1968.

On the other hand, how much did you pay for your first pocket calculator? In 1973, I paid ~$200.00 for a unit that now would sell in BigLots for $4.00. In 1984, my first "personal computer" cost me $2200. Add another $300 for a 5 megabyte hard drive. I built my latest for about $400, including less than $100 for a 2 Terabyte hard drive. There's no comparing the two systems for performance - it's orders of magnitude.

That's why I rely on the Tomato Chicken Index.

Ed_Mc
(more than meets the eye)

Ken Blakely said...

A new truck 20 years ago was a POS compared to a new truck now, and any effort to compare their prices that doesn't include comparison of efficiency, safety, comfort, climate-friendliness, cost of operation, potential resale value, etc is silly and pointless.

That's the standout feature of this "article", and what it has in common with the whole genre of right-wing conservative rantings; it's pseudo-science written by someone with precisely zero expertise in the field.

In other words, it sounds pretty convincing until you step out of the bubble and think critically.

Here's a tip: your status as a former "military man" (whatever that means) and medically retired pastor does not qualify you to write authoritatively about economics, any more than your high school class on physics qualifies you to opine on climate change. See the disconnect there, both in subject and in expertise? It's real.

Peter said...

@Ken Blakely: I suggest you refrain from disparaging others' knowledge and expertise until you know more about them. When it comes to economics, I have graduate and post-graduate qualifications in business (including Economics), and extensive business experience, including serving as a director of two companies before I became a pastor. Yes, I do understand economics, and yes, I am qualified to write about it with as least as much authority as any other businessman. Paul Krugman I'm not, and I make no claim to be (and very glad I am of that!).

As for a new truck twenty years ago being a POS compared to modern ones: far from it. I owned a 1998 F-150, and I currently own a later model; and I've driven and ridden in trucks ranging from old to brand-new. The new ones may have more bells and whistles, but they're not significantly better in terms of their primary function. That's why I'm comfortable comparing base model to base model over a gap of 20 years. We're not comparing bells and whistles. We're comparing the cost of a basic work truck - the cheapest available in a given range. That works from a utilitarian perspective, the "what you pay for what you get" in the way of function and actual job requirements.

What's more, this isn't a "right-wing conservative rant". The original article, I remind you, appeared in the Washington Post, which is anything but right-wing or conservative. As for "pseudo-science", there are an awful lot of economists who agree with me, as well as a large number who disagree. That's because economics is, by definition, not empirically verifiable except in hindsight - and even then, causes and consequences can be (and are) debated ad nauseam from both left-wing and right-wing perspectives.

I'm afraid your comment displays your own prejudices far more than reasoned thought. I suggest you think about that.

GLT said...

No fancy economic degrees in our house, so I hope it's ok with some folks if I comment on an economic issue very important to my wife and me: we think the price of groceries is in a continual upward trend. We base that belief on the real-world experience of buying groceries every week. However, since neither of us has a degree in economics, we could be wrong.

Anonymous said...

Yeah, obvious tatic; notice the SJWs obsession with credentialism... until it backfires.
JoeBob_Walker