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