What do MMM folks think about hyperinflation?

[mousebandit]

What are your thoughts on the possibility of near-future (say within 10 years) hyperinflation?  Not Zimbabwe levels, necessarily, but say, 70's levels (not sure if those levels qualify as hyperinflation).  Particularly rapid hyper or high inflation?  Absurd, possible, likely?  And why? 

TY!  I'm trying to up my financial education skills and understand all these things better! 

MouseBandit

[Mr Dorothy Dollar]

It is something out of my control so hypothesizing about it is silly. If you hold stocks, land, or commodities, like a bulk of the MMM community then inflation will just result in the $ value of the holdings increasing. The only thing impacted would be wages as they would lag the inflation slightly as employers are always suppressing wages. In sum, it is not a fear of mine, nothing you can do, hold stocks, land, or commodities and everything will right its self given time.

[Telecaster]

What are your thoughts on the possibility of near-future (say within 10 years) hyperinflation?  Not Zimbabwe levels, necessarily, but say, 70's levels (not sure if those levels qualify as hyperinflation).  Particularly rapid hyper or high inflation?  Absurd, possible, likely?  And why? 

TY!  I'm trying to up my financial education skills and understand all these things better! 

MouseBandit

Extremely unlikely.  High inflation in the 1970s was primarily caused by two things 1) a huge increase in oil prices, and 2) a loose monetary policy by Fed Reserve chairman Arthur Burns.

We're unlikely to similar events ever return at the same time.

 

[forummm]

In the US, it's unlikely that we'll have severe inflation. But you never know.

Fortunately, the same skills and behaviors that are valuable during "normal" economic times will also serve you well during poor economic times.

[MrStash2000]

You never know but IMOP not gonna happen anytime soon.

Currently we live in a period of over abundance.

And on the horizon expect cheap robot workers, third world labor and agenda influencing corporations to make things even "more affordable" for the sucka consumer.

I would be more worried about deflation.

But since you are a Mustachian and probably carry low debt and have good cash flow. Then you probably shouldn't.

[mozar]

I think we're more likely to head towards deflation, which is scarier.

[Catbert]

Ahhh...the 70s, I remember them well.  I had a 12% mortgage, held an 18% second mortgage on a previous property and my mother bought an 11% 10 year FDIC insured CD. Oh yeah, double digit inflation.  It all evens out unless you are all cash and inflation kills you.

[Cranky]

The 70's had high interest rates - good for borrowers, bad for lenders - but nothing like hyperinflation, honestly.

Coffee prices were high. So was sugar. Gas was expensive, but I didn't have a car, so did not care particularly.

I agree that deflation is generally a worse economic situation.

[mousebandit]

Okay!  Thank you! Now to read up on deflation, LOL!  ;-) 

[Syonyk]

It's certainly possible, and possible to hedge against, but I think it's reasonably unlikely - while the dollar is still the world's reserve currency.  How long can a failing empire sustain that trick of it's fiat currency?  That's a somewhat more interesting question.

I generally treat "monetary system failures" as a heavily related group and hedge against them as a group.

Certainly not entirely - if something goes poorly, I'll lose a good bit of wealth, but I'll still keep something useful around.

Being heavily self sustaining and "useful" to people around you would be nice in such a situation.

[MrStash2000]

Okay!  Thank you! Now to read up on deflation, LOL!  ;-)

If you are worried about deflation just keep debt to a minimum and have cash reserves.

I personally only keep debt to a minimum. I still deploy all cash into Vanguard Funds. It is worth it for the tax breaks alone.

Oh and if you are young make sure you have skills that cannot be farmed off to robotification.

[mak1277]

Okay!  Thank you! Now to read up on deflation, LOL!  ;-)

Why not just go outside for a few hours and take a hike or a bike ride instead?  Seems like you're looking for something to worry about, which in my experience is a fruitless exercise.

[forummm]

The 70's had high interest rates - good for borrowers, bad for lenders

You mean bad for borrowers and good for lenders. I'd love to earn a 20% return but would hate to borrow at that rate.

[mak1277]

The 70's had high interest rates - good for borrowers, bad for lenders

You mean bad for borrowers and good for lenders. I'd love to earn a 20% return but would hate to borrow at that rate.

Aren't rates for lenders generally neutral (i.e., spread on rate banks pay to borrow vs. rates at which they lend is fairly constant)?

Clearly high rates are bad for borrowers.  But wouldn't high interest rates be good (or neutral at worst) for anyone without variable rate debt, which would include many mustachians.

[MrMoogle]

The 70's had high interest rates - good for borrowers, bad for lenders

You mean bad for borrowers and good for lenders. I'd love to earn a 20% return but would hate to borrow at that rate.

Aren't rates for lenders generally neutral (i.e., spread on rate banks pay to borrow vs. rates at which they lend is fairly constant)?

Clearly high rates are bad for borrowers.  But wouldn't high interest rates be good (or neutral at worst) for anyone without variable rate debt, which would include many mustachians.

Inflation might outstrip interest rates, but owning companies (stocks) is a good way to keep up.  The other is owning land or something with inherent value. 

I certainly think something similar to the 1970's it's possible in my lifetime, but I'm not very worried about it.

[theadvicist]

I agree rates (in the UK at least) can only go up. So I am making it a priority to pay off our mortgage (because we can't fix long-term here), and making sure that when interest rates are high, I'll be on the lending side of the equation.

That's my best guess, so it's what I'm doing, but I tend to apply the 'circles of control' philosophy. Get myself in the best place I can, but not worry about things I can't influence.

[tooqk4u22]

Okay!  Thank you! Now to read up on deflation, LOL!  ;-)

If you are worried about deflation just keep debt to a minimum and have cash reserves.

I personally only keep debt to a minimum. I still deploy all cash into Vanguard Funds. It is worth it for the tax breaks alone.

Oh and if you are young make sure you have skills that cannot be farmed off to robotification.

I agree with others that high inflation is unlikely give slow economy and lax demand plus interest rates of all kinds have a lot of room to go up (from zero essentially) to crush inflation. 

Deflation is a possibility like japan and you could argue the US has been tip toeing on that edge given where rates have gone and stayed and growth/inflation is still really low - but immigration, millenials, replacement cycle, and continued low rates will also make this less likely or if it happens not that bad. 

Stagflation is the worst....and probably has a higher chance of occurring than really high inflation or deflation.

[forummm]

The 70's had high interest rates - good for borrowers, bad for lenders

You mean bad for borrowers and good for lenders. I'd love to earn a 20% return but would hate to borrow at that rate.

Aren't rates for lenders generally neutral (i.e., spread on rate banks pay to borrow vs. rates at which they lend is fairly constant)?

Clearly high rates are bad for borrowers.  But wouldn't high interest rates be good (or neutral at worst) for anyone without variable rate debt, which would include many mustachians.

Yes, if you're financing your lending by borrowing, then it probably doesn't matter (at stasis--when rates are rising or following it matters a lot). But if I have $1 million free and clear to invest, I want the highest return possible. High interest rates are great for savers.

[msilenus]

What are your thoughts on the possibility of near-future (say within 10 years) hyperinflation?

In most cases, it's the same thing we've thought since 2010.

[Telecaster]

Aren't rates for lenders generally neutral (i.e., spread on rate banks pay to borrow vs. rates at which they lend is fairly constant)?

Clearly high rates are bad for borrowers.  But wouldn't high interest rates be good (or neutral at worst) for anyone without variable rate debt, which would include many mustachians.

In theory, yes.   What happened in a practical sense in the 1970s is that inflation was increasing so fast that interest rates weren't keeping up and banks were losing their shirts.  Then interest rates way over shot inflation in an effort to get out in front at the same time inflation was cooling off.   As you would expect, rates came down a lot slower than they went up.  So depending on what time period you were looking at it, high interest rates were either great or a disaster.   

[Cranky]

The 70's had high interest rates - good for borrowers, bad for lenders

You mean bad for borrowers and good for lenders. I'd love to earn a 20% return but would hate to borrow at that rate.

Sorry - I should have expanded. High inflation is good for borrowers, which is why rates look high in times of high inflation. You borrow X dollars, and when you pay it back, those dollars are essentially cheaper. High interest rates are an attempt to control the rate at which money will depreciate during inflationary periods.

[forummm]

The 70's had high interest rates - good for borrowers, bad for lenders

You mean bad for borrowers and good for lenders. I'd love to earn a 20% return but would hate to borrow at that rate.

Sorry - I should have expanded. High inflation is good for borrowers, which is why rates look high in times of high inflation. You borrow X dollars, and when you pay it back, those dollars are essentially cheaper. High interest rates are an attempt to control the rate at which money will depreciate during inflationary periods.

It depends. If you are borrowing and get locked into a big loan at a high rate and inflation goes down you get screwed unless you can refinance at a lower rate. And when inflation is rising, the premium on top of inflation that lenders charge could be higher than the normal premium during stable inflation environments because the lender is concerned that inflation will keep rising. But if you get a long term noncallable fixed rate loan at a low interest rate (like a mortgage or issuing 30 year Treasuries), then inflation is your friend.

[mousebandit]

Okay!  Thank you! Now to read up on deflation, LOL!  ;-)

Why not just go outside for a few hours and take a hike or a bike ride instead?  Seems like you're looking for something to worry about, which in my experience is a fruitless exercise.

Mak - as I stated in the OP, I am trying to work on my financial education and understanding these topics, and this is a way to gauge the community's thoughts and opinions on possible future situations.  I'm not worried, LOL - I'm LEARNING.  :-) 

MouseBandit

[aspiringnomad]

OP, if you live in Venezuela, then odds are extremely high. Here in the US, less than 1% probability over the next 15 years is my guess.

[seattlecyclone]

If you own stocks you're relatively well-positioned to weather higher inflation, since the underlying businesses will still have customers and profits even as the value of the dollar goes down. A long period of high inflation could be bad for those of us who plan to use the Roth pipeline to withdraw money from our traditional retirement accounts, since you have to plan five years ahead in nominal dollars. On the other hand if you need to eat some early withdrawal tax that wouldn't be the end of the world if you get to wait until next April to pay it and the real value of that tax has been inflated downward in the interim.

[mousebandit]

Seattle Cyclone - Ah, I hadn't even thought of that wrinkle!  I love little details like that!  :-)

[JCfire]

What are your thoughts on the possibility of near-future (say within 10 years) hyperinflation?  Not Zimbabwe levels, necessarily, but say, 70's levels (not sure if those levels qualify as hyperinflation).  Particularly rapid hyper or high inflation?  Absurd, possible, likely?  And why? 

TY!  I'm trying to up my financial education skills and understand all these things better! 

MouseBandit

Inflation in the mid-to-high single digits or higher, sustained over several years, in the United States, in the next couple of decades is a completely absurd forecast, for a few reasons.  I could give a mini-rant about current economic conditions in the U.S. and the world, sluggish demand growth blah blah blah, but current economic conditions are not exactly a strong bulwark against inflation (or deflation) 10 or 20 years from now.  What did economic conditions look like in 2005?  Long term economic forecasting is a tricky thing, very imprecise, kind of like weather forecasting.  You can make informed forecasts about broadly how things will look in the future: there will still be seasons, temperatures might keep getting warmer on average, there will be an el nino or whatever.  But nobody can accurately forecast whether the temperature on June 12 2018 will be above or below the average temperature for that month.

Fortunately your question is more like "will the temperature on June 12 2018 be 150 degrees or higher?"  I can give a confident no to hyperinflation because it requires fiscal and monetary policy to cooperate in order to enable it.  You need a central bank to be printing ever-increasing sums of money and a government to be spending it (monetary financing of fiscal deficits) to spur hyperinflation, historically.  If there is high inflation and the central bank and government want to end it, they have the power to do so.  Stop growing the money supply and it's awfully hard for inflation to keep hold.

The exception is when there is a "negative supply shock", such as oil prices going to the moon.  This is an instance where you can experience high inflation with shrinking aggregate demand, which puts policymakers in a bind: they can only pull inflation back under control by further hindering an already over-burdened economy and causing a recession with significant job losses and other costs.  Most often they let the inflation shock go in order to try to stabilize the economic cycle.  This is the very reason why the Federal Reserve looks at "core" inflation (excluding food and energy) instead of overall inflation when setting policy: its not that oil "doesn't count" in people's lives, its that setting monetary policy in reaction to commodity price shocks is counter-productive.  An oil price shock happens, put it is not predictive of more shocks in the same direction continuing to happen in the future (otherwise people who trade oil prices would be buying oil now based on the expectation that it goes up, and that buying would have driven it up already). 

In summary -- high inflation like you are describing requires policymakers to tolerate it, which is implausible in the U.S. except in the case of a negative supply shock which by its very nature is a one-time event rather than a continuous trend.

[Reynold]

I saw something interesting, might have been at the Kitces site, about the true hyperinflation that hit Germany between WW1 and WW2.  Apparently, if you were in stocks (which were considered wildly risky at the time, and owned mainly by the 1%), you didn't come out of it too badly, the issue was people who were in bonds (which were considered much safer) or cash.  So it seems that broad investments in the stock market might be reasonable protection even against hyperinflation.  Consider that most companies have to keep operating somehow even in periods of hyperinflation to keep food, housing, etc. going. 

As I've seen it put, if the economy fails so badly that no companies are operating and paper money is worthless, forget about gold, your portfolio should be in canned food and guns. :) 

[dmd149]

It seems as if the common analysis on this thread is:

1. Hyperinflation is extremely unlikely because "it can't happen here" in the US.
2. Even if it does occur, there's not much you can do now

Both are false.

There is no reason it couldn't happen here. Our projected government spending levels far outpace our ability to collect tax revenue. The only reason we can continue this is because we've managed to continue our debt based ponzi scheme. If creditors decide the US debt is too risky, that can all come crashing down.

At that point, the US would either be A) forced to cut spending almost in half immediately, which is the correct thing to do, or B) print money and hyperinflate the currency. Politicians seem unlikely to do A, at least initially, so B is the only plausible thing. They will then continue to blame speculators and busineses and blah blah for causing this crisis.

Now, even if you disagree with the above, and you still think it's a small risk, there are still options to manage against it.

There are three good options to preserve your wealth:

1. Buy small hard assets to include up to two years worth of food and supplies that you will need. Apparently this is not that expensive, a few thousand dollars at most. Just need a good system to rotate through the food and replacing it.

2. Buy a house with fixed-rate morgage. In a hyperinflation scenario, you keep the house so long as you can make the payments. You will be paying it back in hyperinflated dollars so you might be able to get a highly discounted house. If hyperinflation doesn't happen, you just have a house with a morgage like a normal person.

3. Purchase foreign currencies from countries with well managed governments and economies (and keep these currencies outside the country). I currently hold Canadian dollars in a canadian bank account, and swiss francs in a safety deposit at the same Canadian bank. I will be purchasing Australian and New Zealand dollars as well, and buy enough currency to have two years worth of living expenses. Historically, hyperinflation rarely lasted longer than two years wherever it has occured. The reason to keep the cash outside of the control is to avoid US Capital Controls that will occur in a hyperinflation scenario. Basically, the US government would likely make it illegal for individuals to hold foreign currencies and force citizens to exchange it at a way-below market exchange rate.

I bought on to the hyperinflation worries after I read this book by a writer I like: http://johntreed.com/products/how-to-protect-your-life-savings-from-hyperinflation-and-depression

Basically, there is little to no downside to taking the steps mentioned above. If it doesn't happen, worst case is you have some foreign cash from stable countries, a hosue and mortgage, and a stash of food supplies. Yes, you might miss out on some potential market returns, but better than getting wiped out completely in a hyperinflation scenario.

If hyperinflation does happen, you can either wait it out in your home with your food and living supplies, or you can go travel for up to two years with the foreign currency you have stashed.

This is a risk management based approach, like insurance. Low probability? Maybe. But also fairly low cost, and would diminish your risk exposure significantly.

 

[Playing with Fire UK]

I agree rates (in the UK at least) can only go up. So I am making it a priority to pay off our mortgage (because we can't fix long-term here), and making sure that when interest rates are high, I'll be on the lending side of the equation.

Interesting. I'm increasing my mortgage borrowing as a hedge against inflation (lifetime tracker to BOE rate). I'm jealous of the 25 year fixed rates though!

I'm going on the basis that money invested in stocks will keep up with inflation and high inflation will eat away at the mortgage debt.

[Telecaster]

It seems as if the common analysis on this thread is:

1. Hyperinflation is extremely unlikely because "it can't happen here" in the US.
2. Even if it does occur, there's not much you can do now

Both are false.

There is no reason it couldn't happen here. Our projected government spending levels far outpace our ability to collect tax revenue. The only reason we can continue this is because we've managed to continue our debt based ponzi scheme. If creditors decide the US debt is too risky, that can all come crashing down.

At that point, the US would either be A) forced to cut spending almost in half immediately, which is the correct thing to do, or B) print money and hyperinflate the currency. Politicians seem unlikely to do A, at least initially, so B is the only plausible thing. They will then continue to blame speculators and busineses and blah blah for causing this crisis.

Sorry, that's just even remotely true.   The deficit expressed as % of GDP--that is the amount we're not collecting--is pretty small compared to recent decades.  And I'd to double check to be sure, but I believe in 2014 the deficit was smaller then the increase in GDP, which is to say the total debt decreased in relative terms that year.   And there have been other periods in recent history when the total debt shrank or remained stable for years and even decades at a time by that metric.  The trend is not inevitable, is my point. 

Next if we increased taxes to say, 1990s rates, the deficit would be nearly if not actually zero.   So we actually can collect the tax revenue, and quite easily too,  we just choose not to at the moment.  And some even argue that given the low interest rates, it is even smart not too.  I'll leave that discussion for another time.

Finally, our largest creditor--by far--is ourselves.   I don't see us dumping our own debt in mass, but for the purposes of argument let's say you are right, what happens then?   All those 10 year treasuries are still paying the same interest rate.   That cost to the public doesn't change.  But as interest rate go up the value of those bonds goes down.  Future debt would be more expensive of course, but we could retire the old debt for pennies on the dollar.   But why would we?  In a high inflation environment that debt would simply melt away on its own.   And we still have lots of other options, like modest tax increases or modest spending cuts, or combinations. 

[dmd149]

It seems as if the common analysis on this thread is:

1. Hyperinflation is extremely unlikely because "it can't happen here" in the US.
2. Even if it does occur, there's not much you can do now

Both are false.

There is no reason it couldn't happen here. Our projected government spending levels far outpace our ability to collect tax revenue. The only reason we can continue this is because we've managed to continue our debt based ponzi scheme. If creditors decide the US debt is too risky, that can all come crashing down.

At that point, the US would either be A) forced to cut spending almost in half immediately, which is the correct thing to do, or B) print money and hyperinflate the currency. Politicians seem unlikely to do A, at least initially, so B is the only plausible thing. They will then continue to blame speculators and busineses and blah blah for causing this crisis.

Sorry, that's just even remotely true.   The deficit expressed as % of GDP--that is the amount we're not collecting--is pretty small compared to recent decades.  And I'd to double check to be sure, but I believe in 2014 the deficit was smaller then the increase in GDP, which is to say the total debt decreased in relative terms that year.   And there have been other periods in recent history when the total debt shrank or remained stable for years and even decades at a time by that metric.  The trend is not inevitable, is my point. 

Next if we increased taxes to say, 1990s rates, the deficit would be nearly if not actually zero.   So we actually can collect the tax revenue, and quite easily too,  we just choose not to at the moment.  And some even argue that given the low interest rates, it is even smart not too.  I'll leave that discussion for another time.

Finally, our largest creditor--by far--is ourselves.   I don't see us dumping our own debt in mass, but for the purposes of argument let's say you are right, what happens then?   All those 10 year treasuries are still paying the same interest rate.   That cost to the public doesn't change.  But as interest rate go up the value of those bonds goes down.  Future debt would be more expensive of course, but we could retire the old debt for pennies on the dollar.   But why would we?  In a high inflation environment that debt would simply melt away on its own.   And we still have lots of other options, like modest tax increases or modest spending cuts, or combinations.

I'm not sure I quite understand the technical details of your point. Basically you're saying that we can grow and/or tax our way out of our debt problem?

If that is the case, I disagree.

We currently run about $500 bilion deficits every year. We would need to grow about 3% every year which would be an additional $500 billion to the economy every year (ignoring compounding at the moment), The US historically has only be able to collect about 18-20% of GDP in tax revenue since we've tracked it, regardless of who is in office or regardless of what the tax rates are.

Futhermore, even if were able to capture all of that $500 billion in tax revenues and spending stayed constant, that would only allow us to break even on the budge. We would still have interest on the existing debt, which is about 110% of GDP, dangerously high levels by traditional economic measures.

Now, to your point about "owing it to ourselves," I don't know why that is any less disastrous. We either default, and American creditors are out trillions of dollars which would certainly cause a depression (though would be superior to hyperinflation), or the US starts printing money to avoid a default (though it is an effective default) and we have a hyperinflation scenario, wiping out USD denominated creditors and anyone who has significant USD cash.

We have huge future liabilities (social security and medicare), limited political will to cut spending, huge current debt levels, limited abilities to collect aditional tax revenue, and GDP growth rates too low to make a dent in the debt.

But again, I reiterate, even if you think it's a low probability event, you should still manage the risk. A house fire is a low probability event, but you buy fire insurance. Same situation here.

[mousebandit]

dmd149 - I am really appreciating your analysis of things, and concrete suggestions for risk mitigation.  Obviously, I've heard of food storage and such, but the idea of holding the 2-years of foreign currency is a new one for me, and a very good one, I think!  As you say, low risk insurance.  Thanks!

[dmd149]

dmd149 - I am really appreciating your analysis of things, and concrete suggestions for risk mitigation.  Obviously, I've heard of food storage and such, but the idea of holding the 2-years of foreign currency is a new one for me, and a very good one, I think!  As you say, low risk insurance.  Thanks!

Sure, I recommend buying the book I mentioned. Compelling analysis and recommendations.

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

[With This Herring]

*snip*
3. Purchase foreign currencies from countries with well managed governments and economies (and keep these currencies outside the country). I currently hold Canadian dollars in a canadian bank account, and swiss francs in a safety deposit at the same Canadian bank. I will be purchasing Australian and New Zealand dollars as well, and buy enough currency to have two years worth of living expenses. Historically, hyperinflation rarely lasted longer than two years wherever it has occured. The reason to keep the cash outside of the control is to avoid US Capital Controls that will occur in a hyperinflation scenario. Basically, the US government would likely make it illegal for individuals to hold foreign currencies and force citizens to exchange it at a way-below market exchange rate.
*snip*

For our USA readers:  Please remember that US citizens must annually report significant assets they hold in foreign countries or face stiff penalties.  The US government's definition of significant is around $10,000 cumulative, but the threshold varies depending on your situation, the form, and the types of assets held, so please be wary and make your own judgment or get expert advice if you are in doubt.
Statement of Specified Foreign Financial Assets - Form 8938 Instructions
FBAR - Form 114 Instructions

Also, for reference in the deficit and GDP discussion:
US Federal Deficit as a Percentage of GDP
US Federal Debt as a Percentage of GDP

[dmd149]

*snip*
3. Purchase foreign currencies from countries with well managed governments and economies (and keep these currencies outside the country). I currently hold Canadian dollars in a canadian bank account, and swiss francs in a safety deposit at the same Canadian bank. I will be purchasing Australian and New Zealand dollars as well, and buy enough currency to have two years worth of living expenses. Historically, hyperinflation rarely lasted longer than two years wherever it has occured. The reason to keep the cash outside of the control is to avoid US Capital Controls that will occur in a hyperinflation scenario. Basically, the US government would likely make it illegal for individuals to hold foreign currencies and force citizens to exchange it at a way-below market exchange rate.
*snip*

For our USA readers:  Please remember that US citizens must annually report significant assets they hold in foreign countries or face stiff penalties.  The US government's definition of significant is around $10,000 cumulative, but the threshold varies depending on your situation, the form, and the types of assets held, so please be wary and make your own judgment or get expert advice if you are in doubt.
Statement of Specified Foreign Financial Assets - Form 8938 Instructions
FBAR - Form 114 Instructions

Also, for reference in the deficit and GDP discussion:
US Federal Deficit as a Percentage of GDP
US Federal Debt as a Percentage of GDP

Good tips and resources. THE FBAR requirement is important to remember. However, it doesn't apply to cash in a safety deposit box. The form is easy enough to fill out online, assuming your foreign assets are limited to checking accounts and such.

It also looks like those debt and deficit numbers end in 2011. If you google US Debt to GDP ratio you should be able to find current numbers.

I also think the calculations in the above links use a different calculation that would not generate the 110% debt to gdp level I cited.

[With This Herring]

Just to point this out for others: There are TWO forms to be considered.  FBAR/114 is one.  The 8938 is the other.  They have different rules and thresholds.  Being exempt from filing one does not automatically exempt you from filing the other.  Some people need to file both.

Here is the reference (up-to-date version) used by the charts I linked earlier:
https://www.whitehouse.gov/omb/budget/Historicals/

[projekt]

I am seconding Telecaster's view of government debt and inflation in the US. We are easily able to manage current debt (our interest payments are lower as a % of GDP than they were in the 90s) and we will never have to pay off the public debt completely, although we will be retiring old instruments as they come due.

High inflation would require a situation where the government's ability to continue borrowing is limited. That could happen, but it would be a political decision. Even when S&P downgraded the US debt offerings they did not become less attractive to buyers. Inflation scaremongers in general have been wrong over and over again for years, and hyperinflation is way off the radar. At this point, it's much better to ignore anyone who has been predicting inflation for years while being out of tune with the realities of our economy, which is more like Japan's has been for 20-30 years.

[Syonyk]

^ Our payments on interest are lower because the interest rate is zero.

[Telecaster]

I'm not sure I quite understand the technical details of your point. Basically you're saying that we can grow and/or tax our way out of our debt problem?

If that is the case, I disagree.

We currently run about $500 bilion deficits every year. We would need to grow about 3% every year which would be an additional $500 billion to the economy every year (ignoring compounding at the moment), The US historically has only be able to collect about 18-20% of GDP in tax revenue since we've tracked it, regardless of who is in office or regardless of what the tax rates are.

Futhermore, even if were able to capture all of that $500 billion in tax revenues and spending stayed constant, that would only allow us to break even on the budge. We would still have interest on the existing debt, which is about 110% of GDP, dangerously high levels by traditional economic measures.

Now, to your point about "owing it to ourselves," I don't know why that is any less disastrous. We either default, and American creditors are out trillions of dollars which would certainly cause a depression (though would be superior to hyperinflation), or the US starts printing money to avoid a default (though it is an effective default) and we have a hyperinflation scenario, wiping out USD denominated creditors and anyone who has significant USD cash.

We have huge future liabilities (social security and medicare), limited political will to cut spending, huge current debt levels, limited abilities to collect aditional tax revenue, and GDP growth rates too low to make a dent in the debt.

I'm saying a couple things.  As a nation, we are simply not on a course to an unsustainable debt spiral.  Sure, that could happen.  But that's not the course we're on at the moment.  Looking at debt as a ratio of GDP is imperfect, but quite useful because it shows the drag debt has and gives us a frame of reference to history.   If we borrow 3% of GDP, and GDP grows by 3%, we're in the same position debt wise as we were before if we use the  Debt/GDP metric.   

What does default look like? It means not making the agreed upon payments, right?  Right now, interest on the debt is 1.3% of GDP.  That is an enormous amount of dollars.   In historical terms, that's pretty low.   Since WWII it has been higher than that--sometimes much higher--most of the time.  Since we've been able to afford 1.3% of GDP for the last 70 years, I don't see why we can't continue to do so in the future.

I don't know what the composition of federal debt is, but I read a while back that the Treasury was re-issuing debt in longer and longer term bonds.  If interest rates were to double tomorrow, all those 10 year bonds would still be paying the same rate.  New debt of course would cost more.  But new debt is quite a small amount compared the the old debt.  It wouldn't suddenly kill us, in other words. 

Up above I said if I wasn't mistake, returning to 1990s tax rates would eliminate the deficit.  I actually was mistaken.  It wouldn't be enough, most likely.  But it would be more than enough to put GDP growth faster than the debt growth.   In fact, we're probably at that stage right now anyway.  And if that is the case, then the prospect of default seems very unlikely indeed. 

But again, I reiterate, even if you think it's a low probability event, you should still manage the risk. A house fire is a low probability event, but you buy fire insurance. Same situation here.

I talk with my wife all the time about managing risks of low probability events, so I have no problem with thought process.  But I do question your methods.  By holding foreign currency in foreign bank in fact you are hedging against the risk of hyper inflation in the US.  But you are taking on the much more likely risk of foreign currency fluctuation.  That can work either way, I suppose, but the Iceland banking crisis caused in large part by foreign currencies going the wrong way.  See also the Swiss Franc a couple years ago.  A lot of people got pummeled by that one.  Also, I suppose there is some political risk.  You'll need to repatriate that money in a time of great financial crisis.  You're hoping foreign government will let you do that when the SHTF. 

[dmd149]

I'm not sure I quite understand the technical details of your point. Basically you're saying that we can grow and/or tax our way out of our debt problem?

If that is the case, I disagree.

We currently run about $500 bilion deficits every year. We would need to grow about 3% every year which would be an additional $500 billion to the economy every year (ignoring compounding at the moment), The US historically has only be able to collect about 18-20% of GDP in tax revenue since we've tracked it, regardless of who is in office or regardless of what the tax rates are.

Futhermore, even if were able to capture all of that $500 billion in tax revenues and spending stayed constant, that would only allow us to break even on the budge. We would still have interest on the existing debt, which is about 110% of GDP, dangerously high levels by traditional economic measures.

Now, to your point about "owing it to ourselves," I don't know why that is any less disastrous. We either default, and American creditors are out trillions of dollars which would certainly cause a depression (though would be superior to hyperinflation), or the US starts printing money to avoid a default (though it is an effective default) and we have a hyperinflation scenario, wiping out USD denominated creditors and anyone who has significant USD cash.

We have huge future liabilities (social security and medicare), limited political will to cut spending, huge current debt levels, limited abilities to collect aditional tax revenue, and GDP growth rates too low to make a dent in the debt.

I'm saying a couple things.  As a nation, we are simply not on a course to an unsustainable debt spiral.  Sure, that could happen.  But that's not the course we're on at the moment.  Looking at debt as a ratio of GDP is imperfect, but quite useful because it shows the drag debt has and gives us a frame of reference to history.   If we borrow 3% of GDP, and GDP grows by 3%, we're in the same position debt wise as we were before if we use the  Debt/GDP metric.   

What does default look like? It means not making the agreed upon payments, right?  Right now, interest on the debt is 1.3% of GDP.  That is an enormous amount of dollars.   In historical terms, that's pretty low.   Since WWII it has been higher than that--sometimes much higher--most of the time.  Since we've been able to afford 1.3% of GDP for the last 70 years, I don't see why we can't continue to do so in the future.

I don't know what the composition of federal debt is, but I read a while back that the Treasury was re-issuing debt in longer and longer term bonds.  If interest rates were to double tomorrow, all those 10 year bonds would still be paying the same rate.  New debt of course would cost more.  But new debt is quite a small amount compared the the old debt.  It wouldn't suddenly kill us, in other words. 

Up above I said if I wasn't mistake, returning to 1990s tax rates would eliminate the deficit.  I actually was mistaken.  It wouldn't be enough, most likely.  But it would be more than enough to put GDP growth faster than the debt growth.   In fact, we're probably at that stage right now anyway.  And if that is the case, then the prospect of default seems very unlikely indeed. 

But again, I reiterate, even if you think it's a low probability event, you should still manage the risk. A house fire is a low probability event, but you buy fire insurance. Same situation here.

I talk with my wife all the time about managing risks of low probability events, so I have no problem with thought process.  But I do question your methods.  By holding foreign currency in foreign bank in fact you are hedging against the risk of hyper inflation in the US.  But you are taking on the much more likely risk of foreign currency fluctuation.  That can work either way, I suppose, but the Iceland banking crisis caused in large part by foreign currencies going the wrong way.  See also the Swiss Franc a couple years ago.  A lot of people got pummeled by that one.  Also, I suppose there is some political risk.  You'll need to repatriate that money in a time of great financial crisis.  You're hoping foreign government will let you do that when the SHTF.

The biggest challenge with your analysis is that you seem to assume linear GDP growth rates (of 3% minimum) and assume perfect ability of the US government to increase tax revenue at will, while also projecting linear spending projections. We know that spending on those will increase dramatically in the next few decades. So unless we rein in the spending dramatically, or grow consistently at miraculous rates (6+% GDP growth per year), we are on a very risy course. (Note: I'm also not sure how increasing the tax rate to the same levels as the 90s increases GDP growth).

Basically, a lot of things have to go right for us to be safe from a hyperinflation scenario, and only a few things have to go wrong to get hyperinflation. Not sure if you read Nassim Taleb's book "Antifragile," but his idea is that if you have a lot more to lose than to gain, than you are fragile (if you have more to gain than lose, you are antifragile).

As for the foreign currency hedge, you are right about currency risk. However, using the same criteria we use to determine that the USD is at risk of hyperinflation, we can find a basket of currencies that seem like a better risk than USD. Swiss Franc, Australian Dollars, and New Zealand Dollars are managed by governments that are democratic and fiscally responsible. The currencies are easily traded. From a risk point of view, they work great. The Candian dollar works as well, though their debt to GDP is getting up there.

The idea is not necessarily to repatriate the foreign curency. It's very well possible that the situation in the US becomes terrible enough in a hyperinflation scenario that you'll have to leave the country until it ends. If you leave to Canada, you spend the canadian dollars there. Leave to Australia, spend the Australian dollars there.

Anyway, I can only share what steps I'm taking. I'm buying foreign currencies and keeping them outside of the US and I'm prioritizing that over putting money in the market, at least until I have a few years of expenses saved up. It is a low cost, low risk strategy (according to my risk criteria) that I believe could be a lifeline in case hyperinflation happens. Little downside, huge potential upside.

[EmpireOfDirt]

The idea is not necessarily to repatriate the foreign curency. It's very well possible that the situation in the US becomes terrible enough in a hyperinflation scenario that you'll have to leave the country until it ends. If you leave to Canada, you spend the canadian dollars there. Leave to Australia, spend the Australian dollars there.

This is an interesting analysis dmd149, and I don't necessarily disagree with some of your reasoning.

But I think there are a lot of bets that would be off the table if hyperinflation occurred in the US. Understating it a little, the economies of at least of few other countries may be affected, making exchange rates volatile. Travel to Canada and especially Australia can be curtailed by their governments, especially in difficult or uncertain times, making spending their currency difficult. So in my mind having foreign currency may not be as effective as you imagine.

[dmd149]

The idea is not necessarily to repatriate the foreign curency. It's very well possible that the situation in the US becomes terrible enough in a hyperinflation scenario that you'll have to leave the country until it ends. If you leave to Canada, you spend the canadian dollars there. Leave to Australia, spend the Australian dollars there.

This is an interesting analysis dmd149, and I don't necessarily disagree with some of your reasoning.

But I think there are a lot of bets that would be off the table if hyperinflation occurred in the US. Understating it a little, the economies of at least of few other countries may be affected, making exchange rates volatile. Travel to Canada and especially Australia can be curtailed by their governments, especially in difficult or uncertain times, making spending their currency difficult. So in my mind having foreign currency may not be as effective as you imagine.

Yes I agree. I've been thinking about that problem.

I'm not worried about the exchange rate problem necessarily. If you are spending those currencies in the native countries, no need to worry about currency exchange, right? In the case where you need to say, spend Canadian dollars in Australia or Europe or elsewhere you may want to go, I'm betting on the fact that those currencise will still have instric value. You might be able to just use them directly without exchange them. Everyone's economy will certainly be effected, but that's different from their currencies losing their value.

As far as restricted travel by governments, that is definitely something to worry about. Other governments surely do not want American economic refugeees flooding their country (the irony, no?). But lets put it this way, better to have the foreign currency then not have it. If you are trying to go to Canada and you can show bank statements with a years worth of living expesnes in Canadian dollars in a Canadian bank, you have a much more compelling case to be let in under normal tourist visas and such. Indeed, if you have significant assets and can demonstrate it, they might welcome you with open arms! You never know though.

If you are able to get a second passport, that will also be helpful.

[EmpireOfDirt]

The idea is not necessarily to repatriate the foreign curency. It's very well possible that the situation in the US becomes terrible enough in a hyperinflation scenario that you'll have to leave the country until it ends. If you leave to Canada, you spend the canadian dollars there. Leave to Australia, spend the Australian dollars there.

This is an interesting analysis dmd149, and I don't necessarily disagree with some of your reasoning.

But I think there are a lot of bets that would be off the table if hyperinflation occurred in the US. Understating it a little, the economies of at least of few other countries may be affected, making exchange rates volatile. Travel to Canada and especially Australia can be curtailed by their governments, especially in difficult or uncertain times, making spending their currency difficult. So in my mind having foreign currency may not be as effective as you imagine.

Yes I agree. I've been thinking about that problem.

I'm not worried about the exchange rate problem necessarily. If you are spending those currencies in the native countries, no need to worry about currency exchange, right? In the case where you need to say, spend Canadian dollars in Australia or Europe or elsewhere you may want to go, I'm betting on the fact that those currencise will still have instric value. You might be able to just use them directly without exchange them. Everyone's economy will certainly be effected, but that's different from their currencies losing their value.

As far as restricted travel by governments, that is definitely something to worry about. Other governments surely do not want American economic refugeees flooding their country (the irony, no?). But lets put it this way, better to have the foreign currency then not have it. If you are trying to go to Canada and you can show bank statements with a years worth of living expesnes in Canadian dollars in a Canadian bank, you have a much more compelling case to be let in under normal tourist visas and such. Indeed, if you have significant assets and can demonstrate it, they might welcome you with open arms! You never know though.

If you are able to get a second passport, that will also be helpful.

Fair point. If you look at it as more of a hedging strategy than a guaranteed solution, it becomes more intriguing.

[theadvicist]

The idea is not necessarily to repatriate the foreign curency. It's very well possible that the situation in the US becomes terrible enough in a hyperinflation scenario that you'll have to leave the country until it ends. If you leave to Canada, you spend the canadian dollars there. Leave to Australia, spend the Australian dollars there.

This is an interesting analysis dmd149, and I don't necessarily disagree with some of your reasoning.

But I think there are a lot of bets that would be off the table if hyperinflation occurred in the US. Understating it a little, the economies of at least of few other countries may be affected, making exchange rates volatile. Travel to Canada and especially Australia can be curtailed by their governments, especially in difficult or uncertain times, making spending their currency difficult. So in my mind having foreign currency may not be as effective as you imagine.

And if you have Swiss Francs in a Canadian safety deposit box, in order to use the money, you do have to repatriate it - to Switzerland. My parents talk of the 1970s when they weren't allowed to take £s out of the UK - they were searched before they got on the ferry to go on holiday. There was a limit per person, and it was such a small limit that in order to afford petrol from their journey back from the ferry to their house, they left a blank cheque in the glove compartment. They could not take enough £s out of Britain to pay for petrol for their return journey inside Britain. They weren't trying to 'take money out' of the country, they were just trying to have enough money on them for when they came back.

So whilst it seems like a bit of insurance, in practise, I'm not sure (given the low probability of ever needing to use it, the certainty of the currency devaluing whilst it is held in cash elsewhere, and the possible difficulties in moving it where it needs to be) it's worth it.

Also, remember that paper banknotes can and do get replaced, and if you don't surrender them for new notes at the time of replacement they become worthless. 'Old £20' are now only worth the paper they are printed on. £5 notes are being replaced in September. I have a feeling this doesn't happen often in the US (as the design has never really changed in all the years I've been visiting, though maybe I just haven't noticed) so this may not be something people are widely aware of. Holding actual physical cash has its own risks.

[dmd149]

The idea is not necessarily to repatriate the foreign curency. It's very well possible that the situation in the US becomes terrible enough in a hyperinflation scenario that you'll have to leave the country until it ends. If you leave to Canada, you spend the canadian dollars there. Leave to Australia, spend the Australian dollars there.

This is an interesting analysis dmd149, and I don't necessarily disagree with some of your reasoning.

But I think there are a lot of bets that would be off the table if hyperinflation occurred in the US. Understating it a little, the economies of at least of few other countries may be affected, making exchange rates volatile. Travel to Canada and especially Australia can be curtailed by their governments, especially in difficult or uncertain times, making spending their currency difficult. So in my mind having foreign currency may not be as effective as you imagine.

And if you have Swiss Francs in a Canadian safety deposit box, in order to use the money, you do have to repatriate it - to Switzerland. My parents talk of the 1970s when they weren't allowed to take £s out of the UK - they were searched before they got on the ferry to go on holiday. There was a limit per person, and it was such a small limit that in order to afford petrol from their journey back from the ferry to their house, they left a blank cheque in the glove compartment. They could not take enough £s out of Britain to pay for petrol for their return journey inside Britain. They weren't trying to 'take money out' of the country, they were just trying to have enough money on them for when they came back.

So whilst it seems like a bit of insurance, in practise, I'm not sure (given the low probability of ever needing to use it, the certainty of the currency devaluing whilst it is held in cash elsewhere, and the possible difficulties in moving it where it needs to be) it's worth it.

Also, remember that paper banknotes can and do get replaced, and if you don't surrender them for new notes at the time of replacement they become worthless. 'Old £20' are now only worth the paper they are printed on. £5 notes are being replaced in September. I have a feeling this doesn't happen often in the US (as the design has never really changed in all the years I've been visiting, though maybe I just haven't noticed) so this may not be something people are widely aware of. Holding actual physical cash has its own risks.

Yes I did read up on the need to exchange notes once new notes are issued. Just something to be mindful of.

I still don't understand your repatriation point. Why not just exchange the Swiss Franc at a bank in Canada (or Australia, or whatever). You lose the exchange fee, but there is no requirement to spend it in the respective country.

I also dont think physical cash is necessarily the best way, but it is becoming increasingly difficult for US citizens to hold bank accounts overseas. Canada is fairly easy (just go in person, show two forms of ID, and voila, checking account). I believe Australia and New Zealand now require you to have an address there. So cash is the next best thing. Otherwise, you get a debit card and can use it like any other debit/credit card to pay for things in countries with a modern infrastructure.

Also, inflation in the foreign currency is not necessarily guaranteed. Swiss banks actually have started charging negative interest rates lately, making cash more valuable. If you have an actual bank account, you can also capture the interest rates those accounts pay out. But you're right, that is generally what is likely to happen. But as a risk mitigation strategy, it works for making sure your all your wealth doesn't get wiped out in a hyperinflation event.

I just disgaree with the "throw up your hands and hope for the best" strategy when there are reasonable, low cost steps to take to insure against it.

[mak1277]

But again, I reiterate, even if you think it's a low probability event, you should still manage the risk. A house fire is a low probability event, but you buy fire insurance. Same situation here.

I have insurance on my home because I have a mortgage.  Once I'm mortgage-free I'll also be self-insuring my home (because of this risk tradeoff you mention).

Everyone needs to remember that buying a bunch of foreign currency, or gold, is just speculation...no different than market timing (well, probably worse).

[dmd149]

But again, I reiterate, even if you think it's a low probability event, you should still manage the risk. A house fire is a low probability event, but you buy fire insurance. Same situation here.

I have insurance on my home because I have a mortgage.  Once I'm mortgage-free I'll also be self-insuring my home (because of this risk tradeoff you mention).

Everyone needs to remember that buying a bunch of foreign currency, or gold, is just speculation...no different than market timing (well, probably worse).

It is not speculation or market timing. You are not trying to trade the currencies based on short term fluctuations. It is an insurance/hedge strategy to preserve wealth. There is no "profit" trying to be generated, just an avoidance of huge losses.

Here is an article on keeping swiss francs in safety deposit box written by the author of the hyperinflation book i mentioned earlier:

http://johntreed.com/blogs/john-t-reed-s-hyperinflation-deflation-blog/65776963-swiss-francs-in-an-outside-the-u-s-safe-deposit-box

No one here has to do what I recommend (obviously), but I am taking the foreign currency hedge step and personally feel it is worthwhile. I have nothing to gain by anyone following my advice here. Just wanetd to provide a different view from what had been posted on the thread.

[mak1277]

But again, I reiterate, even if you think it's a low probability event, you should still manage the risk. A house fire is a low probability event, but you buy fire insurance. Same situation here.

I have insurance on my home because I have a mortgage.  Once I'm mortgage-free I'll also be self-insuring my home (because of this risk tradeoff you mention).

Everyone needs to remember that buying a bunch of foreign currency, or gold, is just speculation...no different than market timing (well, probably worse).

It is not speculation or market timing. You are not trying to trade the currencies based on short term fluctuations. It is an insurance/hedge strategy to preserve wealth. There is no "profit" trying to be generated, just an avoidance of huge losses.

Here is an article on keeping swiss francs in safety deposit box written by the author of the hyperinflation book i mentioned earlier:

http://johntreed.com/blogs/john-t-reed-s-hyperinflation-deflation-blog/65776963-swiss-francs-in-an-outside-the-u-s-safe-deposit-box

No one here has to do what I recommend (obviously), but I am taking the foreign currency hedge step and personally feel it is worthwhile. I have nothing to gain by anyone following my advice here. Just wanetd to provide a different view from what had been posted on the thread.

I guess I don't see any difference in what you recommend compared to buying gold as an inflation hedge, which I would consider speculation.  There's no free lunch here, so while I agree that you're hedging a risk, what you're doing is not risk-free.

[Syonyk]

Everyone needs to remember that buying a bunch of foreign currency, or gold, is just speculation...no different than market timing (well, probably worse).

I don't think it's speculation if you're not expecting it to gain value, just hold some value...

I keep some of my assets in "not-USD" because in the case of any issue with the dollar, I'd like to have something of value I can use to trade for things.  I'm working on increasing my "useful items" supply as well, and my useful skill set.

I'm not expecting any of that stuff to gain value, and I expect it to lose relative value in the event of a currency devaluation (of any sort), but I expect it to hold at least some value - keeping 50% of useful value would be much more useful to me than dollars, at that point.