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The Fiscal Cliff and Hyperinflation
12/21/2012 8:30 am EST
What could happen if the US can't pull back from the fiscal cliff? John Reed discusses the implications for investors.
How can you protect yourself against hyperinflation or even depression? We are talking about that today with John Reed. Now John, you have actually written a book with that very title. Tell us your ideas.
I wrote the second edition...I just finished this week because the first one sold out. Basically, I could see a lot of trouble coming up, and I'm not the only one-everybody says the current fiscal policies are unsustainable, but they don't talk about what that means. So my book is 320 pages about what unsustainable means, and it means they are going to stop, what we are doing is going to stop.
Congress and the President basically have two choices: they can cut spending about 50%, because that is about what the deficit represents in terms of federal spending; or they can print money, which is sort of illegal and immoral. But I think that is the choice they will make: they will print money when they can no longer sell US government bonds.
They need to pay Social Security recipients and Medicare, and when the bond buyers stop buying the bonds, they either have to cut spending drastically or print money. I think they will print, and that causes hyperinflation.
Now given all that then, what are your suggestions for the citizens to protect themselves?
Well, hyperinflation makes the US dollar worthless fairly rapidly. In Germany, for example, when they had hyperinflation, before it started you needed four German marks to buy a US dollar. At the end of it, you needed 4 billion German marks to buy a US dollar.
Right, I've heard the wheelbarrow stories.
Yeah, one guy took a wheelbarrow to a store piled with currency and he left it there; it wouldn't fit through the door, and he didn't feel people would steal it because the money was so low value. When he came back, the money was there but the wheelbarrow was stolen. That's a good point, because the wheelbarrow is a hard asset.
What you do not want to have in hyperinflation is dollar-denominated assets or dollars. You don't want to have like a Social Security annuity, which is dollar-denominated; you don't want a private pension which is dollar-denominated. You don't want bonds-government bonds, corporate bonds, municipal bonds. You don't want cash. You don't want certificates of deposit unless they are in a foreign currency.
Now I just recently closed all my IRAs, which is going to cost me a lot of taxes, but I moved the money to Canada, Australia, and New Zealand in savings accounts in those countries and in their currency. Then I also bought a bunch of Swiss francs-just plain cash-and put it in a safe deposit box in Canada, because Swiss francs right now are experiencing deflation.
When you have deflation, money in a mattress or a safe deposit box actually gains purchasing power, because when you take it out you can buy more stuff with it. Also, if you have a Swiss bank account-which is nearly impossible to get these days-they charge negative interest, so you are literally better off with the cash in a safe deposit box then you are with an account.