I’ve read FOFOA (Friend of Friend of Another) the past few years. I’ve occasionally liked things he’s written, but I’ve often come away confused by his writings. I’m not sure if that’s because he’s unclear in his writing, or if I’m just too dense to follow him. He has a stemwinder up that’s given me some things to think about and it’s convinced at least one deflationist that we’re heading for hyperinflation.
FOFOA – Deflation or Hyperinflation?
While deflation and inflation are practically polar opposites, deflation and hyperinflation look almost identical on the surface, with the main difference being the wheelbarrows of worthless cash. As I wrote in 2009 in The Waterfall Effect:
There is a quote I like that comes from Le Metropole Cafe. It goes, “we will have deflation in everything we own, and inflation in everything we use”. This is partly true. It is true during the run up to the rubber band snapping. It is true until we hit the waterfall. At that point I have my own version of the quote. “We will have hyperDEflation in everything measured against real money, GOLD, and we will have hyperINflation in everything measured against paper dollars.”
“Human nature has followed this path for thousands of years. You know the old joke about outrunning the bear? Well, these lenders will influence our financial policy as such. They will try to get their debt securities liquefied first, spend the fiat and in this process outrun you and I. Leaving anyone they can beat to the mercy of the hyperinflation bear eating their remaining fiat assets…”
“…hyperinflation is the process of saving debt at all costs, even buying it outright for cash… because policy will allow the printing of cash, if necessary, to cover every last bit of debt and dumping it on your front lawn!”
Remember, hyperinflation is a race, not against the bear (you can’t outrun the bear) but against your neighbor.
As I said, Marx got one thing right. History does bear out the dramatic story of centuries of class struggle. But if we eliminate his one small flawed premise, we can see it all much more clearly.
The two classes are not the Labour and the Capital, the rich and the poor, the proletariat and the bourgeoisie, or the workers and the elite. The two classes are the Debtors and the Savers. “The easy money camp” and “the hard money camp”. History reveals the story of these two groups, over and over and over again. Always one is in power, and always the other one desires the power.
1. Debtors – “The easy money camp” likes to spend (and redistribute) money it did not earn, either by borrowing it, taxing the savers for it, or printing it. They like easy money because it is always and everywhere constantly inflating, easing the repayment of their debts.
2. Savers – “The hard money camp” likes to live within their means and save any excess for the future. They prefer hard money (or in some cases “harder” money) because it protects their savings and forces the debtors to work off their debts.
Even if you accept that hyperinflation is 100% certain, real estate is still a poor investment choice to carry your wealth through. Gold is so much better that real estate shouldn’t even be considered an investment choice (choice, as in a new investment) beyond your primary residence. Even with 10x or even 20x presumed leverage in a near-term debt wipeout, unleveraged gold is still a much better choice. And in addition to it being the lesser choice, leveraged real estate also carries a non-zero political risk in hyperinflation. I’m giving this an extremely low probability in today’s world, but under any kind of conservative and personal “one percent doctrine” it must be factored heavily into the equation that includes expected leverage and the carrying costs on an unknowable timetable. This is an excerpt from an email I received a while ago:
Today I read a short little book titled Fiat Money Inflation in France by Andrew White (published 1912). My general impression is that there is no law so insane that it can’t be enacted during a hyperinflation. As you may know, they even passed a law such that debts increased along with the issuance of further currency, so that for every so many additional assignats printed, one’s debts increased by 25%. Thus they took away the one silver lining of currency debasement for the middle class. What a nightmare.
This is very important: Once hyperinflation commences it is characterized by a running shortage of cash, even though it appears like the opposite to the outside observer. The currency collapses in value against economic goods because the debt and the credit collapsed. There is no credit, only cash, and there is a shortage of cash for everyone, including the Elite and the government. So they, the Elite/government, print and print for their own survival while saying it is for yours.
RSS Posts Feed
Makes sense to me, except the bit: Gold is so much better that real estate shouldn’t even be considered an investment choice (choice, as in a new investment) beyond your primary residence.
If I were to buy additional real estate, I may buy a few acres just to own, but primarily, it would be additional houses to rent out. I wonder to what extent the rental income before the hyperinflation crash would equal out the stability of gold?
If I budget right, I can buy & rent a new house every year or two, and the rental covers the mortgage payment, plus a little extra, and eventually “own” a number of homes.
However, the price of an ounce of gold is more than my house payment, I could only ever buy whatever $1500 buys that month – an ounce today, 3/4 oz next month, etc.
Perhaps it depends on when I start buying houses or gold.
Wow, that was long. Ok, I’m not quite sure I completely followed it, so: what should I do? Buy gold? Is that the takeaway?
Thib, the long is short is definitely get into metals. Gold for sure.
Silver has been very good the last year – better than gold by far – and might still have a better return for a while longer. Gold prices have languished for about six months, but might be getting ready to take off.
There’s an old line of thinking that you should put three times as much money into silver as gold, since silver tends to appreciate more.
I moved some of my gold over to silver a while back. At some point I plan on taking profits on some of the silver and moving the money back into gold. Not sure when, though.
Best way to start is to start. Buy a little. When you see some profits from that buy a little more.
This is a great article, I always say “there is inflation in the things we need, and deflation in the things we want”
Great chart showing this:
http://goldandsilverlinings.com/?p=635