Fiat Currencies Don’t Matter to Me… Do They?

As I wrote in my article about fiat currencies, one of the biggest risks they hold for the average person of the middle-class is hyperinflation.

Hyperinflation occurs when a currency’s value becomes so drastically deflated, that it takes extreme amounts of that currency to purchase even everyday necessities.

An example of hyperinflation occurred in Germany following World War One. At the end of the war, Germany, as a condition of peace, was required to make extreme reparation payments to other countries.

At the time, Germany didn’t have physical assets sufficient to make good on these payments, so the German government had to raise capital through various means including increased currency production and borrowing from other countries.

All of these actions resulted in an ever decreasing value of the German Mark. In November of 1923, German hyperinflation reached it’s peak, and to end the rampant devaluation of Germany money, the Mark was replaced by a new currency, the Rentenmark.

At this point, the old Mark was essentially worth less than the paper it was printed on. The picture, above, shows children playing with stacks of Marks. It was cheaper to give them the money than to buy wooden blocks.

Banks began to turn the Mark over, by the ton, to junk dealers for recycling.

During this period of hyperinflation, and before world powers allowed Germany to replace the Mark, the average German citizen saw prices that would astound us today.

This medallion commemorates the end of German hyperinflation in 1923, and reads, “On 1st November 1923 1 pound of bread cost 3 billions, 1 pound of meat 36 billions, 1 glass beer 4 billions.

While Germany’s hyperinflation was not solely a result of out of control currency production, it had a significant part to play AND is a potential trigger of hyperinflation if not kept in check.

Unfortunately, the only thing keeping most governments from printing more and more currency is the government itself.

Now, if you believe that a responsible government would never allow hyperinflation to happen through unbridled currency production, you might want to consider this fact.

Since 2009, the US government had printed more dollars than in the whole, combined, 200 year history of that currency. They have done so, primarily, to support their many military commitments.

In addition, the US has borrowed heavily from foreign countries who have, up to this time, accepted the US debt on the strength of the dollar itself.

However, the more dollars the US produces, the less value the dollar contains, and as a result, the debt that foreign countries have purchased (in the form of loans to the US) is in danger of evaporating as the value of the dollar declines.

Some countries, such as China, are now refusing to accept any more US debt and the result is that the US must turn the printing presses even faster to continue to be able to pay it’s bills. As history has shown, this can’t go on indefinitely.

The US is setting itself up for a period of rapid deflation of the dollar’s value and the resulting hyperinflation which will follow.

Now you may say, “Well, they’re getting what they deserve!” Whatever your US sentiment is (I’m not going argue US foreign policy here), the truth remains that they’re not isolated in this crisis!

The world’s money system is intricately linked and when the US, a major backer of other currencies AND a major goods consumer, is having money problems, the whole world is having money problems.

We live in an era of global trade and instant, electronic transactions. Tremors felt in US markets are felt throughout the world and I believe that soon the US economy is not only going to shake, in a financial earthquake that’ll make the Great Depression seem insignificant, it will collapse, and when it does, the world monetary system will collapse as well.

So, what’s this going to mean to you and me?

We will feel the impact of the collapse of the US and world monetary systems, regardless of where in the world we live. Exactly what that feels like is going to depend on what side of the “financial” fence you sit when the time comes.

I think of it this way.

Let’s say that there’s a nice, new, white painted fence.  Can you see it in you’re minds eye?

Good, now, on one side of the fence sits a poor person. They don’t have any savings and they don’t own a vehicle or their own home. All of their income goes to paying their taxes, rent, utilities,  and getting to and from work, with a bit left over for basic necessities. A lot of their food comes from food banks and other charities as well as from the help that friends and family can afford to give.

It’s a sad but all-to-common condition for many people, individuals and families, but fortunately, at least in the developed countries of the world, they are still a minority.

Now, on the other side of the fence sits a rich person. This person has assets in gold and silver, and in real estate, businesses, and in knowledgeably chosen stocks. Their expenses are paid for through cash flow generated by their real estate and business holdings, and through dividends from their stocks. Contrary to stereotype, there aren’t bags of money lying around, because the rich person knows that bags of paper don’t do him or her any good. Money is for “play” not for being and keeping you wealthy.

Like the poor, but to a greater degree, the rich are also in the minority.

Now, sitting right on top of the fence, balanced skillfully (or precariously, as the case may be) sit you or I, a person of the middle-class.

Our lifestyles are based on debt. We have mortgages for hundreds of thousands of dollars. We have credit card debt. We have loans for cars and boats and RVs and the best schooling. Our retirements are being built through the purchase of stocks and mutual funds that are recommended to us by the “financial experts” because we don’t know how to invest for ourselves. We fuel this lifestyle by working long hours at stressful jobs, but we feel that we’re “lucky to have our jobs.”

We believe that we’re “living well”, but the truth is that if our wages were to disappear, few of us would be able to maintain our lifestyles for more than a month or two. Once our “emergency funds”, if we have any, are depleted, we come tumbling off the fence and I’ll be  you can guess which side we’ll end up on.

Full points if you said, “The poor side.”

Now, you may not believe that this is possible. That’s your right, but, I’d encourage you to examine history. It has happened before and I believe that it will happen again.

So, is there anything that we, the middle-class, can do to prevent it?

Unfortunately, I don’t believe so, but, there are things we can do to lessen it’s impact on ourselves and our families and, in so doing, lessen the impact on those that are already poor.

For more on that, please see the next article in this series.