# Inflation/hyperinflation



## hotbmw (13 December 2008)

I was reading the below comments, hyperinflation in germany 1923 and its a bit confusing for a newbie like me to try and put it in context to what our future may be.

If this happens in usa in yrs to come, how does it affect australia? would we have it too? 

is there things you must or must not do to protect your assets or cash with inflation. does anyone know a good article to read or have any advice. im a bit worried about this for the future and i dont know much about it.

Cheers, Rob


How Investments Fared Germany 1923

At the start it is important to understand how hard it was to obtain real income during the inflation. Professionals, skilled workers and others used to enjoying good income found their real salaries disastrously cut. Those who depended on savings, pensions or investment income for a living faced a terrible situation.

Interest from bonds or savings deposits soon depreciated to where they had no real value. Stocks paid meager dividends or none at all; corporate managements needed the money for working capital, or used it for capital building and speculation. Owners of rental property fared no better; the government froze rents, which soon meant that tenants were occupying premises virtually rent-free. Dipping into capital led to big losses, since cash, bonds and even stocks quickly shrunk drastically in value. The urgent need for income had important effects on the true prices of various types of property and investments.

Cash: Money held in cash lost value rapidly and soon became completely worthless. Of all investment forms, this was the most disastrous.

Bank Deposits: In theory, bank deposits became as worthless as cash. However, after the stabilization the government decreed partial reimbursement, and sums in the range of 15-30% of the original deposit value were repaid. Naturally, however, the great majority of depositors withdrew their funds at some time during the inflation, after much of the value had been lost, and exchanged them for goods. Few Germans held money in deposits through the entire period.

Bonds, Mortgages: As usual in an inflation, bonds and mortgages fell in value even faster than cash. After the stabilization, some restitution was provided by law. Holders of government bonds were reimbursed to the extent of 2.5% of the original bond values. Mortgage holders also received some repayment, while a 1925 law provided for 15-25% reimbursement of corporate bondholders, though the payment was delayed for some years. Here again, few investors held bonds or mortgages throughout the entire period; most holders got rid of them for whatever pittance they would bring during the inflation.

Real Estate: Farmers and holders of urban property seemed to benefit if their property was mortgaged; the inflation soon wiped out the mortgage debt. However, they received no income, as noted above, since rents were frozen. After the stabilization, heavy new taxes and the urgent need for cash forced most holders to remortgage their property, often more heavily than originally, so that their gains were illusory. Still, those who held real estate throughout managed to save the capital thus invested. However, those who sold during the inflation (often through desperate need for cash) fared poorly. Because it brought no income, real estate sold at extremely low real price levels during inflation.

Foreign Exchange: Those who held funds in dollars, pounds or other stable currencies, or in gold,german gold coin saved their capital. The government set up rigid exchange controls as the inflation proceeded. As usual under such conditions, a black market flourished. The ones who fared best were the small minority who had the foresight to exchange marks into foreign money or gold very early, before new laws made this difficult and before the mark lost too much value.

Personal Property: Capital was preserved by those who early changed it into objects of lasting value--rare coins, stamps, jewelry, works of art, antiques--or into merchandise such as clothing, fabrics, etc. Of course, most people did not understand the advantage of accumulating such property until the inflation was well along. By that time the prices of all goods had risen so much that they seemed outrageously bad bargains. In the event, however, cash proved an even worse bargain.


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## robots (13 December 2008)

hotbmw said:


> I was reading the below comments, hyperinflation in germany 1923 and its a bit confusing for a newbie like me to try and put it in context to what our future may be.
> 
> If this happens in usa in yrs to come, how does it affect australia? would we have it too?
> 
> ...




hello,

this sounds alright Hotbmw, 

thankyou
robots


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## hotbmw (13 December 2008)

1.
as far as i understand during deflation u want cash at home in a safe and possibly take advantage of falling asset prices?
and during inflation u want property or land and hold onto it?

2.
what happens at the end of the inflationary period, it slowly drops in value back to fair value or do wages increase in line with the new asset value?

3.
if the US has defaltion issues in the next year or so does it follow on to us or does there deflation become our inflation?

thanks
Rob


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## wayneL (13 December 2008)

FWIW, deflation is looking more likely; an excellent case presented here: 
http://londonbanker.blogspot.com/2008/12/deflation-has-become-inevitable.html


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## robots (13 December 2008)

hello,

so hotbmw,

if we have just had inflation where high asset prices, high incomes, high Interest rates, high everything else etc,

now people predicting deflation where low asset prices, low incomes, low Interest rates, low everything else etc,

its a zero sum game, forget about it all and concentrate on job income brother and you on the road man

thankyou
robots


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## lusk (13 December 2008)

robots said:


> hello,
> 
> so hotbmw,
> 
> ...





Hello,

Yes, zero sum game:

Thankyou


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## robots (13 December 2008)

robots said:


> hello,
> 
> so hotbmw,
> 
> ...




hello,

yes zero sum game

oops, sorry I forget mentioning low incomes is so touchie touchie

thankyou
robots


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## lusk (13 December 2008)

Some excellent points on deflation and why we are not seeing inflation/hyper inflation here, but its just a blog so what would this guy know. 

http://globaleconomicanalysis.blogspot.com/2008/12/humpty-dumpty-on-inflation.html


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## hotbmw (13 December 2008)

well im a small business owner and i see 2009 as a year to just save the business. there wont be any savings or high income.

but i do have an investment property im trying to sell now and 50k cash.

sorry for my questions but im trying to make some right decisions to survive. to come out of this in a smart way. thats why i was wanting to learn more....


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## robots (13 December 2008)

hotbmw said:


> well im a small business owner and i see 2009 as a year to just save the business. there wont be any savings or high income.
> 
> but i do have an investment property im trying to sell now and 50k cash.
> 
> sorry for my questions but im trying to make some right decisions to survive. to come out of this in a smart way. thats why i was wanting to learn more....




hello, 

no worries HotBmw, 

read some of Andrew Forest's interview's, he hit the nail on the head

the world hasnt ended, people still living man

thankyou
robots


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## tech/a (13 December 2008)

hotbmw.

During times of inflation your $devalues.
In periods of Hyperinflation your $ becomes pretty much worthless.
Asetts like property hedge you against inflation as their values rise with it.
Same with Art,Stamps,Coins.

As an example.In simplistic terms.
If inflation is at 50% then a property worth $100,000 now costs $150,000.
Your cash of $100,000 still only buys $100,000 of X in this case a property.
Your Mortgage soon pails into in significance as the (Lets say) $50K mortgage is still worth $50K as the property rises to $150K and if year in year out or heaven forbid 100% +----you can see what I mean.
So provided you can service debt then having it becomes less of an issue.

School is really out on long term deflation or eventual inflation.
Past statistics do show that periods of deflation/recession and depression are followed by inflation.So maybe not now but in the future you'll need to be on your toes.

Look for increases in Oil and commodities.wages,costs of living and of course interest rates as spending is reigned back in.

I too am in business and hold property.
On the business side I see tremendous opportunity as we take this time to increase market share to replace lost new business.
We have already seen 2 competitors fail releasing more business which we are looking to secure---it has to go somewhere even if deminished.

Currently I have a fair amount of cash which will be put to work if and when interest rates fall to 4 ish %. It will be invested in hard asset.
If interest rates do fall to 30-50 yr lows I will be locking down for a long period 10 yrs in investment properties.Remember these assets will increase in price during these times. If you dont need the cash then leave the property alone---in my view.


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## hotbmw (13 December 2008)

thanks for your replies tech/a and robots. really appreciate it.

great points teach/a. but my small business is involved with importing goods into australia and with the low aussie $ i just cant service my clients as i used to. in my field i cant see any opportunities in expanding unfortunately. now is the time to buckle down and work harder and smarter and get by on thin margins  

the investment property i have has a fair bit of debt, the properties maybe worth 525k now (was over 600k a year or so ago) with around 425k debt. im thinking if deflation does occur its better i have this 100k in cash with my other 50k and invest back in the property market in a year or so. does that make sense to u tech/a?

"If interest rates do fall to 30-50 yr lows I will be locking down for a long period 10 yrs in investment properties"
do u mean u will buy and lock in a fixed interest rate for 10 yrs or do u mean u will invest heavily into real estate for the long term (10 yrs)?

if i have this 150k in cash, in a year or 2 i could punce on 2 investment properties and use 50k for each of them as deposits and negative gear them and then use the other 50k and get a margin loan to invest into the share market if its still at lows.


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## tech/a (13 December 2008)

Long term investments which I hold will be locked down.

I may buy more if I can gear it right.
I have no intention of selling any at this time as my gearing is manageable.

Your strategy is similar to selling in a bear market to return when more bullish.
Fine if you can time it right.
Property unlike shares have Costs like stamp duty sales fees etc. And cant be sold in a mouse click.

Choice is yours but if your not needing the tax advantages of negative gearing and its too heavily geared to return a positive number then your option is clear.

In property if its not positively geared then I dont do it.(But thats me.)


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## Glen48 (13 December 2008)

The trouble is how do you measure de/inflation use the Feds info.
When the Feds work out things like computers are now 10 times faster the economy must have improved by 10% or use inflation as way of increasing Tax's.
I guess the best way is to keep an eye on your costs and the USD once the USD dives hold on for the ride.


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## GumbyLearner (13 December 2008)

Hot Beamer

There are all kinds of arguments about the deflationary vs. Inflationary argument ATM.

I dont think there are any immediate or final answers but then again Im no economist. And in this environment I think your guess is as good as theirs! 

The best place to start would be to look at Kondratieff.
He was put in a gulag by his employers for the development of his economic theory cycle called K-Waves. Not that it will provide all the answers. 

You can find this here -> http://www.kwaves.com/kond_overview.htm




Also, there is a lot of 'fudge in the figures' so to speak. Economic models that calculate the inputs/outputs used guage employment, CPI, PPI, GDP, GNP etc.. have all been altered on numerous occasions since Volcker was the US FED chief in the early 80's. You know things like employment (now include part-time/casual), CPI (doesnt include oil or food among others), GDP (includes income generated by foreign owned entitys operating in the country as opposed to GNP which calculated production created by domestically owned companies). It really makes it tricky at times to assess the real impact of govt and market announcements.

By the way the US govt stopped reporting M1 money supply in 2006, so its anybodys guess as to how much 'quantative easing' of money supply has occured this year.

So I suggest you check out this site to -> www.shadowstats.com
For possible contrarian views on deflation/inflation

Cheers
Gumby


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## chops_a_must (13 December 2008)

tech/a said:


> hotbmw.
> 
> During times of inflation your $devalues.
> In periods of Hyperinflation your $ becomes pretty much worthless.
> ...



I always hear this bandied about by the property bulls.

I have no idea what happened to property during this time outside of Perth, but what happened to property in our last inflationary period... 87-91-2?


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## GumbyLearner (13 December 2008)

I remember 88 vividly chops.

Three bedroom brick veeners in the burbs on 1/4 acre blocks smashed down in price but you have to remember the interest rates were ridiculous back then. But this time I fear unemployment for the over-leveraged!


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## Julia (13 December 2008)

chops_a_must said:


> I have no idea what happened to property during this time outside of Perth, but what happened to property in our last inflationary period... 87-91-2?



In NZ it rose exponentially.  e.g. after two years I sold an IP for more than double what I paid for it and during the period of ownership had rents coming in far in excess of mortgage costs.


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## numbercruncher (13 December 2008)

Beause of crazy amounts of debts that keep blowing up, I think Inflation will get postphoned until all the blowups are refilled with fresh replacement equity - So im thinking deflation for the time being ....

We also have the scary derivatives timebomb thats leveraged like nothing ever created before ..... heres a good little run down on that little sucker ...




> .....any wealthy individual can go to a broker these days and put down $1 million, and then leverage this amount 3 times. The resulting $4 million ($1 million equity, $3 million debt) can be invested in a fund of funds that will in turn leverage this $4 million another 3 or 4 times and invest them in a hedge fund; then the hedge fund will take these funds and leverage them another 3 or 4 times and buy derivatives like subprime CDOs, which are often themselves leveraged 9 or 10 times!
> 
> At the end of this long credit chain, the initial $1 million of equity can become a $100 million investment, out of which $99 million is debt (leverage) and only $1 million is equity. So we get an overall leverage ratio of 100 to 1.




Imagine that blowing up ...... they say in the last 5 years derivatives have grown from 100 to 600 trillion dollars !! ( shares went 25 to 50 trillion apparently)


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## chops_a_must (13 December 2008)

Julia said:


> In NZ it rose exponentially.  e.g. after two years I sold an IP for more than double what I paid for it and during the period of ownership had rents coming in far in excess of mortgage costs.




Interesting. Thanks for that Julia. It went the opposite here, and remained that way for the best part of 10 years.


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## hotbmw (14 December 2008)

Glen48 said:


> once the USD dives hold on for the ride.




what effect will this have? inflation?


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## Glen48 (14 December 2008)

Every thing is based on the USD however the USA can't keep borrowing money from over seas there has to be a limit, the yanks borrowed money to help after Katrina and look how much they have held their hand out for since.
China and others hold a lot of USD having sold a lot of Chinese made good to USA since the Western world has stopped buying Chinese good look what has happened to their economy in a short space of time. I assume once USD  starts going down  they will want out the only answer for USA is to put up IR's to attract other money back to USA. Hence inflation


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## hotbmw (14 December 2008)

thanks for your simple explanation Glen.
and US inflation, will it have a follow on effect here also or?


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## Alan Shearer (14 December 2008)

hotbmw said:


> 2.
> what happens at the end of the inflationary period, it slowly drops in value back to fair value or do wages increase in line with the new asset value?
> 
> 3.
> ...




Interesting questions. I would like to know this also. Does anyone know?

AS


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## tech/a (14 December 2008)

chops_a_must said:


> I always hear this bandied about by the property bulls.
> 
> I have no idea what happened to property during this time outside of Perth, but what happened to property in our last inflationary period... 87-91-2?




*Chops.*
I was a statistic of the late 80s.
Heavily into Commercial and industrial property my tennents were going broke and i was selling at fire sale prices to satisfy banks and the 18% interest + 6% default interest due to my busines not being able to cashflow the debt.

Learnt a lot,cost me a marriage a house and all but one property (The one my business owned.) Sold that 10 yrs later and invested all of it into Residential---man am I glad I did.


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## Lancelot (14 December 2008)

hotbmw said:


> well im a small business owner and i see 2009 as a year to just save the business. there wont be any savings or high income.
> 
> but i do have an investment property im trying to sell now and 50k cash.
> 
> sorry for my questions but im trying to make some right decisions to survive. to come out of this in a smart way. thats why i was wanting to learn more....




Sell the hot BMW


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