What Inflation Looks Like In Real Life

At the tail end of 1983, during my final year of university, I left the US to spend nearly 6 weeks in Israel, where I toured the country and worked for a short time on a kibbutz outside of Tel Aviv. I’d been given a chance to make such a trip for practically no cost–about 1,400 dollars. I had two clever professors who arranged the trip, and about 10 of us made the journey. Someone from the Israeli Dept. of the Interior (equivalent) took us from North to South in about a week and a half, and then we worked on a kibbutz for about four weeks. I repaired trees in the citrus groves, after the harvest.

We were quite aware that Israel was experiencing inflation, at that time. Understandably, this was of virtually no concern to us. After all, we were carrying Dollars. And besides, one tends to worry more about bombs and random shootings when in Israel. Just prior to our arrival, there had been a flurry of bus bombs (non-suicidal) using the standard package or suitcase method, left under seats. This made for tense feelings, indeed, when riding public buses in both Tel Aviv and Jerusalem.

In 1983, Israel’s inflation rate was 191%. In 1984, it advanced to 445%. By 1985, the government froze prices, and by 1986 inflation was back down to 20%. A wild ride indeed. And, this illustrates that once inflation reaches these very destructive levels, even a return to “slower” inflation can still mean rates in double digits.

My primary experience of this inflation, during that 6 week period, was via the extraordinary purchasing power of my US Dollars, but more importantly, the demand on the street for my US Dollars. The experience is potentially instructive for what may come, eventually, in the United States and other OECD nations like Britain that are debasing their currencies.

When inflation takes hold, the phenomenon is understood at street level and no longer does an average person need an Economist on TV to provide an explanation. I quickly learned that merchants would give me a premium exchange rate for my Dollars, and there was no point in making the trade at Bank Leumi or Bank Hapoalim. This was true when buying a lamb pita in old Jerusalem, or, bargaining for some goods in the markets. I also learned to negotiate first in Shekel(s), and then to offer my Dollars for the extra discount.

Should a similar inflation come to the US or the UK (or Switzerland? After all, they too are debasing) then I expect the hard currencies will be Gold and Silver. In the United States, there would also be a chance that Canadian Dollars could take on some attributes of a hard currency, and in the UK, perhaps Euros. But the principle will be the same: sellers of goods and services in a time of inflation can preserve their capital and, if the inflation is quite strong, start “saving” almost immediately by taking gold/silver or hard currencies without making any additional banking transactions. Since that speed and efficiency is an advantage, it makes economic sense for sellers to offer buyers a premium for their hard currencies at the point of sale. It’s a win-win for both buyer and seller.

In fact, what’s interesting about inflation is that the marketplace, at street level, is the place where this value discovery process unfolds quickly. Should strong inflation come to the United States, you can expect your butcher, your mechanic, and your other fee-based service providers like consultants and accountants, for example, to be among the first to not only embrace gold and silver transactions, but to initiate them.

Photograph: Sam Rohn, panorama of Jaffa Gate, Jerusalem 2005

Comments

[yellowhoard:]

The bigger they are, the harder they fall. When the dollar finally comes crashing down, it will be breathtaking.

Mar 21 05:32 PM

[Sober Realist:]

People have been proclaiming the imminent demise of the dollar for the last 3 decades. My advise to all of you is not to count on it. There is simply nothing strong enough to replace the dollar as the world's reserve currency. Russia even admitted this the other day:

"Finance Minister Alexei Kudrin told reporters on the sidelines of the G20 finance ministers meeting that it would take up to 30 years to create a new super-currency, suggesting there was no unity in Russia on the issue."

American hegemony will outlive all of us here. And a lot can happen between now and 2040: revolutions, wars, famine and drought, pandemics, the creation of disruptive technologies, new geopolitical alliances. Do you remember the news magazine articles back in the 80's about Japan spreading its tentacles across the globe and economically taking over American and the world? I remember them well. The same is now being said of China. If you do some research on China, you will see that there economy is not as nearly developed beyond the export or die model, nor are they the bread basket of the world, nor are they blessed with abundant natural resources. Their 2 trillion cash reserves will be used up in a flash as they scramble to rearrange and restructure their export-dependant economy. And they have a big demographic time bomb of their own. Will China overtake the U.S.? Official estimates are that China is at least 50 to 100 years away from having a modern technologically advanced navy like that of the U.S. If America falls, the rest of the world will be crushed underneath it.

Mar 21 06:30 PM

[goldnotcurr...:]

During periods of inflation, gold may serve to be a good hedge.

If financial armageddon hits, gold is just a shiny rock that wont buy a bottle of water.

Mar 21 06:59 PM

[Paulo:]

Uhm, where is the money going to come from for this modern technologically advanced navy in all the oceans of the world over the next 50 to 100 years? Why will Armaggedon of some kind necessary result should past naval performance not be projected into the future?

Mar 21 07:02 PM

[traden4alpha:]

Or we could just learn from Brazil, which responded to a period of high inflation with innovation in the financial service sector (proof that not all financial innovation are bad). If your paycheck is losing money by the hour and the goods in the shops are steadily getting higher price stickers, you want to minimize the time between getting paid and filling the shopping basket. Brazilian banks became extremely quick in handling settlements to help consumers and business move money quickly.

Mar 21 09:40 PM

[expat in China:]

It is obvious we are in a trade war created by imbalances and the US was caught with its pants down (debt). I am not an economist and many will refute my thinking from either side of the aisle but I would want to have credit, cash, or assets during a time of debasing dollars and preparing the war chest! Is our chest empty?

As I stated a few days ago "toilet paper" this is the most valuable currency in a crises and can save your life. You can barter for bread, soup and bullets and off course use it 1 sheet at a time. DO NOT laugh it is a commodity of choice and a comfort, what would you rather have in the morning, coffee or toilet paper well today you will say coffee, but tomorrow you will change your mind.

Mar 21 10:06 PM

[PeteK:]

Besides the US Dollar,
What other currency will you trust ?
Most foreigners will say US Dollar.

Mar 22 01:57 AM

[Roger Knights:]

This article should be tagget so it gets called up when people search for articles on gold and silver.

Mar 22 04:38 AM

[Ferdinand E...:]

Gregor, if a Swiss government loses its marbles, and Switzerland goes off the rails, then in theory everything can go. This article is very interesting to me however, because it reminded me of certain street people I encountered when in the US army in Japan and Germany. They certainly knew a few things that the people who taught me economics in the US and Sweden didn't know.

Mar 22 09:12 AM

[BrunoT:]

Much of the comment here is wishful thinking passing as fact. When the dollar drops you will, like the author says, want gold or silver instead. Hegemony be damned, when you can't pay your bills as a nation you print money and when you print money you debase it. Fact of life.

As for the difficulty of "making change" with gold, please try to keep up. One doesn't have to shave off bits of physical gold from a bar to pay the grocer. We already have credit cards and debit card technology. You'll just deposit your gold with a bank and 'gold grams" will be debited as required to pay your bills. GOLD WILL BECOME A COMPETING CURRENCY. (unless the govn't seizes it to prevent the competition)

Some people here need to go take a beginner course on what money was, is, and always will be. It's a medium of exchange, store of value, that's all. Any form you can print and make easily will of course eventually fail. It's too tempting to make your own money to pay your national bills with instead of raising taxes.

Mar 22 10:13 AM

[Asbytec:]

With gold currency, you do not carry a double eagle in your pocket, you carry a note that says you own one. It's these notes that are traded, along with notes of future payments (it might take a while for gold to actually transfer on your sale.) For example, say you sell flour to a cookie maker. The cookie maker promises to pay you in gold certificates when he sells the cookies. This promise to pay is money to you (similar to a loan) and you can be used to purchase more corn meal. The actual payments may be days or weeks in coming, but that's ok...you have a valuable note.

Under such a system, it is impossible to have an economy and have a few hoard all the gold or certificates..hoard all the money. If they did, there would be no transactions possible in such an economy. This is unlike the current fractional banking system where a few own the money (the Fed) and we simply borrow their money to make transactions. In fact, we're bound by law to accept dollars in return for goods or services. But, this is exactly why we will never again see a gold coin. (Sometimes it makes me wonder why gold is even a valuable commodity, anymore, but it is...)

Mar 22 10:18 AM

[expat in China:]

Asbytec

You are living on credit, there is none in the future for amercia, in the real world you pay up front or no delivery what are you thinking

"The cookie maker promises to pay you in gold certificates when he sells the cookies. This promise to pay is money to you (similar to a loan) and you can be used to purchase more corn meal. The actual payments may be days or weeks in coming, but that's ok...you have a valuable note."

Mar 22 10:47 AM

[Sober Realist:]

expat in China said:
"It is obvious we are in a trade war created by imbalances and the US was caught with its pants down (debt)."

China is and has engaged in protectionist trade policies in order to keep its exchange rate low which thus supported its rapidly growing export-or-die economy. They then bankrolled America's consumption economy to keep the symbiotic relationship with us alive. China overpaid for foreign assets to hold its currency down. The bill for subsidizing China’s exports during the boom is now coming due. No one forced China’s government to hold a $1.95 trillion reserve portfolio; they did so to support their export-dependant economy. China's trouble is equally as big as that of the US. It cannot solve it without making concessions at the global round table.

The global allocation of production and capital that has supported this severely unbalanced trade flow must be changed either through default or reset.

Mar 22 02:19 PM

[5142152-337:]

Wow! Reading this article and posts makes one feel like the end is here. Well, whether or not we go to another currency, and regardless what it is, the fact, repeat FACT, that at the G20 meeting next week, the subject of the almighty dollar being replaced as a reserve currency IS HAPPENING! It makes me ecstatic that I saw this as a possibility four years ago and began accumulating gold and silver in earnest. Of course, losing my lifes savings in 2000-01 to the stock market gave me time to pause, regroup and do thorough research on where to put my $$$. In posts since then, I have urged readers here to explore the PMs. Your talking about self preservation, after all. God bless us all!

Mar 22 04:08 PM

[Gedankonomist:]

"By 1985, the government froze prices, and by 1986 inflation was back down to 20%."

Yes, I'm sure that freezing prices did the trick.

I wonder why no politician has ever thought of legislating water to run uphill.

Mar 22 08:26 PM

[expat in China:]

Sober,

Yes the RMB is about 20% over vallue and was heading lower yoy as planned to support the textile quota reductions in place from 2006. This is a planned long term movement for a huge populace that can not change on a dime or any time a new leader gets elected. Our country is wipe sawed every 4 or 8 years into new direction and new policy.

It is smart to think long, go slow and not cause extremes.

My article from "CHINAS WARNING" Joseph Trevisan:

I was sitting in McDonalds (china) listening to university grads, they where talking about the 4th generation of rich that seem to have to many cars and where lending them to others for 100 RMB per day ($14 USD).

I was thinking that’s not exporting toys?

Sure they where heading home to the country, driving new QQ’s, ($5000 US cars). Yes there grand parents paid for them with there savings and when they get home to the farm they will set up day trading net stores. No don’t worry they have no interest in American equities they are clearly focused on commodities (turkey wings) form far off lands. There was really a sense of panic that they could not get home to the country fast enough to get the lion share of the rice farmers savings. It appears that Hooters has gone turkey instead of chicken in China?

I think they said that the average peasant had 80,000 RMB (12000 USD). Is that not more than the average US citizen?

Get a grip on reality, pick up a map and learn a little about the world outside!

Mar 22 08:35 PM

[Sober Realist:]

A message from the leading pro-democracy Chinese dissident Bao Tong:
(3-3-2009)

"The duty of a government is to maintain social justice and to be fair to all legal enterprises and all work forces according to the law. I plead with the NPC to order all levels of state administration to continue to protect (labor-intensive) village and township enterprises and to do their very best to help rural migrant workers who have lost their jobs; significantly reduce the amount of funds directly controlled by state administrations (especially funds allocated to Communist Party administrations), so that these resources can be channeled to consumption funds, especially rural. The goal is to end the abnormal situation of “rich state vs. poor people” and the huge income gap between urban and rural areas. Only if an effort is made towards reaching this goal can China materialize the much desired domestic market. If 800 million rural residents are without decent purchasing power, there will be no significant domestic market. Without elevating the income levels of rural residents or rural migrant workers, that is, the purchasing power of the largest sector of society; the so-called policy of “stimulating the domestic market” will surely be misguided."

****If 800 million rural residents are without decent purchasing power, there will be no significant domestic (Chinese) market.****

"Without migrant workers and the labor-intensive industries in townships and villages, China would not be where it is today. It would be suicidal to [make policies to] discriminate against them."
The Chinese populace is deeply concerned about the four trillion yuan designated as an economic stimulant. Four trillion yuan are the savings of the entire people, an average of 3,000 yuan for each of China’s 1.3 billion people. For millionaires, it is a drop in the ocean, but for the millions of poor, it means surviving for a year.

So will this huge sum be used improperly? Will it aggravate various social problems? For example, will it stimulate even more lavish spending by some Communist Party administrators, or more corruption on the part of some officials, or more substandard construction projects[2], thereby harming the nation and the people? Will it worsen the growing urban/rural income gap or worsen the already decreasing ratio of labor income versus GDP? Or will it stimulate a new surge of environmental pollution and destruction of natural resources?"
----------------------...
"(1) Social distribution and social welfare is serious tilted in favour of Government civil servants

From 2003 until 2008, government revenue accounted for one-fifth to one-fourth of total GDP. Of this huge revenue, 58 percent was used to support about 70 million functionaries in party and government organs. With wage growth lagging far behind the growth rate of GDP, pay for public officials nationwide (excluding regional pay) was increased a total of 3 times since 2001, with no increase less than 15 percent. The groups mainly covered so far in the system of guaranteed pension, health care and other social benefits enjoyed in China have been Party and government functionaries. Medical and health resources, for example, are characteristically tilted in favour of cadres as a group, for example the "grading system" in the drug supply, the higher and better political status, social status hierarchy, of the group participating in medical insurance higher the level of the quality of medical services, medicine supplies, etc. According to official Chinese figures, 80 percent of Chinese government investment in medical expenses is for a group of 8.5 million mainly (high level) party and government cadres.

The wages of the numerically vast group of base-level workers, however grow very slowly, or fail to grow at all; major social welfare segments in the social security system such as medical and pension insurance etc., have virtually no connection with the bottom of society.

(2) Enormous wealth is concentrated in a handful of rich and powerful families

The focus of the limited anti-corruption in China is among the lower-level officials; political high-levels seem to be insulated from corruption.

Although rumors about the secrets of success of the children of high-ranking cadres have been circulating in China and overseas, they cannot be confirmed, and such people have never been included in the Hurun rich list.

However, there are two sets of data that suffice to demonstrate how the red aristocracy leaped from the "proletariat" to the super-rich list in a mere 30 years.

Some data indicate the astonishing concentration of wealth in China. The World Wealth Report 2006, released by America's Boston Consulting Group, shows that 1.5 million families in China (about 0.4 percent of the national total) share 70 percent of its total wealth-and this is only bank deposits, shares and other public financial assets, excluding gray income-while in developed countries, under normal circumstances 5 percent of households own 50-60 percent of the wealth.

Further data deal with the kind of people who hold this concentrated wealth. According to data reported in a joint investigation by the State Council Research Office, the Research Office of the Central Party School, the Central Propaganda Department Research Center, Chinese Academy of Social Sciences and other agencies, as of the end of March 2008, 27,310 people in the PRC privately owned property (not including offshore or foreign property) in excess of 50 million rmb, and 3,220 people owned in excess of 100 million yuan. 2,932 of the wealthy in excess of 100 million rmb are children of senior cadres, whose [total] assets exceed 20,450 billion. And checking the source of their assets, it was mainly derived relying on their parents' power capital.


[3] Trend to self-interest shown in the distribution of political power and inheritance of social status

In China's political marketplace, trade in power, that "scarce good," has always taken place in a black box. The facts show that children of senior officials have priority in the inheritance of power. Even if some of them don't take up key posts, due to lack of ability or some such, they at least enjoy political titles like Delegate to the National Peoples Congress. the Chinese Peoples Political Consultative Commission, etc.

In China, the deep-rooted interest relations between officials gives cadres' children distinct advantages in succeeding to power. The official study also shows that cadres' children enjoy over twice as many chances of becoming cadres as those of ordinary people. The advantages of cadres' children in the transmission of social status is also reflected in employment issues. A Peking University team investigating "The Expanding Scale of Higher Education and Graduate Employment" found that, through relationships and power, parents can directly determine their children's employment; the better the family background, the higher rate of getting a job on graduation, as well as the amount of starting salary.

This shows, not only that children's higher education outcomes vary according to sector, but more importantly, indicates that China's social mobility is closed like the hereditary status of pre-modern society.

This is tantamount to blockage of the channels for the elites at the bottom of society to rise, despite the quality of the ruling elite group being weakened, and despite the great harm is to social stability."


REVOLUTION:The concentratration of wealth in the hands of a few Chinese party elite has resulted in a large rift in its population which will have to be resolved at some point in the future.

Mar 22 09:39 PM

[expat in China:]

Mr Sober

please subsitute the word China with the word America and it sounds like home? There is really no difference.

Mar 23 08:06 AM

[Leftfield:]

The increase in family dynasties has been evident in this country for awhile. Concentration of wealth has been very high in the last several decades.

Looking at the "solutions" of our leaders, we have Bush starting the funneling of trillions to Wall St. which continues with Obama. (Geithners's public-private partnership is truly awful; a black box with huge payoffs to middlemen and banks receiving either profit on their assets or taxpayers become the owners).

Obama has added the porkfest for Democrat constituencies in his fiat-financed programs. This should keep the masses quiet for awhile until it all crashes around us for real.

I'm thinking the idea is that it be too late then for the rest of us. We have to wake up and at least continually vote out incumbents.

Mar 23 09:08 AM

[Sober Realist:]

Yeah, yeah we all know we are all controlled by big corporations - that's whose really running the show, but you can't compare the kind of regime running China and its citizens with that of the U.S. Last time I checked, you and I could speak our mind about anything we like...not the case in China. Bao Tong spent years in prison and is now under house arrest:
www.time.com/time/prin...

Mar 23 04:56 PM