|1 year Subscription to Real Estate Investor's Monthly
|Distressed Real Estate Times
|How to Get Started in Real Estate
|How to Buy Real Estate for at Least 20% Below Market Value
|How to Order|
Copyright 2012 by John T. Reed
Here is an email I got from a friend, Vincent Boston, who was an international businessman for decades. He experienced hyperinflation or high inflation in a number of countries.
My comments in [red].
From: Vincent Boston <email@example.com>
Subject: I consider myself fortunate.....
Date: May 27, 2012 1:00:01 AM PDT
To: John Reed <firstname.lastname@example.org>
Most Americans have no experience, even briefly, of living outside of a "stable dollar" life.
I feel fortunate that I have had the following experiences, which make your excellent descriptions of the "new financial reality that may occur" in your articles more vivid and understandable, since I can map them to something that I have personally experienced.
MEXICO CIRCA 2001:
I was contemplating permanently moving to San Miguel de Allende in Mexico, an isolated interior town with a large community of permanent American expats. Mexico was in it's periodic mode of social and financial stability at that time...unlike now. I lived there for a few months and talked to some grizzled old expats who had been there for decades. Some things that I remember. If I wanted to buy a condo or a house or whatever, at the closing I would need to bring a briefcase full of USD's to the closing for the full purchase price...a hundred thousand USD. This had nothing to do with me being an American. The Mexicans for generations have done this for real estate among themselves. The closings are recorded, legal, above-board, and not shady or tax-avoidant. It is simply that Mexicans do not trust their own currency as a store-of-value. For daily transactions, fine. And they don't trust banks. Because banks are the main implementers of the Mexican government's periodic capital controls, forced conversions, account freezings, and so on. There are large quantities of USD stored in buried family strongboxes all over Mexico. The grizzled expats said never never keep in Mexican banks dollars, or in pesos, more than what you need to transact with. For God's sake, NEVER your retirement nest egg !! Middle-class Mexicans grow-up and live in a dual-currency world. Pesos for transactions and paychecks, savings ALWAYS in dollars !!! They find nothing strange about this. Most Americans have never had to think about a world where routine transactions and store-of-value are done in two different currencies...by everybody.
EAST BERLIN July/August 1990: The wall had just come down a few months before and I had a business trip to West Berlin. We stayed an extra week in East Berlin staying with a friend-of-friend. Via dumb luck, we happened to be in Berlin on the very Saturday that all East German Marks would be cancelled and auto-converted into West German Marks....at a 1:1 ratio...a huge gift to the East Germans! I remember delirious crowds of East Germans chanting "D-mark! D-mark! D-Mark!" in AlexanderPlatz at midnight, as a caravan of armored trucks from West Berlin rolled into the East Sector full of D-marks for the conversion !! And 1 week before, when the East Mark was still in operation, I bought groceries and paid for a hotel in the East with East Marks...happily accepted, I might add.
The couple we were staying with were an educated skilled doctor and an engineer in East Germany...people who had more social standing and money than most in East Germany. I recall them describing with bitterness when they got permission to leave the old DDR, that wherever they went NOBODY wanted their East Marks, or the rate was so horrible that they would share Happy Meals and sleep in quasi-flophouses in the West....on vacation!!! Within the DDR, that had a good income in East Marks and could stay in "Party Member" hotels and visit restaurants and buy better clothes and so on... but once they crossed the border, they were no longer Madame Doctor this and Herr Professor Engineer that...they were just penniless bums at the bottom of the social scale…until they got back to East Germany again.
CZECH REPUBLIC AUGUST 1989: The iron curtain has just vanished for these folks as well. No "gift" conversion from Czech Kroner to a hard currency however. They wanted D-marks, and you could buy anything you wanted for a few D-marks. Hire a taxi for all-day for 5 DM !!! no tip required...the driver was SO happy! Here is the shocker: they did not want my USD folding currency...it was just as "hard" as the D-mark, but they refused it..even sometimes when I DOUBLED the offer to the restaurateur..."The bill is USD equivalent to $2...I will give you $5" "The response was no..D-mark..only D-mark...or Czech Kroner.
It was a shock to me, who up to that point had only experienced places where they love USD...even if they hate Americans.. to experience an inkling of the attitude of "put your USD back in your pocket and give me something that has some value."
TURKEY CIRCA 1996: It was 120,000 Turkish Lira to the dollar. The result of many years of 20-50% inflation. However, the Turks were used to it. Pay me in my hotel or shop dollars...or Turkish Lira...whatever. I just convert back and forth as needed with the money changers hanging out in the town square all day. No panic..no preference..just learning to live with constant inflation....but no restrictions on currency conversion. [That is, no capital controls]
I did observe, all over Turkey, unfinished home building projects and extensions. Strange. I asked. Turns out Turks believe in bricks-and-mortar more than even hard currency as a store of value. When a Turkish family saves a bit, they buy some bricks-and-mortar and add another few feet to their room addition in progress...or start another wall on "house for rental" they are building back in their home village. The Turks considered nothing strange about this...it had always been this way. No currency...not even "hard" currency...just hard goods...real estate...business inventories of commodities..and so forth.
AFRICA in the 1980's: well this wasn't me but a French expat acquaintance who grew-up there. Diplomat's son. He had to cross a border from one shit hole with worthless currency controlled by the government to the next country, another shit hole with a worthless currency controlled by the government..although a different currency. No conversion. No taking currency out of either country. What to do? He went to the market in shit hole A and bought bags of rice and loaded his car with them. Then crossed the border. Then went to the border market in shit hole B and sold the rice to obtain "their" folding money.
Essentially, I have been fortunate to have gotten glimpses into societies where:
a) There are multiple-levels of "currencies" in-daily-use ranked according to "hardness". [Capital controls, when in place, outlaw use of any currency but the official one.]
b) "Hey American....I have no interest in that green-ink printed paper in you pocket that you seem to think is so great. Give me something I want." It doesn't require a great leap of imagination for me to see how this could happen at my corner Exxon station someday.
c) It is simply assumed by everybody that both the government and their agents ("the banks") are constantly trying to trick-you and screw-you in some way. Or if they aren't right now, they certainly will do so in the near future. This is part of the definition of "normal life".
I saw that it is perfectly possible to live with these realities. And how quickly things can change. Just like people who live in bad neighborhoods. You just learn a whole new definition of financial "common sense". Millions of people around the world already do...and have their whole lives.
It is a world of ongoing barter and commodities and hard and soft currencies and changing government controls and restrictions.
Most American's life-experience is
"I earn a USD. I put it in the bank. I can get it out whenever I want. If I leave it there for a few years it will buy more or less the same as when I put it in".
They will have an EXTREMELY hard time adjusting to a new economic world of unstable shifting dollar values and controls, and the only thing that "holds its value" during crisis are in-demand commodities that can be bartered.
[I expect the U.S.—known for its compulsively law-abiding citizens by world standards, e.g., we have one of the highest income-tax-compliance rates on earth—will try the 1920s Austrian/German approach—also compulsively law-abiding. That means a combination of hyperinflation, capital controls, financial repression, and wage and price controls. That leaves only barter and the quite illegal black market as ways to buy what you need. That more or less destroys the economy and rule of law. Lack of respect for rule of law and lack of a stable currency are two of the most important things that separate poor countries from rich ones. In Austria in the early 1920s, to comply with the law meant to starve or die from some illness caused by malnutrition and/or lack of heat during cold weather. See Anna Eisenmenger’s diary Blockade. See my book How to Protect Your Life Savings from Hyperinflation & Depression, 2nd Edition
for more details on the various ways to protect yourself and your family.]
John T. Reed