A thought about protecting yourself from hyperinflation

[Speck Tater]

I'm not talking about ordinary inflation. I'm talking about Weimar hyperinflation; Angola hyperinflation, Argentina hyperinflation...

Suppose the US government keeps printing paper money and inflation takes off like it did in the Weimar Republic in 1923. People went to market with buckets full of paper money, and they printed bills denominated 100 trillion Marks! While there is no limit at all to how high inflation of paper money can go, it seems like coins, even those cheap modern clad coins, have a limit to how far they can inflate.

A nickel is already worth almost 4 cents in metal, so if we had something ridiculous like 500% inflation it would take 5 paper dollars to buy what 1 paper dollar used to buy. HOWEVER, the nickel would then contain 20 inflated cents worth of metal, and so its value would not lose as much to inflation.

Post 1982 pennies don't have as much copper, but they are still worth almost half a cent, so they can't inflate much beyond 100% inflation rate.

So it seems that if hyperinflation hits, coins will retain more value than paper money. Not just because of their metal value, but because they are tangible, and more likely to be perceived as something of value as compared to a piece of paper with "1,000,000,000" printed on it. And if things get so bad that barter at the local farmer's market, or even on the black market is the only way to get things you need then those tangible coins are likely to be more prized than worthless pieces of paper.

So it seems to me that for people of little means seeking to protect their money from hyperinflation, a big jar full of coins might make a sensible hyperinflation hedge. If you don't have millions you can move offshore and into another currency, if you don't have tens of thousands you can invest in gold bullion or silver bars, then maybe big pickle jars full of pennies and nickels actually makes sense.

The question is, how high does inflation have to go before a coin's metal content is worth face value? If inflation goes no higher than 100% then nickels and pre-1982 pennies would be safe, but most other coins would not help you. If inflation grew to 1,000% or more, just about any coin would preserve some of it's value.

So say, for example, that US inflation matched inflation in Angola from 1991 to 1995 and it took 1,000,000,000 dollars to buy 1 dollars worth of stuff. Suppose you started with only $1,000 in your bank account. What would you money be worth after that episode of hyperinflation?

Based on metal content alone:

In paper dollars $1,000.00 today would be worth 1/100,000 of a penny in purchasing power.
in pre-1982 pennies (or pre-1996 Canadian pennies) $1,000.00 today would be worth $1495.00 in purchasing power.
In modern pennies $1,000.00 today would be worth $413.00 in purchasing power.
In modern nickels $1,000.00 today would be worth $755.00 in purchasing power.
In modern dimes $1,000.00 today would be worth $132.00 in purchasing power.
In modern quarters $1,000.00 today would be worth $132.00 in purchasing power.
In modern half-dollars $1,000.00 today would be worth $132.00 in purchasing power.
In modern Susan B. Anthony dollars coins $1,000.00 today would be worth $47.00 in purchasing power.

The moral of the story seems to be, if you're poor like me and don't have hundreds of thousands of dollars to protect, hoard pre-1982 pennies and ALL nickels. An equal mix of the two would preserve the purchasing power of your money regardless of how high hyperinflation went.

Any way you look at it, putting all your money into buckets full of nickels would seem to be a far better investment than leaving your money in the stock market, or even in a dollar-denominated bank account if and when hyperinflation hits.

[patriotvoice]

1. $1,000 US 2009 nickels weigh about 220 pounds.

5.0g/nickel * 20 nickels/dollar * 1,000 dollars = 100,000g * .0022 lb/g ~= 220lb

That's a lot of change to lug around. Invest in gold. It weighs more... and buys more.

On edit:
US Mint says modern nickels way 5.0g, not 4.5g:
http://www.usmint.gov/mint_programs/circulatingCoins/index.cfm?action=CircNickel

Adjusted calculation.

[Speck Tater]

2. True, but why would you lug it all around?

True, gold is more compact, but where can I find a gold coin that is the right size to buy a loaf of bread or five pounds of potatoes at the farmer's market? At 932.00/ounce a loaf of bread would cost about 0.002 ounces (0.0667 grams), or 0.0667g / 19.33 g/cc = 0.00345 cc = 0.0345 mm^3 = a cube 0.186 mm on a side which according to ISO 14688 sand grading standards qualifies as the size of one grain of "very fine sand". (A piece of gold the size of one grain of ordinary "fine" sand would be closer to 8 loaves of bread in value.)

In a "complete collapse" scenario, you leave 199.5 pounds of nickels at home and take half a pound of nickels with you when you bicycle into town to visit the farmer's market.

[patriotvoice]

3. Because in "complete collapse" scenarios, you don't barter with Federal currency.

You convert hard assets (gold, Cu-pennies, nickels, etc) into local currency (eg, http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=170x11325); you take them down to the bank, ask for the equivalent amount in local currency, and go about shopping. The bank still operates as a bank; just relying more on local currency than Federal.

On edit:
The local currency then has the denominations necessary to carry out exchanges in non-obscene terms.

[Speck Tater]

4. Hmmm. That's very plausible. Hadn't thought of it. nt

[ret5hd]

5. Or you can go now to a local coin shop and buy 90% silver dimes.

You could get them by the bucketful a couple years ago (last time i checked).

[sendero]

6. That's what I have...

.. among other things, lots of pre-1965 half-dollars. quarters and dimes.

These are 90% silver and just about right for barter.

That said, I don't really believe in high inflation, much less hyper. Deflation is the order of the day.

[AtheistCrusader]

7. This makes sense, looking at it in today's conditions...

But can you convince someone that a nickel is worth more than 5 ordinary pennies in a hyper-inflation environment? I'm skeptical that people that you are likely to barter with will either understand or care.

Most people recognize mecury dimes, silver, gold, etc, as 'valuable' under those conditions. I don't think regular minted coins will be recognized as valuable, by the guy at the end of the street selling a loaf of bread.

I could be wrong, but I just don't see it happening. Though, I can appreciate you looking for low-cost solutions here. Investing in Silver or Gold is expensive, and probably not an option for a lot of people.

[Art_from_Ark]

15. Here's what would make nickels valuable in the eyes of the average citizen:

Government switching to a new, cheaper alloy like aluminum or zinc. However, the public would have to be aware of it. This is what happened once the clad coins were introduced in the 1965 coinage year-- people started hoarding whatever silver coins they could, because they knew the silver price was rising and the coins already contained their face value in silver.

On the other hand, the copper in a pre-1982 penny is already worth more than 1 cent, but most people still think that pennies are still solid copper so there's no rush to hoard them by the general public.

[vincna]

8. How about non-dollar denominated securities?

The are mutual funds that invest in non-dollar denominated stocks and bonds. If the dollar inflated as you describe, it would lose value against other currencies and the value of the non-dollar denominated securities. You don't need hundreds of thousands to open an account. With some mutual funds, you can open an account for a few thousand and there might be some that are less than that.

[notesdev]

9. Inflation now is nonsense

We are in the grips of deflation and it is only becoming more severe. The inflation hypers are either people who don't get the whole picture, or have a financial interest in a rise in the price of gold and other inflation hedge instruments.

I present to you the MULT M1 Money Multiplier series, courtesy the St. Louis Fed:

http://research.stlouisfed.org/fred2/series/MULT

The long extended drop lasting decades is an interesting illustration that as the extension of debt became an increasing substitute for income, the velocity of money decreased, albeit slowly, as a result.

That sharp drop you see is the result of the Fed flooding liquidity into the market. That money is going NOWHERE. It is not being lent, it is not being spent. It is being hoarded to suck up the mounting loses of bad bets.

This is not a recipe for inflation. Nobody's got money to pay higher prices, and thus all higher prices can do is destroy the market, leading to no prices and no goods. Without a way to put that money supply back into wages, an inflationary cycle cannot be started; and what is happening to wages and employment is fairly evident.

[dixiegrrrrl]

10. The money guys I read and trust agree with you.

At least for the immediate future, they say.
Barring a war.....

Hmmmm...what is that Korean guy doing all of a sudden?

[truedelphi]

14. War is the USA's trump card. We always go to war when a big oil interest (like Iraq)

Decides to have its oil paid for in terms of a currency other than American Dolalrs.

Does Iran plan on going to the Euro any time soon?

[westerebus]

11. Et tu, M2?

While M1 is borrowing like a ground hog, M2 is soaring. What we have is a very long bow. Pull the bow string back wards and you can get the desired effect of velocity; compress the bow string forward and then hope the bow string stays attached.

What happens when the bow is enlarged to the point that it must be secured to a large frame to support it's size?

What happens when you add wheels as it has grown even larger to reach farther out? Or to accommodate a larger arrow?

When many hands are required to operate the a multiple arrow launcher that has levers and gears and must be anchored at one end to assure rough accuracy?

Who will be operating this mechanism and under whose authority will arrows be replaced? At what cost?

And if that all important bow string breaks because the crew running it went unsupervised, were given unlimited arrows, and encouraged to shoot for the moon?

As for now the bow and all its' parts and players are raising expectations the replacement bow string will not fail as long as they are in charge of operating the mechanism with all its' complexity and innovation.

Can we expect hyper inflation next week or next year? Chances are slim to none. How about five years down the road when all the wonderful T programs are planned to recede and private capital returns? I have no idea.

Have you heard about this new Chinese invention called gunpowder? Alchemy is so over rated.

[notesdev]

12. Try looking at the data

M1 is also soaring. The chart I posted is the money multiplier, not the money supply. It shows why the upward spikes in money supply measures don't translate to inflation - nobody is doing anything with that money, it's sitting in these banks to try and unwind their catastrophic positions.

All of these banks have things that they hold "off-balance sheet" (AKA accounting fraud), and stuff called "Level 3 assets" (AKA "marked-to-fantasy"). But the bills are coming due and can't be avoided.

So what do they do? They get the Fed/Treasury to help them rig the game in a desperate attempt to avoid admission of insolvency. The Fed/Treasury pumps cash into them, they sit on those piles of cash and slowly bring the bad assets back on their books. They can't lend or spend the cash while this happens or they fall below regulatory capital requirements.

But hey, it's your money. If you want to get reamed by deflation by putting your assets in inflation hedges, all I can say is "Goldman Sachs says thanks".

[westerebus]

13. M1 multiplier is tanking.

The money is not being spent. The M1 and M2 have expanded. The reason they have expanded is to cover the under weighted position of the institutions that are insolvent.

I might be old, I'm not blind.

At some point in the future, the pressure to inflate the interest paid out to keep people buying our national debt will take place. As for right this minute, the huge amount of reserves sit idle while capacity (jobs) and inventory (any thing not edible) decreases. Too much money chasing too few goods has caused inflation in the past.

There's a reason they don't count gas and food in the CPI. You do not need wage inflation to drive prices higher. Wages have been flat for over a decade, has inflation gone away?

I don't think the FED will ease out. I do think interest rates will go up. I do expect the dollar to devalue. Within this mix, I expect inflation to remain a FED policy. The national debt will increase as GDP declines which limits trade and drives protectionist policies forward in Congress.

Oh happy day! When Wal Mart goes away! Oh happy day! When Goldman Sachs is cast away! Sing! Oh happy day!!

So are you interested in this green tech nano carbide string replacement process or not?