Copyright 2013 John T. Reed

The 9/4/13 Wall Street Journal has an article tilted “Escape for Cash Trapped in Caracas.” Google that title to find a copy on-line to read.

The 5 laws that accompany hyperinflation

I have repeatedly told readers that hyperinflation is always accompanied by five laws:

• capital controls

• price controls

• financial repression laws

• rationing

• anti-hoarding laws

Venezuela, run by socialists, has high inflation. They also have capital controls. Those prohibit residents from possessing foreign currency or gold and from getting their local, hyperinflated currency out of the country.

The Day the Dollar Dies

In my web article The Day the Dollar Dies, I said that on the first day or week of hyperinflation, the U.S. government will slam shut the escape routes for your US dollars (USD) with capital controls. That’s why I pay many of my US bills out of a USD checking account in Canada at Bank of Montreal.

Nothing but hard assets to buy

I further said that the only way to save USD trapped in the US after the capital controls begin is to buy hard assets with it. That is precisely what the Journal article is saying they are doing in Venezuela. Big multi-national companies there are investing their profits in office buildings in Venezuela.

The article did not say, but I suspect, they may be overpaying for the buildings because of artificially high demand caused by the capital controls.

To be sure, they are scared about the various socialist governments there seizing those buildings from them in the future. But they regard buying buildings there now as the “best of a bad bunch of options.” Indeed, that’s why you should follow my advice to move your rainy-day savings to savings accounts in AUD, CAD, CHF, and NZD and your current routine bill-paying money to a USD checking account like the Premium Plan I have at BMO.

No liquidity

Hard assets like Venezuelan office buildings do not provide liquidity and insufficient liquidity can bankrupt an otherwise solvent firm or family.

Do not own liquid assets, or ear income, in countries that have, or may soon get, capital controls

The other mistake these companies have made is being in Venezuela to begin with. The people of that country and others in Latin America have repeatedly shown themselves incapable to electing competent, honest, federal government decision makers. Investing in Venezuela and similar countries is like adopting an incorrigible teenager. The people seem to be chronically incapable of voting for anyone other than short-sighted, free-lunch demagogues.

The U.S., perhaps in part because of allowing millions of former banana republic citizens to immigrate here, is adopting banana republic fiscal and monetary policies

The problem in the US is that the US government generally has not behaved like banana republics, but they are now.

You need a certain amount of liquid assets to pay your routine bills and to buy necessities of life. Making sure you have that is job one when it comes to managing the risk of hyperinflation. Job two is getting out of the currency that is in danger—the USD for most of my readers—and into hard assets or well-managed currencies. If you work, or have a business, in a country at risk of hyperinflation, you probably should reconsider whether you want to continue doing that.

John T. Reed