Copyright 2012 by John T. Reed
Because advice on hyperinflation and deflation largely is about assets and liabilities, and young people tend to have relatively few assets, many of them have asked what, if anything, they should do about pending hyperinflation.
Looking over the table of contents of my book How to Protect your Life Savings from Hyperinflation & Depression, I see no items that do not apply to young adults.
Young adults would typically have less money in the various asset classes. But an argument can be made that means they should be more concerned than older adults who have larger dollar amounts of assets.
The principle is what they called risk preference in my business school. It means you should look at the amounts you are dealing with in terms of percentage of your net worth, not dollars when making decisions about how much risk to take.
For example, you should choose the course of action with the highest expected value when making a decision. However, people shy away from that sort of logical purity when the percentage of their net worth at risk is high.
For example, if I offer you a bet where we throw a die (singular of dice) and you double your money if it comes up 1, 2, 3, or 4, and you lose all your money if it comes up 5 or 6, you should agree to the bet. The reason is you have a 2/3 chance of doubling your money and a 1/3 chance of losing your money. If the amount involved is $100 the expected value of the bet for you is 2/3 x $100 + 1/3 x -$100 = $66.67 -$33.33 = $33.34 plus getting your $100 back. In other words, if you won, as you probably will, you would end up with $200. And if you lost, which is unlikely, you would end up with $0.
However, suppose I say the bet is $100,000 and that happens to be your entire net worth? Will you still make the bet? Logically, you should. The expected value of accepting the bet would be $33,333.34 on top of the $100,000 you already have.
The problem is your willingness to risk losing drops when your entire net worth is at stake. That is not mathematically logical, but it is life-style logical. It would be nice to go from a net worth of $100,000 to $200,000. But it would be disaster to go from a net worth of $100,000 to a net worth of zero.
Either direction is the same amount: $100,000. But the change in your life style is disaster if you lose. but only moderately better if you win. This stems from the marginal utility of money, point of diminishing returns, etc.
So it’s true that young adults have fewer dollars at risk in hyperinflation, but a greater percentage of their net worth. When looked at that way, which is the correct way to look it at, they ought to be more concerned with following my advice than their wealthier elders.
So follow the advice in the book. About the only modification would relate to minimum charges and fees. For example, having a safe deposit box in Vancouver, Canada costs me about $350 a visit—mainly airfare from San Francisco. If you only have $500 or $1,000 to put in the safe deposit box, you should probably leave owning Swiss franc cash out of your portfolio for the time being. Stick with Australian, Canadian, and New Zealand dollars in savings accounts in those countries.
Now let’s talk about a sort of spiritual risk preference. It is like the “percentage of your net worth” argument saying the young need to follow my advice even more than wealthier elders.
Young adults tend to have young children. In Anna Eisenmenger’s diary of hyperinflation in Vienna, she said that doctors there said that 95% of the children were malnourished and not thriving. In other words, they were not as tall or as heavy as they were supposed to be during those years. I believe that is a permanent injury to the children in question. Mothers could neither produce their own milk nor get cow’s milk for their babies. Normal foods like fresh dairy products or eggs or vegetables or grains were hard or impossible to get. Babies threw up the little canned milk and goat’s milk they were able to get.
Below I discuss getting citizenship in a country with stable currency, or at least permanent residence or work status there. If the U.S. gets hyperinflation, and the usual suspect accompaniments: capital controls, wage and price controls, rationing, and anti-hoarding laws, you and/or your children are likely to suffer serious health problems, maybe including death or permanent maiming.
So do not be telling me that hyperinflation protection is only something for middle-aged or older people to worry about. The young adults typically have their children and a higher percentage of their net worth at stake. How bad are you going to feel if what happened in Austria in the early 1920s happens here—complete with children suffering from deprivation—and you ignored warnings about it from me and others?
One thing I would emphasize with young people is to get a second passport (not a copy of your U.S. passport; citizenship in another country). Generally, it is hard for people my age—66—to get an additional passport above and beyond my U.S. passport. Most countries do not want old immigrants, unless they bring a lot of money like a million or more dollars as investors or entrepreneurs.
This is sometimes called dual citizenship. I do not like that phrase because being a citizen of three countries would probably be even better. And you could theoretically become a citizen of four or more countries although that strikes me as exceeding the point of diminishing returns.
But it appears to be relatively easy for young Americans to acquire a second passport. Most countries have multiple ways for young people to become citizens. For example, if you got to college or grad school there, you can get residence or student visas. By the time you were done, you would have almost enough years to apply for citizenship—five in most cases I have looked into. Plus, by being there all those student years, you would have great opportunity to get the things you need to immigrate; a spouse who is a citizen, a local job, knowledge needed to pass citizenship tests, connections, etc.
Google “immigrating to ___________ (insert country here)” to see the requirements of countries you are interested in. Here is the link that came up first in a Google search for “immigrating to Australia.” Also, see my article When do you flee the U.S.? Where do you go?
If you are wondering “Why would I ever leave the good old U.S.A.?”, read some histories about hyperinflation in other countries in the past. The most riveting and scary is Anna Eisenmenger’s diary of Vienna from 1914 to 1924 (titled Blockade). You cannot buy it. You can only borrow via interlibrary lending.
By the time you get to the end of that, it will be crystal clear why you would want to have another passport in addition to your U.S. passport. Hyperinflation can make life literally intolerable or impossible in a country. If and when it does here, you need to leave. To do that, you may need a non-U.S. passport. I mean citizenship in that foreign country, not a forged document like some scene in Casablanca.
A century ago, the U.S. passport was the most sought after in the world and all you needed if you had one. No more. The Democrat party business model is to get as many voters addicted to U.S. government checks and free services as possible. They have also absolved their own voters of paying any federal income taxes, even giving “refunds” to many who have not paid any income taxes, while incessantly demanding that Republican voters pay ever higher percentages of their income to the IRS.
This, predictably, is bankrupting the U.S. government and will probably lead to hyperinflation when the federal government can no longer sell its bonds to real buyers as opposed to selling them to its own Federal Reserve. The Fed buys the bonds with money it conjures out of thin air. That is inflationary. Lately they have been calling it “quantitative easing.” Most knowledgeable observers refer to it as “printing” money with the quotation marks signififying that actual printing presses are no longer used, just computer entries.
Republicans talk a good game about stopping the Democrat business model, but when it comes time to vote the vote for the Democrat business model.
We are near the point where not being a citizen of another country in addition to the U.S. is irresponsible risking of the health, safety, and life savings of you and your family.
Similarly, during past hyperinflations, it was great to live near the border in hyperinflated countries. In the U.S., that would generally be the Canadian border. The Mexican border has the same technical characteristics, but there appear to be many dangers in Mexico. In both, it might turn out to be great to be an American with a TN1 visa living near our northern or Alaskan borders with Canada. Those visas let citizens of NAFTA countries (U.S., Canada, Mexico) pemanently work in the neighboring country while living in the other.
But it is also possible that in the event of a hyperinflation crisis in the U.S., Canada would cancel NAFTA or at least the TN1 portion of it.
Just living near the Canadian border could turn out to be a life saver in the event of U.S. hyperinflation. For example, if I lived in Point Roberts, WA, which is on the border with Canada, I could walk across the border to the nearest Canadian bank to access my safe deposit box. That would cut my transaction costs from $350 from San Francisco to zero in Point Roberts. The same would be true of buying food and other supplies in Canada in the event they were hard to come by or impossible to get or afford in the U.S.
Working for a foreign government, or renting space to them, was a Godsend in hyperinflated Austria or Germany in the early 1920s—because they paid in the stable currency of their homeland, not the hyperinflated local currency. Working for a non-U.S. government or company might be the same if and when the U.S. gets hyperinflation.
Many young people think the way to prepare for hyperinflation is to get a secure government job. Ha! Since hyperinflation means the government is on the verge of bankruptcy, that is hardly the case. Austria and Germany were crawling with bands of desperate discharged soldiers during their hyperinflations.
If any governments in the U.S. are able to retain some employees it would probably be local governments or state governments in the few healthy states. And they would typically keep the old, union-tenured employees and lay off the young. Working in another country with no hyperinflation would likely be infinitely superior to any job in the U.S. In Austria and Germany in the early 1920s, the majority of adults and children were suffering from malnutrition, scurvy, and/or cold temperatures combined with inability to get fuel to heat their homes. Having a “good job” in the midst of all that was not even close to attractive. Plus, good jobs, unless they are on a farm, do not pay in other than inflated currency which sellers of food and fuel and such do not want.
My other hyperinflation advice generally incurs little or no risk if we somehow avoid hyperinflation. So you put $50,000 into an Australian savings account. What’s the harm? You bring it back with little or no gain or loss and pay some currency conversion charges.
Moving to another country and obtaining citizenship, however, is more expensive.
But again, it’s not like I’m telling you to bet your life savings on black at a Caesar’s Palace roulette table.
Americans have been trying life as expats for centuries. My wife’s father was an expat accountant for a U.S. oil company in Indonesia, then an accountant for USAID in Tawan, Ethiopia, Sudan, and Tibet. Her grandfather lived in Cuba as an American expat. My wife was born in Indonesia and had both U.S. and Indonesian citizenship until age 18 when each country ordered her to choose one. (A U.S. Supreme Court decision has since said Americans can have more than one citizenship.)
My West Point classmates who stayed in the Army for a career moved an average of once a year, typically to a different continent on the major (non-school) assignments. Unfortunately, they had no chance of getting citizenship in those countries. My point is that many Americans live in foreign countries for various reasons and most treat it as a travel opportunity and educational experience.
Lots of foreign correspondents, lawyers, investment bankers, consultants, and all that live overseas and it is considered some sort of glamorous, plum assignment.
So if you make the effort to get a non-U.S. passport and turn out never to need it, and get no other benefit from the experience, that will have been wasted money and time other than the peace of mind it may have given you vis a vis possible hyperinflation.
But if you approach getting another passport as a multi-faceted adventure with multiple benefits, a second passport being just one of them, it has little or no risk. One of my West Point roommates spent two years in Australia as an exchange officer in the Army and regards that as one of the greatest times of his life. He said he would live in Australia 6 months out of every year if he could afford it. My wife has fond memories of growing up in Taiwan and, to a lesser extent, in Ethiopia, but she has zero desire to do it again or to subject our kids to it. Of course, at the time, those were underdeveloped countries, not places like Canada or Australia.
Young adults tend to have less stuff than older ones. Furniture, pets, homes, etc. If you have to leave the country, that is a great virtue.
Owning a home with a fixed-rate mortgage will likely turn out to be a great thing if we get hyperinflation. Make sure you can make all the payments. And if you have to leave the country, it may be hard to take care of it while you are gone. But if you can rent it to a good tenant or put a good friend or relative into it to protect it from harm, you will be glad you did when the hyperinflation ends.
An email friend of mine who is a college sophomore thanked me for this article and sent this link to a 9/3/12 NY Times story that says Spaniards are rapidly doing what I urge readers to do in the above article.
Events in Europe can affect us in two ways. Show us what will happen to us if we do not stop adding to the national debt or, if we ignore that lesson, just contribute to our going bust sooner by hurling our important trading partner Europe into a financial crisis that will worsen ours.
A Spanish reader said the NY Times article message that Spaniards are leaving the country exaggerates. He says the general feeling is to get your money out of Spain, but not your body. He says Spaniards feel their money is safe in places like Germany. I am not so sure about that. Germany, like Spain, is a euro country. The question is whether you think only reincarnated Spanish pesetas or Greek drachmas will be hyperinflated, but not the euro after those countries leave the euro. I would think they should get out of the euro altogether, not just out of Spanish euros. The euro is an unprecedented and arguably doomed currency. So what will happen to it is too unknown.
I do not urge Spaniards to leave Spain. I am no expert on Spain (visited Madrid and Palma de Mallorca in 1967), but probably they should get their money out of both Spain and euros, and get a second, non-Euro-Zone passport, but not leave Spain until such time as it becomes intolerable to live there as defined in my When do you flee the U.S.? Where do you go? article. Leaving? Probably not yet. Being able to leave if you need to—especially in Europe with its 20th century history—absolutely.
John T. Reed