Copyright 2012 by John T. Reed
Real estate is a good hedge against inflation. Fixed-interest-rate mortgaged real estate is a great way to profit from inflation.
But you can’t eat real estate. And you have to eat.
And you can’t move real estate. Indeed, the French word for real estate is “immobilier,” which means the same as the English word immobile.
During hyperinflations around the world in the past, it has been hard for non-farmers to get food. Hyperinflation and capital controls render the city dwellers and suburbanites unable to pay for food in any currency that the farmers want. Price controls outlaw the farmers selling for current market value. Barter is the only permissible and accepted by the sellers medium of exchange and it is extremely cumbersome forcing non-farmers to pay enormous sums as measured by the pre-hyperinflation value of the goods they are bartering for the mundane, formerly cheap vegetables, grains, meat, and dairy products they are getting in return.
Personal property like furniture and office equipment and vehicles are hard assets that retain most of their purchasing power in hyperinflation. They are portable or transportable, but cumbersome to move.
Long-term leases with fixed rents at pre-hyperinflation levels are good to have during hyperinflation, but they make you immobile for the term of the lease in order to benefit from them.
Looking at extremes is often helpful for understanding new circumstances. What would be the extreme of mobility?
You live in a recreational vehicle rented on a month-to-month basis. You are a citizen of both the U.S. and Canada and a couple of other countries.
All your personal possessions are backpackable. Your computer data is out there somewhere in the cloud. You have bank accounts in multiple currencies in multiple countries.
You buy your food, health care, clothes, shelter, etc. month by month. Your job has no physical location and can be done from anywhere in the world where you can get an Internet connection.
What are the hyperinflation-in-the-U.S. implications of this extreme mobility?
When one of the leave-the-country triggers listed in my flee the country article happens to you, you must leave the country. You have no way to profit from hyperinflation in the U.S. dollar other than to place securities markets speculative bets against it. You have no protection—other than long-term fixed leases—against the costs of things you need rising other than to leave the country.
But if you can leave the country, and you have foreign currency savings that does not become hyperinflated, you should be in fine shape.
Furthermore, you can escape the problem practically overnight. You just leave. Since your hard assets are all in your backpack, nothing is holding you back.
At the other end of the spectrum is the American subsistence farmer who has stored years worth of food, other necessities, and fuel. A subsistence farmer is one who produces only for his own family’s consumption. As a practical matter, most probably produce some extra stuff to sell to get money to buy necessities that they cannot produce. For example, my grandfather, who built his own farm house, probably got the lumber by cutting down his own trees, taking them to the sawmill, and giving some of them to the mill for their cutting services. And he probably bartered for the nails or sold some farm produce or his carpenter services to get money to buy them.
Virtually everything the subsistence farmer owns is a hard asset. He has already used his U.S. dollars to purchase and store as much of the needs that he cannot produce on his farm so hyperinflation will little affect him. He lives, or can live, off the grid via growing his own vegetables, grains, and livestock. He grows his own firewood. He may be able to get additional protein by fishing, hunting, and gathering on or near his farm. He has a water well and a septic system. He may live in a very mild climate part of the U.S. where he needs little heat or air-conditioning.
What are his hyperinflation risks? Looters and laws that confiscate his assets through taxation or directly. Both occurred in Austria in the early 1920s hyperinflation there. Generally, it is impossible for even the best family subsistence farmer to produce everything his family needs. Medical care, vehicle maintenance, and so on require money and availability. So you would never be totally insulated from the adverse conditions around you caused by hyperinflation. And there is the moral and social issue of you being Mr. Smarty Pants with all your needs taken care of while your friends, relatives, and neighbors suffer severely because they lacked your foresight and decisiveness.
I suggest you try keeping a hyperinflation diary. List where you went each day to obtain goods and services and then write down how you would have done that if we had hyperinflation, capital controls (outlaw possession of gold or foreign currency), price controls (cause scarcity and lower quality of goods and services), and rationing. I predict the diary will quickly reveal that it is next to impossible to function in a country with the combination of hyperinflation, capital controls, price controls, and rationing and anti-hoarding laws—the usual combination that you get once hyperinflation takes hold.
The basic problem is although hard assets like a home or farm tend to hold their value during hyperinflation, those assets cannot provide for all of your needs. And real estate cannot be moved to a country where all your needs can be met. Moving personal property to another country is theoretically possible but may be illegal in part or simply impractical because of shipping cost.
In the modern world, we need many things that simply cannot be produced on a farm or stored feasibly, like prescription medicine, auto parts, medical care, Internet service, telephone service.
Subsistence farming, which is largely a thing of the past, is theoretically possible, but extremely difficult. It requires an enormous variety of skills to plant and harvest crops, can food for the winter, raise livestock, maintain farm buildings and fences and equipment, breed animals, slaughter animals, cook meals. Hollywood depictions tend to portray that somewhat accurately, but in real time, repairing a fence that surrounds ten acres in the hot sun or rain or snow or whatever weather is infinitely less fun than watching an actor do it for a couple of minutes in an air-conditioned theater. An on-line post by a current subsistence farmer says five acres is about the minimum for a family to live off of.
Not everyone likes farm animals. Farmers wear boots because the barn yard is covered with animal urine and feces. Subsistence farmers generally cannot take vacations. If you have a milk cow, you have to milk it, twice a day, every day. If you stop, the cow is in pain. Over time, if you stop milking it twice a day, the cow stops giving milk at all and will not do so again until it gives birth.
The work is almost all outdoors or in unheated, un-air-conditioned buildings. The weather is often unpleasant or severe in most parts of the U.S. You have enemies like vermin and wild animals and plant and animal diseases—maybe criminals.
Subsistence farming, when it was the rule in the U.S., involved three generations: adults who did the main work, children who did what they could, and grandparents who had tremendous experience and knowledge but declining physical skills. Trying to do it with one adult or two or a single mom and kid strikes me as probably beyond the point of reasonableness. True, the amount of food they need is proportionately smaller but there are many discontinuities. For example, a two-person family that wants fresh cow’s milk cannot buy a cow that is half the size of a four-person cow. Their well is not half as deep as a four-person well, and so on.
Bottom line: there is a reason Americans and Europeans left the subsistence farm in the 1800s and 1900s. It is what economists call division of labor. It is infinitely more efficient for each of us to do what we are best at and to take advantage of economies of scale and that means we have a far higher standard of living when we do that. During hyperinflation in the U.S., you can continue to enjoy modern division of labor and the resulting high standard of living by traveling to another modern, developed country which has a stable currency at the time—like my recommended foreign currency countries: Australia, Canada, New Zealand, and Switzerland. Furthermore, you would not have to live in those particular countries. Any modern, developed country with a stable currency would do, although you would save currency conversion charges if you went to countries where you already owned that currency.
Most likely, you have a home here in the U.S. and some partial capability to grow a garden, store food and other necessities, work and make perhaps enough money to roughly keep pace with, say, double-digit inflation like we had in the early 1980s. And hopefully you have put some money abroad as I recommended so you can leave the U.S. if necessary.
So what do you do with our U.S.-located hard assets while you are overseas. One reader who apparently was raised by wolves asked if I would abandon my house to looters.
No. I expect I would leave it with my three sons, daughter-in-law, and granddaughter and our many guns, dog, and several cats. We also have CHP and the sheriff. In general in Austria and Germany during the hyperinflation there, police still functioned relatively normally. Our neighborhood and that of our homeowner son are relatively low crime for various reasons like dead-end canyons with only one road in and out. Our son’s home is across the street from one of the largest police stations in our region. Neighborhoods that are low crime now would probably remain so during hyperinflation. I do not know the incidence of gun ownership in our area, but I am sure it is relatively high and would get higher fast in the event of a financial crisis.
The notion that mobs will rampage across the land did not happen much in historical episodes of hyperinflation and Americans are more well-armed than almost every other country. As long as communications kept up, and they generally did in the early 1920s, any rampaging mob would be tracked on live TV and the surrounding citizens and neighbors and police would be coordinating armed resistance on their phones and cell phones.
Will my sons and daughter-in-law and granddaughter be starving while my wife and I are watching the sun set over the Sydney Opera House and Harbour Bridge?
No. In Anna Eisenmenger’s Diary, they did not go overseas. Rather, they took turns going to her uncle’s farm in Linz.
Anna, incredible trouper that she was never went there, but she did end up in a hospital which was apparently something similar to my surprise. There she got nutritious food and much-needed rest.
I expect my sons and daughter-in-law would do reasonably well with our stored stuff and their stored stuff. They live sort of hand-to-mouth like typical young people, which is actually one of the groups that typically does well in hyperinflation. Living hand to mouth when your source of income adjusts to the rising prices is actually a sort of indexation when you think about it.
I expect my wife and I could probably send them some stuff from abroad. I expect they would join us abroad at times or that we could come back to the U.S. and trade places with them temporarily.
When our oldest son got admitted to Ivy League Colleges and went no one of them, we applied for financial aid. The annual cost then in the late 1990s was about $45,000. The colleges all said we were too affluent for him get get any financial aid at all.
So what did we do? We took a deep breath and decided to somehow muddle through. And that is what happened. Dan graduated from Columbia in 2003. Similarly, hyperinflation is not a precisely predictable situation. We will all have to muddle through.
The approach that seems to be the best is to do your best to remain in the U.S. as long as you can via stored food and other necessities, producing your own food, being able to not so much “live off the grid” as be able to survive if and when the grid goes off you. And if and when you can no longer remain in the U.S.—because of one of the events listed in my “when do you flee the country?” article—you need to leave. What about leaving hard assets behind? You have to do what you have to do. Top priority is the health and safety of you and your family. Net worth is secondary.
Probably having as many options as possible—and certainly at least the two options described above—is best. Denial and assuming just doing what you have always done will be fine is probably suicidal.
John T. Reed