Preparing for Hyper-Inflation
First, let me say that this is a dry and boring topic and even worse it is confusing and complicated. If you aren’t interested in it I will totally understand if you skip reading it. However, I’m hoping you will at least skim through it and take a look at the graphs.
Today we are continuing our series on Preparing for Survival as vandwellers. What am I preparing for? I consider high inflation rates in the next few decades as inevitable for two reasons:1) The Aging Baby Boomer population that is retiring and signing up for Social Security and Medicare 2) Peak Debt and the Federal Governments need to get out from under it. In future posts I’m going to make suggestions on things I’m doing (and you can as well) to get ready for hyper-inflation. I’m prepping for hyper-inflation (10% or more per year).
Baby Boomers Signing up for Social Security & Medicare
After World War II the United States experienced an unprecedented population explosion as our soldiers returned from war and started to make babies (the baby boomer generation is generally considered to be those born between 1946 and 1964). Eventually their children grew up and entered the work force. I’m one of them (I was born in 1958 and got my first job in 1974) and chances are that most of the readers of my blog are as well.
When we entered the work force the great majority of us started paying Social Security and Medicare taxes. While we call them taxes, most of us think of them as payments on a pension plan and health insurance policy for our old age (the Supreme Court has ruled that’s not true, the government is not obligated to pay us). In four years when I turn 62 I’m going to start doing Social Security which should be about $1400 for the rest of my life. If I live till I’m 82 that means the government owes me $17,700 a year for 20 years or a total of about $354,000 dollars. I consider that to be a real debt that the government owes me because we had a contract that I agreed to pay monthly payments with every paycheck and they would give me a pension.
In the exact same way those monthly payments were to buy me health insurance benefits that are administered by Medicare. So when I turn 65 the government becomes responsible for much of my health care costs. Those costs make my pension look like nothing in comparison! If I live long enough the odds are extremely high that I will have a heart attack, broken bones, and eventually prostate cancer. The government’s share of my health care costs could easily run into the millions of dollars because they cover hospital stays and skilled nursing facilities which will be the majority of the costs of each event.
Now, multiply that by the millions of baby boomers who are going to be signing up for Medicare in the next 20 years and the debt becomes literally staggering. By 2035 the number of SS/Medicare Recipients will double. But not only will there be more of us, we will live longer. The number of us who are over 85 will quadruple by 2040. People of that age are much more expensive to take care of. Let’s look at the statistics. I’m taking this directly from the website of the Department of Health and Human Resources: http://aoa.gov/AoAroot/Press_Room/Social_Media/Widget/Statistical_Profile/2010/3.aspx
Population Over 65:
- In 2000—35 million
- In 2010—40 million
- In 2020—55 million
- In 2030—72 million (roughly 20 percent of the U.S. population)
Of course the government doesn’t produce anything so that means the taxpayers are responsible for paying us. The bigger problem is that the ratio of working taxpayers to retirees is declining and by 2030 the projection is that there will be 2 taxpayers supporting every one retiree. That is not a good ratio!!
As we Baby Boomers retire and enroll in Social Security and Medicare the government has a huge debt hanging over its head that is going to become an insurmountable problem.
We are all well aware of the huge debt the Federal Government has run up in the last 10 years. When the housing bubble burst in 2008 the US (and the whole world) slipped into a deep recession that has devastated the economy. Trying to stimulate the economy we’ve been spending money that we don’t have at a phenomenal rate racking up an incomprehensible debt. When the government spends money it doesn’t have, it has to borrow it from someone else. The majority of it is borrowed from the American public but an alarming amount is from foreign governments like China and Japan. The current government debt is 17.4 Trillion dollars. In 2013 we paid $415 Billion dollars in interest to service the debt and the only reason it was that low was because we were paying an average of 2.4% interest rate. Inevitably the interest rates are going to go up so the amount of our interest payments will also skyrocket.
As terrible as that is there is no reason to believe we are going to stop increasing the debt and paying more and more interest on it. I strongly encourage you to go to this site to get a staggeringly bad overview of the current state of the US economy: http://www.usdebtclock.org/index.html. There are so many facts there it may overwhelm you so I strongly suggest you spend a few minutes and try to take in all the information it is giving you
But government debt is the least of our problems. Even worse is the incredible amount of private debt in this country. Private debt is any money that you and I as citizens or businesses such as small business or corporations owe to someone else. So it’s things like car loans, mortgage payments, small business loans or money corporations borrow. It is the total debt of everyone in the country and right now it is about 43 trillion dollars. So adding together government debt and public debt the combined debt of America right now is 60.9 trillion dollars.
Now I want to show you a graph that shows the history of the combined debt of the country as a percentage of Gross Domestic Product (GDP). But first, let me explain what GDP means. Gross Domestic Product (GDP) is the total economic activity of a country for any given year. If a farmer raises a crop or a miner digs iron ore out of the ground that adds to the GDP. If Kellogg’s turns the wheat into Wheaties, that adds to the GDP. If Ford turns the iron ore into a car, that adds to the GDP. If I go to work and stock a box of Wheaties on the shelf, that adds to the GDP. If I go to McDonalds after work for a burger that adds to the GDP. The GDP is the total economic activity of a country in any given year.
Why would we care about the ratio of debt to Gross Domestic Product (GDP)? Because we have a historical record of what happens when the ratio get too high. When debt takes up too much of the economy it sucks the money that should go to growth and wealth-creation out of the economy and is devastating to it. Debt makes it impossible to borrow money to start new businesses or expand existing businesses. Consumers stop spending when they have too much debt because they are afraid they can’t keep making the payments. Eventually other countries will lose confidence in the US economy because of our high debt ratio and stop loaning us money.
You may be wondering why we don’t just use the total dollar amount as a comparison instead of using the GDP. Because the inevitable result of too much debt is a period of deflation (a depression where there is too little money) followed by inflation where there is too much money and so the value of each dollar declines. So a dollar in 1890 would buy 20 pounds of four; a dollar in 1940 would buy 10 pounds of flour; a dollar in 1980 would buy 5 pounds of flour and a dollar in 2014 will buy a 1 pound of flour. Inflation causes the purchasing power of a dollar to decline so we can’t use dollars to study the historic effect of debt on the economy. So we will use the Gross Domestic Product (GDP) instead because it is always adjusting for inflation. Here is a chart of the history of US Total Debt both Government and Private.
Notice that the last time debt was more than 300% of Gross Domestic Product (GDP) was in 1933 at the start of the Great Depression. The period from 1928 to 1933 were the best of times in America with the economy booming and people were borrowing money like there was no tomorrow. But when the debt peaked in 1933 it all collapsed and we fell into the Great Depression. Since the 1990s we have been doing the exact same thing. We assumed the economic great times would never end and we spent and spent and borrowed and borrowed and BOOM! In 2008 it hit its peak and collapsed. But the government didn’t learn its lesson and kept spending and printing money like there was no limit. We’re all going to pay for that terrible mistake when inflation starts to go out of control.
Inflation is Inevitable and the Only Solution
Throughout history many countries have faced an economic crises just like the United States is facing and nearly all of them tried to do the same thing, spend their way out of it. But that doesn’t work, it only leads to hyper-inflation and eventually the total collapse of the economy. And we are going to do the same thing because inflation is the only thing that will save us in the short term. If we don’t make some very hard changes, the day will inevitably come when people lose their confidence in our ability pay back our loans or even keep up with the interest payments. When that happens the U.S. could actually default on its loans. And even if that doesn’t happen just making the payments and paying the interest on our loans is going to be such a burden on the economy we will be forced to do something and that something is for the Federal Reserve to create inflation. How does inflation solve our debt problem?
As inflation increases it is inevitably followed by wage inflation as well. Workers see their buying power being eaten up by inflation and the companies they work for making huge profits because of inflation and they demand pay increases, which they get. So as prices go up, wage go up also, though usually a little behind and a little lower than inflation. When wages go up taxes also go up. By creating inflation the Federal Government has more tax money every year without raising taxes. At the same time, most of their debt payments are not increasing so their loan payments are at the pre-inflation rate, but their income is at the full inflation rate. Inflation is the only way the government can keep operating. It also has the same effect for the average American taxpayer who is deeply in debt. Their wages will go up but their payments stay the same. That makes them more likely to spend money and cause growth in the economy.
Inflation is very good for debtors, but is very bad for savers. If you have money in the bank its buying power is going down constantly in inflationary times. For example, if your only income is $1000 a month from a pension then you’re buying power is going down constantly. Fortunately Social Security is somewhat inflation-proof so your payments will go up, but probably will lag behind actual inflation. Maybe you can live okay on $1000 a month now but because of inflation in 2 years you will be struggling and in 5 years the cost of living will have gone up so much you’re starving. Similarly, if you have a $3000 cash emergency fund today it might pay to get a new engine installed in your van but in in 5 years it might only pay for the engine but not for the labor to install it.
Because Baby Boomers are about to start drawing SS/Medicare and because of our huge National debt, hyper-inflation (10% or more per year) is coming. Then when you add in Peak Oil driving the price of all petroleum products to much higher prices and extreme weather events from Global Climate Change our economic future is very grim!! In future posts we will look at how to prepare for the very bad economic times that are coming.