How to prepare for hyperinflation

Hyperinflation can be scary for those who haven’t experienced it. Fortunately for us, there are some lessons from history and today that can help us prepare for and weather the storm.

Text | Jameson Lopp. How To Prepare For Hyperinflation. 2022/3/6.

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It’s been two years since central banks issued trillions of dollars in fiat currency in response to a global pandemic, and now another destructive force has reared its ugly head: inflation.

Today, the United States is grappling with the highest inflation numbers in decades, and many of us—especially the younger generations—are getting a crash course in economics as prices continue to rise. Naturally, we’re curious to see if the future will get even more extreme with a hyperinflationary collapse.

Hyperinflation can be scary for those who haven’t experienced it. Fortunately for us, there are some lessons from history and today that can help us prepare for and weather the storm.

What is hyperinflation?

Inflation (inflation) is a general increase in prices. In a fiat currency system, inflation is more or less considered inevitable. Central banks normalize inflation to a certain extent.

Hyperinflation is runaway inflation with a sense of panic. Usually, some exogenous event occurs, such as a war, riots, or global pandemic. The government will fund its crisis response with debt that it can't reasonably repay, and print more money to make up the difference. Prices rise parabolicly, which prompts consumers to panic buy anything that will hold its value, creating massive shortages. The government prints more money to try to offset this, and it all becomes a vicious cycle.

What constitutes hyperinflation is subjective, but economists tend to favor Philip Kagan's definition of a monthly price increase of at least 50%. In fact, there are some examples that far exceed that number. During 2007-2008, prices in Zimbabwe doubled in a single day, according to the Cato Institute.

More recently, hyperinflation has been observed in Lebanon and Venezuela, both of which offer clues as to how hyperinflation might play out in your region.

Finding a store of value as quickly as possible

When hyperinflation hits, you are incentivized to spend your depreciating currency on anything that can better hold its value. In extreme cases where prices double in a few days, almost anything that is non-perishable becomes a store of value. For example, buying a couch and storing your value in it may be better than using currency.

In a nutshell, hyperinflation means a deterioration in the market economy because time preference surges. Every consumer is incentivized to spend money as soon as they receive it.

Often, people will seek to exchange their currency for another country’s currency, but this can become untenable. Once governments take notice, capital controls can be imposed. Foreign exchange trading may be made illegal, or at least a bad thing, in order to prop up failing currencies. Recently, Russia imposed a 30% tax on foreign currency purchases. We’ve even seen sleight-of-hand currency swaps—where a country exchanges its current currency for a more devalued version.

Bitcoin is an alternative that may prove useful against hyperinflation. Designed with a hard cap of 21 million bitcoins (a total of 2.1 trillion divisible units), I think Bitcoin is more resistant to hyperinflation than any other currency. Bitcoin is a decentralized bearer asset like gold, making it harder to appropriate. But unlike gold, it is more marketable and can be sent to anyone in the world at a relatively low cost. It could come in handy if you need to circumvent capital controls in a hyperinflationary crash. It might make sense to buy some just in case.

Focus on the bare necessities

During hyperinflation, every day you don't spend money, you lose some of it. Once that purchasing power evaporates, it's gone forever. During hyperinflation, you'd better make big purchases early because if you don't, those items will become more out of reach over time.

If you're lucky enough to live in a stable economy, it's hard to imagine what this type of shopping would be like. Expect long lines at ATMs, empty shelves at grocery stores, and increased crime.

When shopping, focus on the basic necessities you need to survive, such as food. You may want to buy food with a long shelf life so that you can buy more without having to worry about it going bad. If you make discretionary purchases, give extra consideration to items that may become scarce and therefore have the potential to be resold at a higher price later. You never know what the future holds.

Don't trust government readings, verify

As Warren Buffett likes to say, don't ask your barber if he needs a haircut. You can't expect an unbiased opinion from someone who has a financial incentive to deceive you.

Governments create hyperinflation by printing money at increasingly unprofitable rates. They print money because it is more politically advantageous than raising taxes. So if you are looking at inflation statistics compiled by a government agency staffed by political appointees, take them with a grain of salt.

For example, the Consumer Price Index, maintained by the U.S. Bureau of Labor, is constantly changing. Changes to the report are posted on the bureau's website, and these announcements often raise more questions than they answer. You can easily see the difference between today's CPI algorithm and the one used decades ago at shadowstats.com.

“Starting from January 2022, the weights of the consumer price index are calculated based on consumer spending data from 2019-2020,” the bureau wrote in a February notice. “The Federal Statistical Office considered intervening but decided to maintain the normal procedure.”

Let me just say this: the world has changed a lot since 2019.

As a security professional, I encourage clients to verify information independently rather than relying on third parties. If you suspect you are in a hyperinflation environment, it is even more important to calculate how inflation will affect you. Keep your normal shopping receipts and compare them. Adjust for other changes such as deflation, where suppliers change sales units to hide price increases.

Inflation is a complex phenomenon with many factors, such as supply shocks. However, if you verify it on the street, you will have a better understanding of how inflation affects you because at least you will understand the methodology.

Have an exit strategy

There are only two options for dealing with threats: fight or flight. When you have a good chance of bringing about change, open resistance makes sense. But when you know your chances of winning are slim, the smart move may be to avoid the confrontation altogether and move to another location.

Hyperinflation is a systemic problem that makes it nearly impossible for individuals to change the status quo. Ultimately, you can't really fight hyperinflation; the best you can do is adapt to and avoid its effects as much as possible.

If you figure out how to deal with hyperinflation, trouble may also be waiting for you on the other side. Hyperinflation squeezes entire communities, and desperate people do desperate things. For this reason, hyperinflation is believed to be a cause of unrest, mass poverty, and war.

In all of these edge cases, it may not be in your best interest to stick around. If you are a well-known Bitcoiner and Bitcoin proves to be a successful inflation hedge, you may be scorned or even become a target of criticism. If this happens, get out before things get too bad.

Wealth security is about anticipation. Markets are a collection of human decisions, and human nature is relatively predictable. If you pay close attention to your financial situation and are flexible and resourceful, hyperinflation won't take too much out of you.

According to the "Notice on Further Preventing and Dealing with the Risks of Virtual Currency Trading Speculation" issued by the Central Bank and other departments, the content of this article is for information sharing only and does not promote or endorse any business or investment activities. Readers are requested to strictly abide by the laws and regulations of their region and not participate in any illegal financial activities.