Preparing for Deflation and Hyperinflation at the Same Time

What would you do if somebody held a gun to your head and forced you to put all of your life’s savings on a roulette wheel for one spin?  What would be the smart move?  I already know what I would do.  I would put 45 percent of my money on black… 45 percent of my money on red… and then put the last 10 percent on green.   I would not get rich but I would make damn sure that I did not lose everything. This is the type of unwinnable scenario that we may all soon face in our fragile economy.

Our global economy is facing pressure that is simply unsustainable.  There are now too many large countries trying to manage too much debt.  I strongly believe that we will face a global economic collapse at some point in our lives. The question that I still cannot completely answer is whether this will be a deflationary collapse or a hyperinflationary collapse.   Most collapses in the past have been deflationary such as what happened in the Great Depression.   The price of stocks, goods, and real estate suddenly drop and credit markets freeze up.  The value of the dollar actually increases and it’s purchasing power goes up, but there are very few dollars moving around.

There is a much more rare event which is equally destructive called a hyperinflationary collapse.  This occurs when governments and central bankers try to avoid deflationary pressures by expanding their balance sheets and printing more money to solve their financial woes.   Recent examples of this have been in 1930s Germany and more recently in Zimbabwe.  The price of everything including real estate, food, and commodities start to rise rapidly as the value of the currency starts to fall.

What we face now is the mother of all global economic collapses.  The world is now interconnected like never before. The U.S. dollar is the world reserve currency and the Federal Reserve controls its quantity in the global market.  The Fed works in coordination with the International Monetary Fund and the European Central Bank to help manage the money supply and to control the rate of inflation or deflation around the world.   If central banks around the globe decide that they want to avoid deflationary pressures at any cost, they could actually push the planet into global hyperinflationary territory like we have never seen before.

These are the questions that we are left with.  Will my property suddenly become much more valuable or suddenly lose most of its value?  Will my cash suddenly become much more valuable or actually lose most of its purchasing power?  Ultimately, it all depends on what a few central bankers decide and how quickly they act. One thing that I have decided to do is to hedge my bets.  I put some of our assets in physical property, some into commodities, and much of it into physical cash in multiple different currencies.  I keep some money invested in stocks and some invested in gold.  I intend to be on both sides of the seesaw.  I gain on one side as the other side goes down.  I don’t profit wildly but I don’t lose everything either.  It keeps me from obsessing over all of these wild market swings.

I have a couple of points when it comes to planning for deflationary collapse.  When deflation occurs this can lead to wide spread banking collapse where credit becomes frozen.  It becomes impossible to get a loan and very difficult to get access to cash.  This makes most real estate temporarily unsellable.  Throughout history when this occurs, real estate can suddenly lose most of its value because no one is able to sell anything.  There is no market.  Just think about it.  If you owned a house that is normally worth 120,000 dollars but you could not sell it and your family was starving, suddenly a cheeseburger could become more valuable than your home.  The markets become extremely distorted during this period.  However, if you place yourself in the position due to poor planning where you eventually want to trade your house for a cheeseburger, then you are totally screwed.

If you pay close attention, you will see however that these extreme market processes are almost always very short lived.  People who hold on to their real estate through a deflationary collapse will usually see a return to previous market value in 3 to 5 years.  If you had enough physical cash at the bottom of this collapse, you could buy up property at this level and make a huge profit. The problem is trying to make sure you have cash available to do this if the entire banking system goes completely under.

Many people just assume that as long as they hold their money in a bank with FDIC insurance that they will be safe but this is just simply not the case.  The last time I checked, the FDIC only had about 50 billion in reserve funds.  This is not enough money to bail out Bank of America or Citibank by themselves.  I believe that many depositors will lose their savings regardless of FDIC insurance should global collapse occur and multiple banks fail simultaneously.  Without access to cash, many people with mortgages could lose their property to banks over the subsequent months by no fault of their own.

I have decided that the best thing that anyone can do is to pay down any secured debt.  I would recommend keeping an emergency savings in a regular savings account of a stable bank.  I would avoid money market accounts because they may not be very secure during a global financial panic.  I want to own anything I need outright including my home and food storage.  Beyond the basics, I intend to split my financial planning right down the middle… half prepared for deflationary collapse and half for a hyperinflationary melt up.  I want to make sure that no matter what happens that I already have what I need and already own what I have.  This advice may not be for everyone but it helps me sleep like a baby.