From Wikipedia:

“In economics, hyperinflation is inflation that is “out of control,” a condition in which Prices increase rapidly as a Currency loses its value.

“The main cause of hyperinflation is a massive and rapid increase in the amount of money, which is not supported by growth in the output of goods and services. This results in an imbalance between the supply and demand for the money (including currency and bank deposits), accompanied by a complete loss of confidence in the money, similar to a bank run.

“No precise definition of hyperinflation is universally accepted.

“As a rule of thumb, normal inflation is reported per year, but hyperinflation is often reported for much shorter intervals, often per month.”

(Another rule of thumb is that double digit inflation increases can be labeled as being hyperinflation.)

from Asia Times Online:

“Since the Fed was founded in 1913, US inflation has registered 1,923%, meaning prices have gone up 20 times on average despite a sharp rise in productivity.”

For example, in 1913, Gasoline cost $0.12 per gallon. Today it costs about $2.90 per gallon — a 23 fold increase.

In 1913, Milk cost $0.13 a gallon. Today, Milk costs $2.90 — a 21 fold increase.

In 1913, Gold was about $20 an ounce. According to Market Watch, Gold futures surged to a new record high of $942.20 an ounce on Wednesday, after the Federal Reserve cut the fed funds rate by 50 basis points to 3.0%, meeting market expectations.

This means to me that relative to Gold, the price of gasoline and of milk has decreased. In other words, productivity has resulted in price drops for gasoline and milk relative to Gold.

Finally, in 1913 the highest Federal Income Tax Rates were between 1 – 3 percent!!

Economic Conditions Today

The Federal Reserve has lowered the Federal Funds interest rate in order to inject liquidity into the financial system. That’s another way of saying that the Federal Reserve has increased the supply of money — and therefore has decreased the value of money. This can be seen by the dramatic increase in the price of Gold relative to the USD.

The central bank cut the federal funds rate to 3 percent — which together with the surprise rate cut last week after a massive sell-off on world financial markets — the Fed has now cut the rate by 1.25 percentage points in January, the steepest rate cut in a single month in the nearly 20 years that the bank has been targeting the federal funds rate.

In short the Fed is printing money in an effort to stave off a recession.

Protecting against Hyperinflation

I wanted to title this hedging against hyperinflation, but hedging has become a dirty word in global finance.

In any case, as you read above, gold has MORE THAN MAINTAINED its value since 1913. That tells me that owning gold, real gold, is a good hedge against inflation.

In 1997, the United States Treasury introduced inflation protected U.S. Treasury Bonds, or TIPS. So it becomes a better alternative to Gold as an inflation hedge. (TIPS are U.S. Treasury bonds whose principal increases at the same rate as the consumer price index. The interest payment is calculated from the inflated principal and paid at maturity.)

Why do I say a better hedge against inflation? Because the reason that Gold is rising now is that it is acting its role as a “CRISIS hedge”.

When people are scared, a paper IOU, such as the USD, is not enough.
Conclusion
As a crisis hedge Gold is excellent.

But as an inflation hedge it has a very spotty record although it has had its moments, according to InflationData.com.

On the other hand, we all now know that real estate is not a hedge against inflation.

Since energy use can only increase with the increase in technology development and usage, Energy Stocks should hold their value. (There’s a reason why Oil is called Black Gold.)

Purchases of many consumable and “necessities” will probably stagnate as people will stretch the time before they will buy replacements. For example, I’m guessing that people may start to refill their premium AquaFina water bottles with tap water rather than buy another six pack of AquaFina. And Starbucks will see slower sales as they will be viewed as a luxury, (vs. a necessity), in a depressed economy.

Which means, to me, that the whole resturant/hospitality business and the entertainment industry will see slower sales as ordinary people start to cut back on spending.

These aren’t terrific insights — but they are realistic observations that, I think, ring true.

We should arrange our purchases to reflect our necessity to make ends meet each week and each month.

About Long Term Debt

I close with this final thought.

Hyperinflation IS your friend if you have a fixed rate loan, say on your house, that is reasonable, say, 6 percent. Because if inflation rises above six percent — which I think is a sure bet — then you will be paying on your 6 percent loan with inflated dollars which are worth less than the value of the dollar when the loan originated.

20% drop in prices = 13.7 Million homes with negative equity
30% drop in prices = 20 Million homes with negative equity

House prices need to drop 30% to return to the long term historical averages price trend…

If you are making big payments on a house worth less than your mortgage are you going to keep doing that or are you walking away from the house and the debt?

Even if the US Government says we’ll keep your payments low with our bailout plan – would you keep making payments into a house with negative equity? If not – prepare for a lot of foreclosures…and a return to more people renting.

http://www.nytimes.com/2007/12/14/opinion/14krugman.html?em&ex=1197867600&en=0b7dda0e508c22e5&ei=5087

Only a fraction of current defaults are attributable to resetting rates. Most defaults this year have occurred before the first rate reset. Targetting resetting rates is an easy way for politicians to sound like they are getting ahead of the problem, but ultimately many people purchased homes they could not afford under any reasonable scenario usually with brokers and lenders turning an eye to outright appraisal and income fraud.

Loans obtained through inflated appraisals or inflated income would likely not be renegotiated favorably. Investment homes or homes not purchased as a primary residence would likewise not qualify.

Banks will almost certainly be unwilling to refinance loans where a borrower has no equity in their home or has a high debt to income ratio. With home prices falling 4.5% according to the most recent Case Shiller data, and significantly more in the bubble areas most in need of foreclosure assistance, many recent subprime borrowers already owe more than the value of their homes. This trend will only continue.

Ultimately this plan will change very little for the millions of borrowers affected by years of easy lending and speculative real estate.

http://biz.yahoo.com/ap/071210/bank_of_america_fund.html

And worse, the industry analyst, Andy LaPerriere, said: “So I think things are going to get worse, and I think you’re going to hear calls for a taxpayer bailout to mitigate the economic fallout from this subprime, and actually it’s, I think, bigger than a subprime problem. It goes to people with good credit scores who’ve also gotten imprudent loans.”
He continued, referring to both the lenders and the borrowers: “We don’t want it to happen again, so we don’t want to bail out people who made bad decisions or else we’re just going to see more of this behavior in the future.”
Agreed – folks should reap the rewards of their decisions, provided they were not provided false or misleading information on which to base those choices.

An interesting idea was brought up – a change in the bankruptcy code, which now prevents the courts from renegotiating a mortgage but allows renegotiation of other debt, would help >500,000 borrowers.

Unfortunately, the market must come back to equilibrium and even innocent people will be hurt. You help out investors who made bad decisions now, you’ll get more bad investments in the future; you help out borrowers at investors expense, i.e. borrowers who made bad decisions, and you get a worse credit crunch when investors reduce lending.

That’s a rock & a hard place, clearly we all are going to get gored by one of the two horns of this dilemma. The politicians will likely be the ones to decide which horn it will be and who will suffer the most pain.