Inflation: Robbing You Since the 10th Century

Watching from afar as inflation in Argentina grows worse – officially 11%, realistically around 25% – it’s tempting to think of the scourge of fiat money as a modern phenomenon. If only FDR hadn’t confiscated US citizens’ gold to usher in the beginning of the current era of paper money, we could be living in a precious metals paradise, as our ancestors before us did.

That narrative, of course, is utterly false. Humans have been screwing up money for centuries, beginning with China’s printing of jiaozi in the 10th century. History is littered with episodes of hyperinflation, but my favorite is that of revolutionary France as told by Andrew Dickson White in Fiat Money Inflation in France. It contains the most vivid description I’ve seen of how inflation transforms into hyperinflation, and how far governments will go to maintain their power in the face of a dying currency.

France’s hyperinflation began as all hyperinflations do: the state printed too many assignats(pictured below), and they rapidly lost their purchasing power. French citizens sought alternative stores of value and mediums of exchange, as any intelligent person would.

The French government, correctly perceiving this as a threat to its financial hegemony, reacted violently. I’ll let three short passages from the book explain. Note in particular the rapid progression (all emphasis mine):

August 1793:

“Couthon had proposed and carried a law punishing any person who should sell assignats at less than their nominal value with imprisonment for twenty years in chains, and later carrieda law making investments in foreign countries by Frenchmen punishable with death.”

September 1793:

“The Convention decreed that any person selling gold or silver coin, or making any difference in any transaction between paper and specie, should be imprisoned in irons for six years: – that anyone who refused to accept a payment in assignats, or accepted assignats at a discount, should pay a fine of three thousand francs … Later, the penalty for such offences was made death, with the confiscation of the criminal’s property, and a reward was offered to any person informing the authorities regarding any such criminal transaction.”

May 1794:

“The Convention decreed that the death penalty should be inflicted on any person convicted of having asked, before a bargain was concluded, in what money payment was to be made.”

Yikes. Fiat currency isn’t just a contemporary problem, that’s for sure. Are Argentines headed for the guillotines, too?

Probably not. The Argentinian government has made a virtual decennial ritual out of inflating its currency out of existence. As a result, Argentines have earned their black belts in navigating through hyperinflations. That, combined with the Argentine government’s lack of resources to enforce its edicts, ensures that most Argentines won’t suffer the gruesome fate that many poor 18th-century Frenchmen did.

Importantly, though hyperinflations – or even just double-digit inflations – decimate much of the wealth of a populace, they also create massive distortions. Or, as we like to call them at Casey Research, opportunities.

Indeed, in the newest issue of The Casey Report, which will hit subscribers’ inboxes tomorrow afternoon, Casey Research Chief Economist Bud Conrad digs into the worldwide agricultural markets to answer the question: Is agriculture a good investment at today’s prices?

If you’re wondering how agriculture and hyperinflation are related, here’s how: Bud’s analysis concludes with a compelling recommendation to buy a specific agricultural company that owns hundreds of thousands of hectares of farmland in Argentina… an opportunity made possible by Argentinian President Cristina Fernández de Kirchner.

How? Farmland prices have risen rapidly around the globe – so rapidly that buying farmland today looks like a good way to lose money, at least in the short term. But Kirchner has bungled the Argentinian economy so badly and has investors so spooked that Argentina is one of the only places on earth where you can buy productive agricultural land on the cheap.

Thanks, Cristina! If you want to join us in snapping up one of the only sources of cheap farmland left, you can try The Casey Report absolutely risk-free.

For more on the Argentinian situation, I’ll turn it over to Jeff Thomas, worldly correspondent of InternationalMan.com. He’s penned, exclusively for us, a story about the long lines developing at South American ATMs. Read on to find out why.

Dan Steinhart
Managing Editor of The Casey Report

Is There a “Dollar Clamp” in Your Future?

The photo above shows a queue of people waiting at a currency exchange booth in Montevideo, Uruguay. Only a year ago, such queues were uncommon, but now they exist, literally at every such booth, at every hour of the day.

Are Uruguayans suddenly becoming spendthrifts who need repeated daily infusions of cash to get through each day? No; and in fact, very few of those in the queues are Uruguayan. They are Argentines.

The reason these people are in a foreign country, trying to extract a foreign currency from the exchanges is that the Argentine currency has been devalued dramatically through inflation and is on the way to further inflation. Argentines have understandably sought to bypass the peso in favor of the US dollar, in order to keep from losing their purchasing power any more rapidly than necessary.

In response, the government of President Cristina Fernández de Kirchner has imposed a “dollar clamp,” which is intended to limit the use of dollars by Argentines. Not surprisingly, Argentines are trying everything they can think of to circumvent that dollar clamp, including taking the one-hour Buquebus ride across the Rio de la Plata to Uruguay to extract US dollars from their peso-based Argentine credit cards, for “spending money.”

The day-tripper “tourism” has become so extreme that Cristina Fernández has passed a new credit-card limit to Argentines. An Argentine overseas now may extract only US $800 per month. More pointedly, if the destination is a neighbouring country (read: Uruguay), the limit is $100 every three months.

No need to question whether $100 every three months would actually pay for the expenses of a visit across the river – there has been no attempt to disguise the measure as anything but a currency control. The purpose is that, as the monetary collapse completes its downward spiral, the sheep are penned in ever more firmly, to ensure that the final shearing may be as productive as possible. As one Argentine commented to me recently, “After October, there will be no more new Versace for Cristina. They have to take all they can from us now.” That’s a reference to both Mrs. Fernández’s rather extravagant wardrobe expenditures and the expected outcome of the October elections.

But surely, all the above are the machinations of a south-of-the-equator, tin-pot dictatorship and have little relevance to the First World.

Not so.

Argentina provides us with a very useful lesson. Over the decades, its politicians have repeatedly collapsed the economy through the classic progression of governmental overspending/creation of massive debt/dramatic inflation/currency controls. Historically, this progression has always led to an eventual collapse of the economic system (wherever and whenever it has occurred, not just in Argentina). We can therefore observe the developments as they occur in Argentina and project out as to what may be on the way in the First World.

The First World countries have most certainly reached the point of having top-heavy governments that have enormous appetites for funding, and are expanding those appetites dramatically at a time when they should be cutting back dramatically. As governments in this situation always do, they have turned to indebtedness as a solution, in order to prolong the current trend as long as possible. In order to cope with the debt, massive money printing is undertaken, which leads directly to inflation. Inflation leads to an outflow of wealth from the country in question, which is then addressed through currency controls and protective tariffs.

Argentina is in the last stage of this progression and is poised to go over the edge. Its last production of this economic stage play was in 2001, and when the collapse came, the situation in Buenos Aires became so volatile that Argentina went through five presidents in just three weeks.

The US, on the other hand, has reached the point in its money-printing scheme that it is now buying $85 billion per month in Treasury bonds and mortgage-backed securities and is committed to continuing to do so “until conditions improve.” This is equivalent to a railroad train approaching the cliff of the Grand Canyon whilst a crew of workers shovel dirt into the canyon to fill it in, in time to prevent a train wreck.

If the classic progression continues as it does historically, we can anticipate dramatic inflation, followed by currency controls and protective tariffs in the US and other First World countries.

As yet, there is little on the news regarding protective tariffs, but currency controls are very much in the works. Many have been implemented, and more are to come.

At this point, anyone whose primary address is in a First World country might wish to ask the question, “Is there a dollar clamp in my future? Will my government soon be at the stage that my national currency will be inflating dramatically; and if I choose to divest myself of it, shall I find that I am unable to do so, as a result of hastily implemented government controls?”

The answer is unequivocally “Yes.” Governments are in the habit of claiming that their first priority is the safety and well-being of their citizens. However, when a citizen of any country chooses to exit from the relationship, either physically or monetarily, governments have a nasty habit of turning, suddenly and forcefully, vindictive.

For those who have a difficult time getting their heads around this fact, the following may be useful in providing a very real perspective. Picture a situation in which you are married and have reached the decision that your spouse’s wasteful spending is crippling you personally. You then request a divorce. You make plans for splitting up the bank accounts and personal possessions and are hit with an injunction from your spouse’s attorneys. You say, “But these possessions are mine. This money is mine. I worked with the sweat of my brow to earn them.” The attorneys then advise, “That’s not the way we see it. We regard them as community property, and we’re prepared to negotiate with you as to how much we willallow you to walk away with.”

The above situation is virtually the same as one in which you choose to split the sheets with your government, should you choose to do so at a time when that government is facing economic collapse. Your net worth is not your own; it is community property, and your government can, if anything, become more vicious than a divorce lawyer.

First Worlders are not yet queued up, as are the Argentines in the photo above, because the First World has not reached that stage in the progression as yet. What these Argentines are doing is a last, desperate measure. However, First Worlders may use the Argentine situation to forewarn themselves. They may choose to diversify their wealth beyond the confines of the nation-state to which they are presently married – and to do so whilst they still retain a modicum of control over their own wealth.

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