What to do for the potential of hyper-inflation in the US?

For some folks in the US (including myself) there is a major concern with the size and scope of the US deficit (now over $20T and approaching 100% of GDP). The latest round of “stimulus” put us another $2Trillion in debt, further pushing the day of reckoning up. At some point, the US is going to find that it can’t get people to buy their debt. When that happens – look out!

Wheelbarrow of marks to buy bread

A lot of folks are not that worried, because the cost of borrowing for the US is incredibly low In one of their recent podcasts, Stacking Benjamins talked about how the cost of borrowing for the US government is incredibly low (0.68% for the latest round of bonds recently) – so why not borrow at this incredible rate? The concern I have is that, no matter what the rate is, we are still borrowing a crapload of money, and that will need to be paid! It may be 10 years, 20 years, 30 years from now, but we are going to have to pay it off – or put out new bonds. What happens when the rate on those bonds is 4%? 6%? 8%? Each of those rates have been paid at some point by the US government.

The FIRE community is all about generating cash flow and using debt strategically. This isn’t strategic. So what is a person to do when their government is addicted to debt, and you can see the train wreck coming? Over the next several weeks, I’m going to go through some periods of history where countries had this happen, and what were the areas where someone could have at least done some items in advance to mitigate it. Maybe we can do some of these now to prepare.

The issues with Germany’s 1923 financial collapse starts at the beginning of World War I. While Britain had large financial resources, and France imposed their first income tax to pay for the war, Germany “decided to fund the war entirely by borrowing.” The idea was to pay for the war from the spoils of war, gained from France, Russia, etc. At the start of the war, the mark (German currency) was valued at 4.2 marks to the dollar, but as the war progressed without success, it dropped down to 7.9 marks per dollar.

As we all know, German eventually lost the war, with one of the reasons being the economic collapse of the country. By 1919, the mark was valued at around 48 to the dollar. For the next several years, the mark slowly drifted down, as Germany tried to come out of the war, eventually landing around 90 marks to the dollar by 1921. Germany’s industry hadn’t been damaged during the war (unlike France) but the reparations decision in 1921 ordered Germany to pay their reparations in gold or foreign currency (not cheaper marks). While there were arguments about this, eventually Germany had to comply, which led to more and more devaluations of the German mark. By 1922, the mark was valued at 320 to the dollar.

Germany tried to work out a better reparations method (including working with J.P. Morgan Jr) but it failed, and hyper-inflation was kicked off, with the mark falling to 7,400 to the dollar by the end of 1922. When Germany couldn’t pay reparations, Belgium and France occupied the Ruhr Valley industrial area. In trying to work this out, Germany printed more and more notes, further devaluing the currency. “A loaf of bread in Berlin that cost around 160 Marks at the end of 1922 cost 200,000,000,000 Marks by late 1923. By November 1923, the US dollar was worth 4,210,500,000,000 German marks.”

In late 1923, Germany issued a new currency, backed by bonds indexed to the market price of gold – based on the same price of marks-to-gold as it was pre-war. The central bank was no longer allowed to discount government treasury bills. The new marks were allowed to be exchanged with the old marks (at a rate of 1-trillion paper marks to one new Reichmark). By 1924, one dollar was the equivalent of 4.2 of the new marks (i.e. back to pre-war levels)

So what were the lessons we can learn from this experience?
• The link to a real asset, gold, was broken at the beginning of the war, unleashing inflation. Since the US got off the gold standard, inflation has eaten up 80% of its buying power, as of 1971. There are numerous tradeoffs that the gold standard has created, so that is a topic for another time
• When you lose a war, the victors can be very punitive (see Versailles 1919).
• Political Fragility and infighting can prevent a positive solution to the problem (anyone see that as an issue in the US today?)
• Hyperinflation destroys savings and fixed return assets (bonds). Since a large number of people save this way, hyperinflation can lead to riots and societal collapse
• All these issues can easily lead to the creation of a dictatorship or rule-by-decree. People will do anything to lessen the pain
• The items that maintained (somewhat) their value were good quality company stocks and real assets (gold, real estate, etc.) For those concerned about hyperinflation, invest wisely, start growing some of your own food, and be prepared for society to go through some rough spots.

My plan is to look at other historical issues in the past to get some guidance for long-term planning in the US

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Mr. 39 Months

Watching Your Weight While on Lock Down

Like many folks in the world, we have been on lock-down/self-quarantine here at Casa 39Months for the last month or more. Both of us are lucky (unlucky?) enough to be able to do our work from home, so we have been busy for 8+ hours a day just getting our normal work done. We are also lucky enough to have the room in our house for each of us to have a “home workstation” setup without having to take over the kitchen table.

That said, one of the concerns I have had (and many people I have talked to) is getting a good diet while working from home. Most folks can go to work and only eat during lunch or breaks, but when you are at home, you can just get up, walk to the fridge or shelves, and grab something. In times of stress, folks also have a tendency to eat snacks & fatty foods to help deal with it (survival response from 100,000 years ago?). So how do you deal with this issue?

As a numbers geek, I chose to approach it by doing some tracking and charting! Taking a page from various low-carb/keto plans, I started March 1st, tracking the carbs I have been eating on a daily basis and tracking my performance. Just like with the finances, this helps me judge my performance and motivates me to keep the carbs low.

For many of the books I read, if you get your daily carbs in the 100-150 range, you can slowly lower your weight, while under 100 can cause dramatic weight gain (though you should only do this for a short span of time). It is also different for each sex (women need more carbs, apparently). How have I done?

  • March average: 143
  • April average (to date): 156
  • Weight loss/gain to date: Loss of 1 lbs.

As for exercise, the self-quarantine has put a damper on my workouts/lifting, but I do get out daily for long-walks, and I stretch every morning. I think some of the weight loss/lack of weight gain is muscle atrophy. Since muscle is heavier than fat, I am concerned that I am losing muscle tone and not the fat. We will have to see once I get back to the gym.

Therefore, I am doing my best to keep the “Quarantine 15” off. How are you doing?

Mr. 39 Months

What are you thinking of doing with your stimulus check?

          

The US Federal Government is looking to send out checks to US citizens as part of their stimulus package for the Chinese Corona Virus, and the effect it has had on the economy. The objective of these checks is to assist individuals who have been laid out, or who are having difficulties with their bills. The hope is that individuals will spend this money and keep the economy going, rather than having it “seize up” with folks saving and holding off spending.

If you think about it, a lot of folks (mostly non-FIRE folks) live paycheck-to-paycheck, and use debt to help fund their lifestyle. If you shut off their paycheck for even a week, they’re hurting – and they aren’t spending money on food, clothes, etc. If it kept up, then even folks with decent finances will find themselves hurting, because their businesses will have lost too much revenue.

Retire by 40 had a good article on this, in which he discusses the stimulus checks, unemployment insurance, and potential ways he is planning on spending it (some of it he actual intends to potentially use to help his tenants if they are in need).  

How much will you get?

  • $1,200 for single tax filers that make less than $75,00 adjusted gross income. It will be reduced if you make more, up to $99,000
  • $2,400 for married, filing jointless, up to $150,000 AGI. If you make over $198,000 AGI, no stimulus
  • $500 for each qualifying child.

Unfortunately, we did a $50K Roth conversion last year, so our AGI is around $188,000. This pushed us almost up to the max. Based on a calculator available from Kiplinger’s, it looks like we’ll only be getting $500 for the two of us. Still, its useful money to help stimulate the economy, and I’d prefer the money got spent on folks in worse financial straights than we are.

We’re already doing what we can while in self-quaranteen at home (everyone in New Jersey has been asked to stay home unless in essential industries). Both of us can do our jobs from home, so “no skin off either of our noses.” We are ordering takeout from our favorite restaurants, to try to help them stay in business. We continue to grocery shop, and we are helping out where we can (just gave $1,000 to our local Southern New Jersey food bank). Trying to help where we can, while staying out of trouble and not contributing to the sickness/panic.

Hopefully everyone is healthy and contributing where they can!

Mr. 39 Month

Did you ever wonder…..

Life if full of mysteries and part of the joy of life is exploring them and trying to find out the answers. Some of crazy complicated, and you can never figure them out (ex. The human heart and its emotions). Some it just takes some real world experience to identify why things are.

I have always contributed to my retirement savings on a regular basis, through payroll deductions either to my 401K, or through monthly payments to my IRA. I think I have been doing since my first post-military job. Even when I was a young lieutenant making $25,657/year, we were putting away almost $1,000/month in savings (Note that this was because we were on military base housing, so rent & utilities were paid for).

I always wondered why you could contribute to your IRA all the way into April of the following year – i.e. I could be putting money into my IRA for 2018 as late as April 2019. Could even deduct it on my taxes, as if I had already done it (though you would get into a lot of trouble if you said you would to the IRS, but did not). Yet, I asked why people would wait until the following year, and miss the benefits of a year of growth, and the potential upside of dollar cost averaging. Did not make sense to me.

Well, as of this year, I finally figured out why. I stumbled on it when we did our Roth conversion last year, and I discovered that we had overdone it, and because our income was now too high, we could do our regular monthly ROTH investments. I had to pull that money back and place it in our normal IRAs. Ouch! Major paperwork issue – though it has been sorted out.

Therefore, I stopped contributing monthly to our Roth IRAs, and instead put the money into our normal, post-tax investments. Fast forward to November, and we are considering doing a smaller ($40k) Roth rollover. Why so small? Because if we do more, it may dump us over the threshold of being able to contribute. Therefore, we are going to keep it at $40K, and then, when we do our taxes in early 2020, we will see if we can contribute to our Roth for 2019.

Thus, in March of 2020, I will be contributing funds to my 2019 Roth IRA. Now I know why.

Mr. 39 Months

Excellent post from Go Curry Cracker on 2000 and 2008 retiree status

We’ve all seen the articles and data on ‘sequence of return risk’ where, depending on how the markets do in the first couple of years of retirement, you can be in great shape, or you can be in a world of hurt.

Go Curry Cracker has spent the time to do the numbers on how things are going for folks that retired right around the time of our two most recent “crashes.” An excellent read!

I know there is a lot of talk about a pending recession in the US. All I can say is, its going to happen sometime, so don’t panic too much. Stick with your plan, and be flexible depending on the market.

Mr. 39 Months

Social Security Fixes in the United States

A lot of ink has been spilled over the last 10 years on the state of the United States’ social security program. For those outside the US, this is the base retirement investment program, which takes 6.2% of someone’s salary, and another 6.2% of the salary from the employer, and uses this tax to pay for current retirees. Most folks think they are paying into an “account” for themselves, but it is actually sort of a giant Ponzi scheme, where current tax money is used to pay off outstanding bills. For folks in the FI community, Social Security is a part of the program, but probably not a major part.

Like so many Ponzi schemes, it is predicated on getting more and more people/taxpayers to pay into it in order to keep it rolling. Unfortunately, the folks in the US have not been having 3+ kids to help defer this, and the bill for the “Baby Boomers” is coming due. The taxes taken in are now not enough to pay current beneficiaries, and so the system is spending up the excess it has built up over the past decades. Depending on which accounting system you use, the year it goes “belly up” is around 2032. Unless something is done, benefits will be cut to 75%, which could be very serious for the ones who most depend on social security.

This happened previously, and the two sides of the political aisle got together in the 1980s and came up with a series of items (extend retirement age, tax benefits, etc.) to fix it, at least for the next several decades. Well, we are fast approaching the time when we need to do something similar, but both sides of the US political aisle seem to not want to even discuss it. Probably because it has been called the “third rail” (i.e. the electrical rail for trains) for politics – to touch it means death.

Which is sad, because the closer we get to the magical date, the more severe the changes that will need to be made in order to keep it solvent.  I recently read a report from the Society of Actuaries (an accounting field that specializes in longevity, insurance, etc.) on potential fixes, and what percentage they could go to in fixing the problem.

  1. Raise the retirement age to 70. Life expectancy is longer, but it could be hard on people with physically demanding jobs or who are disabled. +68% of fix
  2. Reduce the cost-of-living-allowance (COLA) by a certain percentage. A congressional commission felt the consumer price index (CPI) was overstated by 1.1%, meaning the COLA was too high. However, these would be cumulative, so as retirees get older, they fall further behind in purchasing power. +37% fix
  3. Reduce benefits by 5% for future retirees: Puts everyone in the same boat, but would hit low income the hardest. +26%
  4. Increase the number of years used to calculate average wage from 35 to 40 years. This would encourage people to work longer, but would hurt folks who work less than 40 years, especially mothers. +24%
  5. Affluence test: Reduce benefits for those whose total retirement income exceeds $50k/year. This preserves the benefits for most, but discourages savings and encourages people to hide assets. It also changes Social Security from a universal, “all in this together” program, to one of need. Would hurt support for program. +75%
  6. Raise payroll taxes from 12.4% to 13.4%. Would not hurt because real wages are going up, but we may also have to increase Medicare payroll tax (it is in even worse shape) so total taxation would be burdensome. +53%
  7. Increase wages to social security tax: Currently capped at , this would make Social Security a worse deal for higher incomes, further eroding universal support
  8. Invest 40% of Social Security Trust Fund in private investments. Could boost returns with less risk to individuals, but this would be 5% of private market. Stock voting and selection could be politicized. +48%

While there does not seem to be one single answer, the best way to do this is with a series of 3-5 of these, and this will get us over the 2032 “hump.” All we have to do is have the political will to do it.

That is the problem.

Sorry to be a bit of a bummer, but we all need to be planning on our financial future, and for those in the US, this is an important part of it.

Mr. 39 months