QnA Friday: Living Through Hyperinflation: A First-Hand Account

by kungfugirl on September 28, 2012

Hyperinflation

Wow. Just Wow. As Barry Ritholz would say, I continue to be humbled by the awesomeness of our Kung Fu Finance subscriber community. You all seriously rock.

First of all, thank you for your inspiring emails and words of encouragement, and I’m glad you liked yesterday’s post! Yes, happily my “trying times” seem to be behind me for now (although I’m sure more will crop up again soon, as that is just life, LOL!).   :)

I wrote that post as much for you as for me…many of you have written in recently about some trying times you yourselves are going through…it must just be one of those weeks! Just remember…this too, shall pass, and the battle is not over unless you quit (or die, in the words of Will Smith!).

So get on out there and fight, and let me know how I can help!

I’m doing something a little different with our QnA Friday today…for once, I had the opportunity to ask one of you a question that has been burning me:

“What is it like to personally live through a hyperinflation?”

(And because I am the nosy sort, I of course didn’t stop there…)

I also wanted to know:

“What happens?” “Who wins?” “Who loses?” “How does it all go down?” “Does anyone actually thrive in a hyperinflation?”

And more!

Today, I am happy to introduce you to an awesome Kung Fu Finance subscriber who actually had all of the answers for me, Martin Malchev.

A week or so ago Martin and I exchanged comments and then Facebook messages…Martin has personally lived through hyperinflation in his native Bulgaria, and I asked him if he would be willing to share his story with us. Luckily, he agreed!

Martin writes beautifully (especially considering English isn’t even his first language!) and is a talented illustrator to boot—you can check out his illustration portfolio here, and he created all of the images that you’ll see in this post.

It’s fascinating and instructive to read a first-hand account of someone who has actually lived through hyperinflation…we read so many theoretical examples, but it’s exceedingly rare to hear from someone who has personally experienced and lived through it.

(And that’s what Kung Fu Finance is all about—real, honest, “been there done that” “from the trenches” accounts from actual individual investors out there trying new things!)

So today, I am very pleased to present to you Martin’s first-hand account of living through hyperinflation.

I hope you find it as fascinating and informative as I did!

Please let me know what you think in the comments, and ask Martin some questions!

Take it away, Martin…

Martin

Living Through Hyperinflation
By Martin Malchev

With today’s reckless printing of currencies around the globe, many of the top economists believe something bad is about to happen. Some say it is deflation that is approaching. Others believe that it is inflation, followed by hyperinflation. There are also people like Marc Faber, who believe that we will have both: First deflation, then hyperinflation.

As a person who has seen and experienced hyperinflation personally – I think this will be the more likely scenario of the upcoming events (the hyperinflation).

Why do I believe so? Well, let me tell you what I saw during the hyperinflation in Bulgaria (my home country) in 1996-1997 and then you can decide for yourself if it has anything in common with what we now see in the US, the EU and almost the entire globe.

As I said, the place of my story is Bulgaria. (For those of you who are not so sure where that is, it is the country north of Greece.)

Before the Soviet Union fell apart, Bulgaria was in its zone of influence along with other countries in the region. But unlike those, Bulgaria was considered to be a pretty rich country (compared to the rest of the Communist Block). It had a stable export economy, we were on a gold standard, and the Bulgarian National Bank had huge reserves of gold and currencies (mostly dollars).

If in 1989 somebody had said to a Bulgarian banker that he would be an eyewitness of a hyperinflation – that somebody would probably have been laughed at hard.

Alas, most people were doing the opposite of laughing 7 years later.

In 1989, $1 USD could be exchanged for 1 Bulgarian lev (the national currency).

In March 1997 $1 USD was trading for 3000 Bulgarian lev.

But what was more shocking was that in December 1996 the exchange rate was $1 = around 300 levs. The jump from 300 to 3000 happened in less than 3 months.

Hyperinflation

Now that's a hyperinflation...WOW.

So what caused this?

Well, what usually causes hyperinflation: The loss of faith by the people in their currency because of the actions of the government.

And what were those actions?

In our case these were big deficit spending, and printing money + borrowing from abroad to cover that spending.

Sound familiar?

Actually, before that there was an economic crisis, starting in 1994. What caused it was the loosened lending standards of the banks, caused by the loosened lending standards of the national bank (our version of the Fed, with the small difference that it really is a bank, has reserves and is owned by the government.)

At some point it became clear that all of those bad loans couldn’t be collected and almost all of the banks had to declare bankruptcy.

But then the government decided that those banks were “too big to fail” and they should bail them out through the national bank and its reserves.

That’s when people’s trust for the banking system began to erode more significantly.

This happened dlowly at first… People began to pay attention to banks. Many withdrew their deposits. The government was printing to compensate for those withdrawals of levs and for their deficit spending, and they were assuring us that inflation was under control, and that “a little inflation is good for the economy”.

I remember that the chairman of the central bank appeared on television many times to assure the citizens that their deposits were safe, the banking system was fine, and that inflation was under control.

He even went further – insuring all deposits on 100% of their amount.

So now, when I see the chairman of a central bank on TV telling people that things are under control – I know this means things are now out of control. When things are really under control no such people appear on TV, because nobody really thinks about them.

Anyways. To make the long story short – the government continued printing paper money (no longer backed by anything), people lost faith in politicians’ ability to manage the debt, and inflation accelerated. Then it became clear it could not be stopped and it went from high speed to light speed in a very short period of time.

That was a short retrospection of the causes and events that led to hyperinflation.

But how was all of that felt by the ordinary people like me and my family?

I was 15 when the hyperinflation peaked, and I didn’t have much to lose, so I wasn’t as worried as my parents and the rest of the adults in the country. I remember that I was irritated when my parents were giving me 200 levs to buy a snack at school, but before the lunch break the price of the snack was already 300 levs.

The next day I asked for 300 levs, only to find out that now the price was 400 levs.

This story may sound absurd, but this was valid not only for the price of my snack, but for everything else in the market. Prices were changing daily, sometimes 2 or 3 times a day.

But one of the few things that was changing not daily but monthly was wages. When workers received their paychecks, those were so inflated that they couldn’t buy much with them.

People were practically working for nothing.

At some point the shops stopped changing their prices a couple of times a day and instead closed their doors entirely. It was no longer rational to trade in levs, but ordinary people didn’t have any currency.

So the economy stopped, or should I say collapsed, and the riots began.

Rebellion Angry Protestors

Angry, hungry protestors

Millions of angry and hungry people were protesting in all towns and cities all over the country. For good or for bad, Bulgarians are not very violent people, so nobody was killed during the protests, nor were there any pillages like those in England that occurred some time ago. Some government buildings were seriously damaged, but given the scale of the protests – that was nothing.

There were clashes between citizens and the police and the usual arrests, bleeding noses, missing teeth at cetera. But in those days everybody, including the media and the police, was supporting the mob, so maybe that is one reason those clashes didn’t lead to lethal consequences.

The police weren’t trying to suppress the protests, but merely to save the lives of the politicians, who wouldn’t last long if the mob managed to get its hands on them.

For my teenage mind it was like a crazy action movie in which the entire country was involved.

But back then I didn’t realize that 99% of the people protesting had just lost all of their money.

They had no money, there was no point in going to work (even if the economy wasn’t on hold like it was), and if they did have money there was nothing to buy, because all of the shops ware closed.

On top of all this it was so very cold. It was winter when the riots took place, and it was so cold that people were often jumping at those protest meetings in order not to freeze.

But while some were jumping and protesting, others were profiting by all of these events.

A small part of them saw it coming and got prepared. A bigger part was informed that all of this was about to happen and also got prepared. They were called “The Credit Millionaires” around here, and for most of them that was how they made their first million. They did it by taking out as many loans as they could and converting them into dollars or German marks. Then, when those loans were inflated, they exchanged some dollars or marks and paid off their loans at once. (As I mentioned above – in just the first 3 months of 1997 the lev lost more than 90% of its value.)

But those people’s gains were other people’s losses.

The losers were the majority of ordinary citizens and most of the banks which now went bust. The government couldn’t save them this time, as it couldn’t save itself. The Cabinet resigned and that made the chaos complete: No government, no money, no economy, no work, no goods, no food, no nothing.

As I think about it today it is some kind of miracle that people weren’t killing each other literally, since they didn’t have much to lose. Maybe it was because they were united against the politicians.

In those times the bigger part of the population were savers and that was the main reason they got hit so hard.

For example, the biggest part of the kids had savings accounts in their names. I, my brother, my cousins and most of my friends had such accounts. In those accounts parents and grandparents could deposit levs, but they were not able to withdraw them. Only their children could do that, and only after they turned 18 years old. Those deposits were insured by the government and that was one reason they were so popular.

Little did we know then that the government itself isn’t insured against bankruptcy.

Those deposits were only a small portion of people’s savings, which all evaporated. So on the one hand my family took a hit by losing their savings. But on the other hand, 4 or 5 years before these events my parents took out a 20-year loan from the bank to buy a home. And one day, in the midst of the hyperinflation, when my father still had a job, he took his paycheck (the last for some time) and with half of it he paid back the loan for our home. With the other half he bought 2 plates (dishes).

There were some people who didn’t have to pay back anything, because their banks went bust. They disappeared and thus freed their clients from all obligations, including payment of loans. Those lucky people, my parents included, didn’t know that such things could and would happen. They were just fortunate enough to unknowingly do the right thing in the right moment. But there weren’t much of those back then. The culture of borrowing and living on credit was yet to come.

In short, if I have to sum up what I learned from personal experience about hyperinflation, it would be this: hyperinflation is the tail of inflation.

Once inflation begins it gains speed and can’t be stopped. The currency inflates to the level of hyperinflation when people lose their faith in their government, and in its ability to payback its obligations. It goes from bad to worse when the rest of the world also loses faith in that same government’s abilities.

When things start to get out of hand, the politicians and the chairman of the national bank always lie about the true level of inflation and unemployment and say that everything is under control. During hyperinflation savers (of currency) and people on wages get hit the hardest. The people who invest their currency don’t suffer that much and some even profit in such hard times. Those who take out loans from the banks (in the inflated currency) and invest them in hard assets (or anything but the inflated currency) profit big time, because either the banks go bust or the loans are wiped out by the inflation.

But, since I have seen hyperinflation only once – I can’t say that it always unfolds like this. I hope I will never understand though.   :)

How it all ends

After the resignation of the Cabinet, the opposition needed some time to form a temporary government until legitimate elections were held. The first decision of this temporary Cabinet was to peg the lev to the stable German mark.

In the first hour after the announcement of that decision, the lev went from 3000 levs for 1 U.S. dollar to 2500 levs for 1 U.S. dollar. Later the German Mark was abandoned for the Euro, and the Bulgarian government did the same – pegging the lev to the Euro. Nowadays they are still pegged, and 1 Euro is = 1.95583 levs. $1 is around 1.50 levs.

The implementation of this so called Currency Board means, among other things, that Bulgarian politicians can no longer manipulate the currency supply by “printing”. This is the main reason that Bulgaria is now one of the few European countries with deficits below 2% of GDP and a very low rate of inflation. (The Bulgarian government cannot cause inflation, but it is being imported through the ECB’s printing of Euros.) This allows the Bulgarian economy to remain stable despite the problems in neighboring Greece.

It is interesting when I think how this event (the hyperinflation) still has a huge impact on the lives of people here 15 years later. Maybe the one positive effect of it is that the people who witnessed it (including even the politicians) got wiser thanks to that terrible experience. The fear that it can repeat makes people more cautious about their money and who they place in government. (Or at least I hope so.)

It is great to learn from your mistakes. It is even greater to learn from someone else’s mistakes without repeating them. Unfortunately you can’t count on that when it comes to politicians. I personally believe in that English proverb – “Hope for the best, but prepare for the worst!”.

So this is pretty much the way I saw the hyperinflation through my teenage eyes back in 1997. I hope it broadens your perspective on the topic at least a tiny little bit. And I’ll be glad to hear your thoughts on this issue.

Best,
Martin Malchev

——————————————

Thank you very much Martin!

Please let me know in the comments what you think about hyperinflation, and if you have any questions for Martin, ask away!

Thanks so much for reading and being a Kung Fu Finance subscriber!

To your financial success,

— Kung Fu Girl

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Susan Fujii, aka , is an SEC Accredited Investor who believes that anyone can learn to be financially independent.

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{ 37 comments… read them below or add one }

Jonathan September 28, 2012 at 4:30 pm

It is scary to think that something like this can happen in the United States. Even scarier that the writing is on the wall and most people in America are oblivious to it.

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kungfugirl October 2, 2012 at 10:26 am

Yes, absolutely.

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FredB September 28, 2012 at 4:39 pm

The ’70s looked like they were heading for hyperinflation until Volcker set interest rates at very high levels. Volcker is still alive but, I don’t think this administration and Fed are going to do that again. Too many of their cronies would be hurt. This time we won’t stop short of hyperinflation.

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Matt VW September 30, 2012 at 8:57 am

An interesting additional side effect of Volker’s action was that businesses started leaving the US at greater and greater speeds because the cost of the money was too high.

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kungfugirl October 2, 2012 at 10:28 am

Very interesting, and makes a lot of sense, Matt. And FredB, I agree– higher interest rates would cripple the U.S. government– we can barely afford our interest payments now as-is!

– KFG

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Tony de Werth September 28, 2012 at 7:16 pm

Martin’s experience is bad, but not as bad as those friends of mine who live in Zimbabwe.
At the height of their hyperinflation I bought 4 bank notes issued by te Reserve Bank of Zimbabwe……a 1 trillion $, a 100 billion $, a 50 billion $ and a 20 billion $……. that cost me US$7.95 on EBay………
And 2 years previous, a Zim $ was equal to approx 0.80 US !!!!
Families wiped out, savings gone, retirement allowances kaput, you name it………
Can’t happen in the US you say ????
Don’t bet on it……..study history…….back to Roman, Greek, and German empires……..it certainly CAN happen here, and soon, and in fact WILL…..

T

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Martin Malchev September 28, 2012 at 10:31 pm

Hey Tony,

Actually the economists who research hyperinflation say that what we had in Bulgaria was pretty mild case of hyperinflation. It is something like “the best case scenario”. And heard that Zimbabwe was the worst case indeed. Another place where they had it rough was in the former Republic of Yugoslavia in 1992 -1994. It will be interesting to hear from your friends or from people from former Yugoslavia here.

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kungfugirl October 2, 2012 at 10:32 am

Yes, I have some anecdotal experience, too– Kung Fu Guy and I backpacked in Turkey in the very early 2000′s for 6 weeks and were “Turkish Millionaires”….we literally paid for everything with millions of Turkish lira– I would have to look up the exact exchange rate but millions of lira were only worth ~$1 USD. Hotel rooms (stunning hotel rooms in Bodrum and right on the Mediterannean) were only $2.00 USD per night…!

I would love to hear from others who have experienced hyperinflation, too (obviously in my Turkish example we were just tourists so were unaffected, but we felt terrible for the locals).

– KFG

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Reuven Kishon September 28, 2012 at 7:19 pm

Fred,

I can’t see them raising interest rates as high as Volcker did as that would cause the government to have to default on their debt (there would be no way in hell they could even hope to service the INTEREST payments).

I believe the people that believe we will go through deflation before hyperinflation are correct, I just can’t grasp how hyperinflation will come about in this scenario. Here’s what I think I understand about this scenario:

1) They will continue to try to stimulate the economy by pumping money via QEx. Unfortunately all this money will continue to sit on the sidelines, which means we won’t see any significant inflation through all this QE.

2) At some point they will have to stop QE as they will realize that each time they do this the effects will diminish more and more. Once they realize it no longer has any effect, the deflationary forces will take over and prices will drop.

It’s the transition from this deflationary environment to hyperinflation that I can’t figure out. Care to help me out here Susan? :)

Also, Susan, it would seem that if someone believed that hyperinflation was imminent, would it not behoove them to look into accumulating some debt? Maybe purchase a home? I’ve seriously considered this myself, especially if I decide to stay in the US. Then again there are some people that claim that if an hyperinflationary environment were to occur, that the lenders (?) would be able to adjust the loan’s interest rate to make up for the loss in value of the dollar?

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Martin Malchev September 28, 2012 at 10:52 pm

Hey Reuven,

You probably know that most of the US dollars are outside the US. So what happens with the dollar if the rest of the world (or just one country – like China or Saudi Arabia) looses faith in the ability of the US government to pay back its debts? Maybe it will be enough to start it all.

As for adjusting the rates of mortgages – even if you are not protected against this in your contract with the bank – don’t worry! In hyperinflation if the banks adjust the rates – people can no longer pay them, because wages (if so happen that anybody has a job then) lag way behind the rates of inflation. That means all loans become bad loans immediately. And that means the banks go bust. Which means you are debt free.

But in my humble opinion to have a “good debt” is nothing like to have a “bad debt” no matter what you think will happen in the future. With “good debt” you will profit anyway. The hyperinflation will be just a big bonus.

That’s only what I think though. :)

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Matt VW September 30, 2012 at 9:04 am

Thanks Martin on your clarification of the mortgage contract. Yes it’s usually in the contract that they can’t change the interest rates (read the details) or make changes unless you don’t hold up to your end of the agreement. The only concern I can think of here is that contract law in the US is also getting a little more questionable. Still possession is 9/10′s the law.

My brother just bought a foreclosed house (a very nice one) on a 30 year fixed loan at 3 1/4%. Great transaction!

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kungfugirl October 2, 2012 at 10:46 am

I totally agree, and thanks again for your outstanding article Martin!

:)
– KFG

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kungfugirl October 2, 2012 at 10:45 am

Hi Reuven,

I’ll try….it *is* complicated, with many possible endgame scenarios. I think the people who predict deflation first and then hyperinflation make the following assumptions:

1) Like you say above, more money/debt will be extinguished faster than new money is pumped in. Also, according to Lacy Hunt, there is a huge difference between productive and unproductive debt, and ours is all unproductive, which is deflationary as it doesn’t contribute to economic growth.

2) The Fed, abhorring deflation, will continue to fight fire with even more fire, printing even more currency which will further devalue the dollar and cause us to spiral into hyperinflation.

The key question to me is what will the Fed do, and when? They have already committed to running the printing presses forever, but there are so many unknowns, as you point out.

For example, what if our creditors suddenly realize that we may not be able to pay them back? Interest rates will rise in spite of the Fed’s efforts to keep them down then, and this will force the issue in my opinion. At that point, all the Fed can do is print-print-print (this is where we differ from say Greece, who doesn’t have the ability to print) to attempt to hide our debt problem from the world (and pay it down with cheaper dollars).

To me, that could easily spiral into hyperinflation….

I’m not sure that helped, but that’s my understanding!

And yes, I would look into accumulating *good* debt– I still don’t believe purchasing a home is an “investment”, although you could get lucky and own it free and clear if we were to hyperinflate (although I’ve also heard stories where banks revalue the loans in the new currency, etc., so no one is truly off the hook, but I’m sure that varies from situation to situation and country to country).

But it’s certainly not a bad time to buy a house– prices are down (in most areas– unfortunately not here in Palo Alto!), mortgage rates are down, and you can probably get a great deal. But it’s still an emotional purchase that will largely cost you money, not make you money, for the time you are living there…..think of it like buying a car. :-)

Thanks for your comment!
– KFG

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Jimmy Adamson September 28, 2012 at 7:20 pm

It is often said that when hyperinflation hits, at first it starts out very slowly and then very quickly. People are blindsided even though the writing was on the wall right in front of their faces. People mistaken inflation for the rise of prices vice the devaluation of the currency.

I can personally say that here in Japan, which has been in stagflation for almost over 20 years, prices have been dropping (at least for me). However, I do believe that the next hyperinflationary event will be worldwide and it will affect other nations and all aspects of peoples` lives in one way or another. There is no escaping it.

Martin Malchev`s first-hand account is an eye-opener from the perspective the ordinary citizen. When the heads of the central banks of the world start talking, then there is trouble ahead. It is dangerous for central bankers to manipulate monetary policy and it is equally dangerous when politicians manipulate financial policy.

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Martin Malchev September 28, 2012 at 11:05 pm

Thanks Jimmy,

I don’t know if hyperinflation will be worldwide, but inflation IS worldwide already. Because the US exports most of its inflation through the statute of the dollar as a reserve currency. On top of that ECB and everybody else print like crazy, with the false conception that weak currency is good for export. If this was the case – Bulgaria would be exporting like crazy in the 90-s (after all our currency was the weakest). But it was the opposite: We exported the most when we were on the gold standard.

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Jimmy Adamson September 29, 2012 at 7:56 am

Inflation is American’s greatest export unfortunately, and it will hurt other nations more than it will hurt America. I don’t think China will be very happy about it as they are the largest holder of US debt. When Bernanke announced more QE, the Bank of Japan followed suit with more monetary easing themselves as with the ECB.

When you mentioned the “chairman of the central bank appeared on the television” trying to calm the market, it was a sign of bad things to come. As a matter of fact, the heads of the central banks around the world have been appearing in the media as of late. This is not good news. When they say everything will be all right, things are not all right. Otherwise, why would they be saying everything will be all right?

Only ex-President Clinton stated the truth of the coming debt crisis that America will have to face at the Democratic Convention endorsing President Obama. Those are ominous words.

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kungfugirl October 2, 2012 at 10:49 am

I agree…very scary when the bankers come on TV to assure us that “all is well”…that’s a complete counter-indicator!

– KFG

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Roy September 28, 2012 at 10:40 pm

The us d is not the Bulgarian currency, its not a stand alone curreacy,As Benny boy prints trillians of usd and distroys the currency , all other currency”s are brought down in line with the us dollar, to enable each country to export. most large economy”s hold us dollars, oops,Strong Deflation is underway, in the west, Benny is madly printing, which is inflationary, trying to keep a balance between the two. Result to date, low inflation. what comes next, ask the bank of internatoinal setelments. Roy.

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Matt VW September 30, 2012 at 9:11 am

Roy, this is an interesting group of thoughts here. 1st I gotta say that here in the US I don’t find the grocery items I buy deflating – quite the opposite. I do see the currencies deflating but that then makes the cost of living go up. Typically in a deflation prices go down. Could we have a situation where our currencies and wages go down as our commodities go up? I’d love to see more ideas in this area.

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Martin Malchev September 30, 2012 at 1:51 pm

Hey Matt,
I don’t understand much of economics, but I think that in a normal market if there is no inflation, when something goes up in price – then another thing must go down. If stocks go up for example, then lets say commodities must go down. Cause money can’t be everywhere at the same time. The only possible way everything to rise in prices simultaneously, like we often see in the last years, is to have inflation.
Correct me if I am wrong though.
And who says you don’t have inflation? Please don’t tell me it is the government. Cause I ‘ve heard that. Ours was repeating the same thing even when it was obvious they were lying.

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Martin Malchev September 30, 2012 at 1:55 pm
Goldman September 29, 2012 at 2:14 am

Hi Martin,
Could you describe whether there were a lot of people trade with gold and silver in Bulgaria at that period with hyperinflation? And for those people who had physical gold and silver got much better off? Thanks.

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Martin Malchev September 29, 2012 at 10:00 am

Hi Goldman!

The official market for investment gold and silver is pretty new. It started in 2007 or 2008 I think (It was after the burst of the housing market in the US for sure). So back in 1997 there were no gold and silver coins and bars for trade here. However gold has always been respected by the population. It was just difficult to obtain. During the hyperinflation there were shortages of everything, including food. I’ve heard of many cases for people exchanging their gold and silver jewelry for food and other necessities. So gold and silver jewelry was often used as medium of exchange, because they were the only precious metal products available for the common people.

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Sophia Hilton September 29, 2012 at 3:43 am

I work for a guy who is Bulgarian and forwarded your email to him to ask if he had lived through this in Bulgaria (I wasn’t sure when he moved to the U.S.). Here is his response:

Yes, I was. Most of the info below is true. I think they are preparing similar scenario in the US. There is one detail missing. The hyperinflation was instigated from IMF and the World Bank , when they announced they will no longer provide loans and further incentives to the government, unless they start privatizing the economy. Immediately after the episode below ended, the most profitable and productive companies got sold to western investors for very little money and now most of the economy in Bulgaria is owned by these western monopolies. That is the end result and probably that was always the plan. If you have never read “Confessions by Economic Hitman” by John Perkins (highly recommend), what they did to our country is exactly what he describes in his book. This was very well coordinated plan from outside to steal the goodies.

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Martin Malchev September 29, 2012 at 10:26 am

Hey Sophia,

That’s true. I skipped much of the story, cause the idea was to describe the live of the common people (mostly mine) back then. The conspiracy behind those events can make a whole book, even though no official source will confirm this, as you can guess. It was all done behind closed doors, away from the eyes of the citizens.
In the text I mentioned that some people saw it coming, and some were told that the hyperinflation is coming. (The credit Millionaires that I talked about.) They were told by somebody who knew, obviously. Which means it was indeed planned.
I don’t want to go into these conspiracies here, but I’ll tell you 2 more things about it, that you may already heard from your friend:
- The first is that one of the conditions that the IMF put on our government was to abandon the gold standard (before the IMF loans the lev was on a gold standard). Yeah – you cant inflate and hyperinflate a currency which is backed by gold.
- The second thing is that the only bank that raised their interest rates during the hyperinflation was the IMF. In 1997 the official interest rate of those loans were 300% Yes, 300, like the Spartans… Keep in mind that the IMF can not loan levs. It could only loan dollars back then… and it was the lev that was inflated… Enough said.

Best,
Martin

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Steve September 29, 2012 at 3:59 am

Thank You Martin,

You can read all you want about inflation, but hearing it from someone who participated really sheds light on the subject. That was some of the best advice I have heard and a real eye opener.

It brings almost everything the Gov. and the Fed are doing into focus, and gives a stronger perspective to what to watch for a prepare for in the future.

I loved his statement, which is what I had thought many times over the last few years, the FDIC and their promise to insure your accounts, but in my mind I always think, sure if only a few banks fail, but if the system fails it is all gone, the government itself in not insurable. End game.

There was that old movie war games, where the computor determined that nuclear war was a game that everyone lost, and so the game was not worth playing. Wish we could convince the government that the game is not worth playing today with our finances and lives.

Steve

Steve

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Jimmy Adamson September 29, 2012 at 8:00 am

The FDIC does not have enough money to cover outstanding debts in the event of bank failures. Look at what happened to the FSLIC. Does anyone remember the FSLIC and the Savings and Loans Scandal back in the 80s?

The FSLIC went bust and the FDIC may also follow the same path.

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Maggy September 29, 2012 at 8:43 am

Hi Martin,

Thank you for sharing your story. All this hyperinflation talk makes me scare and worry. In your opinion what would be good ideas to implement now, to be prepare for hyperinflation?

-Maggy

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Martin Malchev September 29, 2012 at 11:25 am

Hi Maggy,

Please check what DK is doing (the comment below) and then my reply. :)

And don’t worry! Be positive! It may never happen there. And even if it does – you’ll survive it. Millions of people in many countries survived it. They just got poorer if they saved currency. But then, after those events, which don’t last that long – there is a new currency and things go back to normal.

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DK September 29, 2012 at 10:00 am

Hi Martin, thank you for sharing your first hand account! Question: knowing what you know, what would you recommend for the average family to survive and perhaps thrive in this probable forthcoming scenario? I’m sure having some gold, silver, food storage and perhaps a little commodities and real estate are in order but want to insure my accounts (saving and investing) can weather the hyperinflation storm…appreciate your thoughts in advance…Signed: retired and concerned for the future :)

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Martin Malchev September 29, 2012 at 11:16 am

Hey DK,
I don’t think I am smart enough to give you a sound advice. One reason is, as I said in the text, that I have only seen hyperinflation once, and as absurd as it sounds it may not be enough. Maybe no 2 cases are the same.
But if I myself had to prepare for the same event like in 1997 I would store me some food, just like you did. By the way in Bulgaria me have a very old tradition every summer to conserve food for the winter. A lot of people still do it today, even though sometimes it is cheaper just to buy the food from the store. That tradition is one of the main reasons nobody died of starvation in 1997 in my opinion.
Another thing is to think for your security. I hate guns, but maybe it is a good idea to have yours cleaned and ready. (By the way I think it is no accident that the US government wants to take your guns just now. Their timing is perfect.)
As for your money, I’d probably do exactly what you did. Since in hyperinflation the economy and the trade stops – the price of everything goes up AT FIRST, even if measured in gold (a lot of demand and no supply). That’s the time of the sellers and speculators. But after the worst is behind and things start to go back to normal slowly – that is the time of the buyers. Because nobody has money now and everybody needs some. This is the time to buy investments for cheap. To do that you’ll need to exchange your gold and silver for the new currency.

And another thing – back in 1997 Bulgarian didn’t have gold and silver coins and bars, because there was no market for it. Only jewelry. Also the government was weak, and afraid of the people. But I heard that in the 70-s, when the US left the gold standard – gold was confiscated from the citizens by their government. It happened once, so it can happen again. So protect your gold. You can’t hide real estate, but you surely can hide some coins. :D
Anyways. I am going too far here – trying to give advice to somebody who is smarter than me. :D

But today there is a lot of information on cases of hyperinflation. You can research the different cases and draw your conclusions from it. (Which, again is exactly what you are doing, right? :) )

Just the fact that you don’t exclude hyperinflation as a possibility is a big step. Back in 1995-1996 nobody was assuming that hyperinflation is a possible thing.
Lets hope it will never happen though. “Hope for the best, but prepare for the worst.” ;)

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Gary in Aussie September 29, 2012 at 7:59 pm

I can remember the big sell off, of Government assets during the late 1960′s onwards in New Zealand; which was also a requirement of the IMF and THE WORLD BANK to assist New Zealand get its financial house in order. First New Zealand had to devalue its currency; exchange rate was NZ$1.00 was worth Australian $1.25 . Now Aussie $1.00 costs NZ$1.29.
Martin’s article was very timely and correct in its presentation. The time is now to protect your wealth and be prepared for what is to come. Physical Gold and Silver in coins and small bars should be in everyone’s “savings”.

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Matt VW September 30, 2012 at 9:26 am

Thanks so much Martin for taking the time to write your experiences and to further this discussion. I’m curious if you have any other details about how your government played with “financial repression” through that time. This would be stories of how people tried to fend for themselves and how the government stole these people’s money.

I spoke with a tax attorney the other day who told me he was involved with a frightening case recently. A German man had a bank account in Germany. This man married a US woman and took american citizenship. The IRS came after him for having a foreign account and forced him to pay interest and penalties on this account he’d opened years before ever meeting this woman or coming to the US. He said the IRS is doing whatever it can right now to bring in revenue and congress is looking the other way – not keeping them in check. Truly frightening stuff.

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Martin Malchev September 30, 2012 at 1:30 pm

Hi Matt,
Actually the government back then was a lot less restrictive than it is now. After the USSR fell apart we changed the entire system of government. Even the constitution was new. New people replaced the old political elite. Most of those new politicians were selfish, greedy criminals (judging them by their actions) but they were too ignorant and inexperienced to repress the population. They repressed us indirectly with their dumb decisions though. Which let to the events described above. But there were a lot more powerful people involved, who directed those events. As I mentioned above – some people were told what was going to happen. But I think the prime minister and its cabinet weren’t among the informed. They not only lost their jobs, but they were scared by the population and nowhere to be found. They were not in the position to repress anybody. At least that’s how I remember it. But again, I was 15 back then and I didn’t have to make any financial decisions.
But as business owner now I can say that today the government is a lot more repressive. And having said that – it is still nothing compared to your IRS, which is legendary. :D
Let me give you my experience with it. Besides having a small manufacturing business here in Bulgaria I work as an illustrator, mostly with some microstock agencies. In short this means that I sell illustrations through internet. I sell my illustrations around the globe, but when a buyer is from the US – the second he buys one of my illustrations your IRS takes 5% commission from me, and also some % from him (I don’t know the exact number). Keep in mind that I am not a US citizen and I pay my taxes in Bulgaria. The US government taxes me even before the Bulgarian government do so, and even though I am not an American citizen. I can only imagine what it does to my American friends. This only happens with microstock agencies based in the US. I never understood why, but it is a fact.
Also I haven’t heard for another government that taxes citizens who live abroad. The bigger the government – the lesser the freedom if you ask me.

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Matt VW October 3, 2012 at 4:05 pm

Thanks for taking the time to let me know this tax you’re paying. That is unbelievable. One of my favorite books is “for good and evil the impact of taxes on the course of civilization”. It’s pretty clear historically that what our IRS is doing is what all governments do as they spasm at their last trying to stay solvent. They typically have given too many entitlements and are in multiple wars and soon have trouble borrowing enough to pay for all this. It would seem history plans to repeat itself.

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Maggie@SquarePennies October 1, 2012 at 2:52 pm

This is a very interesting topic, but unfortunately none of us knows the future. People in their 20′s in the US have really learned to save more and take on debt less. So now they are supposed to change? Perhaps it’s wise to save if you are ready to take on debt at the first sign of hyperinflation? You say hyperinflation comes quickly after inflation. But the US has had low level inflation before that did not turn into hyperinflation, as far as I remember. So it’s tough to make a move at the right time. It could at least help out those with college loans if hyperinflation came, but at the cost of wiping out any savings they may have.
I’d think it would be good to learn to grow some vegetables and perhaps can them as you said. We can get by on not buying many things, but food is rather necessary.

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Don N October 17, 2012 at 9:09 pm

With so many other countries tied to the USD, will the USD lead the way for those other nation’s currency who are tied to it? That is, if the USD experiences deflation, inflation and then hyperinflation, will many other currencies follow this path? Similar to what Jimmy A stated above.
As you described the Bulgarian Lev being tied to the German Mark and afterwards, the Euro. As the Euro goes, the Lev will follow???
I can understand why the heads of our economic system want to stay away from hyperinflation, as it means their jobs are at risk. But, I don’t see how their present actions are steering away from this possibility. Many smarter people are better versed in this area, but as Martin observed, we will live through this, the ending question is will we be richer or poorer?

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