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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About the Author:

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

Susan has authored 199 posts on Kung Fu Finance, and you can connect with her on .

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