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This morning, I’ll let the Washington pundits have their fun, while I turn to an entirely different kind of story from a different place and time.
I do this for two reasons. I want to give you — and myself — a break from the cacophony of voices covering President Trump. And more importantly, over the next few weeks, I want to return to some big questions that seem to have gotten lost in the transition:
Will President Trump allow a new bulge to appear in the federal budget deficit? To finance it, will he press the Federal Reserve to resume its 8-year money-printing binge? If so, will that drive the country on a new path to inflation? The story starts with …
Hyperinflation in Latin America
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My father first announced that we were going to Brazil shortly after we took this photo. It was 1952, and I was six years old.
He was on a mission for clients to find new investment opportunities in underdeveloped countries. At the same time, he was also on a personal quest for a second home in the tropics.
We were soon in Brazil’s central highlands, nearly 1,000 kilometers inland from Rio. It was the cerrado — verdant forests, pristine rivers, cascading waterfalls, and vast open savannahs with 800 species of birds and 160 of mammals.
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Many years later, the new super-modern capital, BrasÃlia, would spring up on a nearby plateau. But at that time, on our ranch, we had nothing of the kind. No paved roads, no telephone and no electricity.
Two Hollywood superstars, Janet Gaynor (“A Star Is Born,” 1937) and Mary Martin (“Peter Pan,” 1954), along with her son, Larry Hagman (“Dallas,” 1978-91) followed in our footsteps and also found a place nearby.
But Hollywood glitter meant nothing to me. I was too busy with my favorite after-school pastimes — stalking animals in the forest and collecting Brazilian money, especially 1- and 10-cruzeiro notes.
The former activity wasn’t nearly as dangerous as you might think. Collecting Brazilian money, however, was another matter entirely.
“You can save your cruzeiros if you want” said my father. “But years from now, you’ll need at least ten or maybe even a hundred to buy what just one will buy today.”
Sure enough, the pace of inflation in Brazil began to climb rapidly, and by 1967, the cumulative effect was so extreme the government had to do away with the near-worthless cruzeiro and replace it with the cruzeiro novo, worth 1,000 of the old.
But that was just the beginning. Brazil was forced to announce a second 1,000-to-1 currency conversion in 1986 (to the cruzado) … a third in 1989 (cruzado novo) … and still another in 1993 (cruzeiro real).
The climactic finish of this currency madness came in 1994, when a series of new laws created the real, each worth 2,750 of the prior currency. To buy just one real when it was first issued, I would have needed 2,750,000,000,000,000 (2.75 quadrillion) of my original one-cruzeiro notes. Laid side by side, those bills would extend for 429 billion kilometers — the equivalent of 36 trips from Earth to Pluto and back.
That’s a lot of near-worthless paper. But unless you experience it firsthand, it’s hard to imagine the social dislocation and political chaos that can be caused. Consider, for example these scenarios …
A boy quits school when he’s 14 to help support his family. He finds a job working for the municipal government as a street sweeper. But the city’s payroll is always months behind. What’s worse, by the time the boy finally gets his paychecks, the money buys 10%, 20%, even 30% less than it could have bought when he first earned it. He probably could make more money by scavenging some of the garbage he sweeps and selling it off to a dealer. But that’s forbidden.
An agronomy student is more fortunate. He gets a night job in a supermarket and joins a team of clerks who race around the store from closing time to opening time the next morning, marking up the price labels on every single item on the shelves. The team does this every weekday night, sometimes on Saturdays, too. And they still can’t keep up with daily price hikes.
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Inflation sweeps through the country like a locust plague, consuming almost everything, everyone and every aspect of life. Some of the consequences are tragic, even fatal.
Imagine a teenager in biology class on a hot afternoon with no air conditioning. The teacher opens the windows. A warm, humid breeze flows gently into the classroom.
Suddenly a thunderous roar pierces the air. The largest building in town — still under construction — has suddenly collapsed. A Portuguese literature teacher, who lives next door to the construction site, bolts from the school in panic. He finds his home crushed under the rubble, his wife inside.
Again, inflation is the underlying culprit: Cement prices were soaring, and to save money, contractors tried making their cement go farther by mixing in more sand. To help cover surging costs, they also decided to add several stories beyond the original plan.
A year later, the president of the country announces an appeal to patriotism — “gold for Brazil.” The goal is to help pay down the nation’s debts, and all citizens are asked to collect any gold they have in their homes to donate it to the government. Remarkably, many people comply. The wife of a prominent doctor in town even pulls a wedding band off her fingers, drives to the central square, and drops it in a collection bucket, as local officials enthusiastically shake her hand.
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The Size of the Coming K Wave Could Be Enormous One of Kondratieff’s disciples, Joseph Schumpeter, wrote: If the shorter cycles come into phase with each other — and if they, in turn, join with the K Wave — the “amplitude” of the resulting wave would be enormous. It would result in an economic catastrophe of epic proportions. In other words, it would be a TIDAL WAVE of economic change. The last time all these cycles converged was during the Great Depression. And now, it’s happening again. Read more here … -Larry Edelson |
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But it’s soon revealed that most of the gold winds up in the pockets of politicians. The whole campaign backfires. Brazil’s debts continue to mushroom. Inflation accelerates.
When inflation surpasses an annual rate of 2,000 percent, the government gets so desperate it doesn’t even bother making public appeals. It summarily announces that everyone’s bank account is frozen, their savings confiscated. A computer programmer explains it this way: “The government says it’s giving us ‘all our money back.’ But they’ve replaced the old currency with a new currency. So what we’re really getting is money that’s worth a lot less.”
Hard to believe? Well, I can assure you every one of these stories is true — because I experienced them personally. The young boy who went to work as a street sweeper was Sebastião, our housekeeper’s son. The college grad who got the job changing prices in the supermarket was Joaquim, the friend of a friend. The biology class was my class; the teacher whose home was buried in rubble was my teacher. The woman who donated her gold to the government was my friend’s mother. The computer programmer whose savings were confiscated late wrote software for my company.
Sweeping Corruption
Rampant money printing helped create inflation. Inflation trashed the value of fixed salaries. And fixed salaries were the sole form of compensation provided to officials at all levels of government. So whether you worked in City Hall, Congress, the federal courts, or the presidential palace, the only way to maintain a decent lifestyle was to find “other income sources.” For the relatively “honest” officials, that meant illicit moonlighting. For the “not-so-honest,” it meant influence-peddling, racketeering, and other high crimes.
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| Brazil’s Jânio Quadros and corruption-sweeping broom |
By the early 1960s, just eight years after our first arrival in Brazil, government corruption was so widespread that it created an unusually ripe environment for a political outsider with a very “radical” idea: To sweep out government corruption. His campaign symbol was a broom. His name was Jânio Quadros. And he became president in a landslide.
Nevertheless, inflation got worse, corruption remained deeply ingrained, and his reform agenda was staunchly rebuffed by the entrenched establishment. He felt cornered with no way out. So on August 25, 1961, in a gambit to steamroll his opponents, he shocked the nation by doing something no other Brazilian president had ever done in the past or would ever do in the future: He resigned.
It was the most deliberate, disruptive act in Brazil’s modern history. In fact, on that day, his left-leaning vice president was literally on the far side of the planet, visiting Communist China. And that tidbit is cited by historians as evidence that Jânio expected both houses of Congress to reject his resignation. They didn’t. Jânio was history. And soon after the vice president returned, he took over the reins of power, printed still more money, and drove inflation skyward at an even faster clip.
From that point forward, the sequence of events was clear: Jânio’s abrupt resignation created financial and political chaos. That chaos led to a military coup d’état in 1964. The coup then launched 20 long years of brutal dictatorship, the near-destruction of Brazil’s democratic institutions, and worse.
The generals had come to power saying they were the only ones in the country with the discipline to truly control inflation and wipe out corruption. But they did nothing of the kind. Corruption remained deeply ingrained. Inflation continued mostly unabated.
Throughout Latin America, military dictatorships spread like swarms of the Africanized killer bee: Bolivia, from 1964 to 1970 and 1971 to 1982. Argentina, 1966-1973 and 1976-1983. Peru, 1968-1980. Panama, 1968-1989. Ecuador, 1963-1966 and 1972-1978. Guatemala, 1963-1966 and 1969-1985. Honduras, 1963-1966 and 1972-1982. Chile, 1973-1990. Uruguay, 1973-1984. Plus several more. Everywhere, the military juntas vowed to clean up the corruption. But everywhere, the swamp was a lot deeper than they imagined. And invariably, powerful socio-economic trends were far more closely intertwined than anyone realized:
- Overspending to promote economic growth and social reforms was financed by government overborrowing.
- The overborrowing was accompanied by accelerated money printing and money-supply growth.
- All of these factors helped generate rampant inflation, which fed corruption, and in turn, fed even larger fires of inflation.
- Disparities between rich and poor grew progressively worse.
- Day-to-day politics was transformed from rational debate to brick-throwing and dogfights. Divisiveness reigned supreme.
- When citizens protested, they were repressed. Peaceful protests became violent. Violence led to revolution. Revolutionaries took up arms. Armed guerrilla movements multiplied.
Nearly everywhere in the region, massive debts and soaring interest costs continued to make poor nations poorer. Inflation continued to devalue the fixed salaries of the lower classes and to drive up the property values of the higher classes. Combined, all of this widened social and political divisions. And, it destroyed democracy.
No matter what they tried, the wannabe Mussolinis of Latin America and all their king’s men could not put the Humpty Dumpty of corruption-free institutions back together again. With all their military discipline, they could not contain the government overspending, the rampant money printing, the big debt build-up, and the resulting currency collapses.
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New Gold Law to Impact 1.6 Billion People A new global law in effect this March could deliver an unexpected shock to the markets. No less than 32 major central banks are scrambling to prepare for the inevitable fallout. They’re shifting their money into one single asset that could explode in value, even as everything else plummets. $3 TRILLION is set to change hands virtually overnight. You must prepare now – there’s no time left to wait. |
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In the 1960s and early 1970s, whether under democratic governments or dictatorships, Brazil, Argentina and Mexico borrowed huge sums of money. Smaller countries avidly sought their share of the debt as well. And by 1982, a year when military rule in the region was near peak strength, their borrowing zeal culminated in the most serious debt crisis in Latin American history. Result: Incomes plunged further, unemployment surged, and inflation gutted whatever was left of the shrinking middle classes.
I traveled through most of these countries during that dark era. I saw, in person and on site, how their democratic governments destroyed their economies, and then how the military destroyed their democracies. So in an upcoming issue, I will invite you to join me on those travels — to see what I saw, to meet the people I met, to feel the emotions I felt, and to draw your own conclusions.
But before we go there, some important lessons for Trump (and for investors):
- Don’t underestimate the potential damage of budget deficits, government debt pileups and unbridled money printing.
- Also don’t assume that, just because those impacts can take years to incubate, it means they’re dead and buried.
- To say draining swamps is “easier said than done” is the understatement of the century. The pushback can be ferocious, the unintended consequences even more so.
- History often seems like a long chain of random events, each connected by a hidden synapse. Sometimes, you’ll find out why strange things happen only after the fact. Sometimes, you’ll never know.
Good luck and God bless!
Martin
Dr. Weiss founded Weiss Research in 1971 and has dedicated his entire career to helping millions of average investors find truly safe havens and investments. He is Chairman of the Weiss Group, which includes Weiss Research and Weiss Ratings, the nation’s leading independent rating agency accepting no fees from rated companies. His last three books have all been New York Times Bestsellers and his most recent title is The Ultimate Money Guide for Bubbles, Busts, Recession and Depression.
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Well said.
Ahoy,
I worked on a Moore-McCormack Line Merchant ship as a deck officer from Brooklyn and along the East Coast to South America on the “Romance Run” to many ports in Brazil, Uruguay and Argentina in 1973. I remember that the cab drivers had a card to translate for inflation because it was too expensive to update the meter every week.
On another note, I got my news on shortwave at sea, and from various newspapers when ashore. A lot of what I heard was total garbage including VOA. I became a conspiracy freak. Found out Wrestling was fake and that was the frosting on the cake. Thanks for your insight.
Best Wishes from an Old Salt
America has entered perpetual civil war. Why would anyone protest a President BEFORE he took office? Can you imagine if Romney supporters did the same to Obama? Lunatic liberals have shown their true colors – vicious and crazed. Their aggression has just begun. And the media are part of the lunatic liberal left. The Russian “pee” story and the “MLK bust” story are just two of many such examples of flat own perposeful lying. But don’t just focus of stupid young people and govt workers. The elites want this. But nobody knows why. My comment would be banned if I told you.
Ken absolutely agree.
We have just gone through a period precious to most, where many want peace on Earth and goodwill to all mankind. Yet parts of Hollywood, the media swamp and the lunatic left, want to start a civil war. I have investors looking for directions to make this country great again and this group wants violence and destruction when we could have growth and peace.
It is my observation that America is just as polarized as we were in the early 1800’s and
the result could be the same as it was in 1861. The looney left is showing how childish
they are and are certainly proving P.J. O’Rourke correct when he said: “At the core of
Liberalism is the spoiled child – miserable, unsatisfied, despotic and useless. Liberalism
is a philosophy of sniveling brats!” Can i hear a big AMEN?
@TGGoforth
AMEN
You are saying these are lessons for Trump and to beware of some of what you saw happening. What I want to know is what you suggest Trump do to get the country back on track. From what you are saying it may be to late.
Question: Hyperinflation as you described hit many countries in 1960s-2000s for the reasons you described. There was also hyperinflation in the 1920s linked to war reparations. But, could you name one country that suffered hyperinflation during the Great Depression of the 1930s?
The financial mismanagement of “Donald” is certainly possible but how long must the hyperinflation “egg” be incubated before hyperinflation hatches out?
The Great Depression was a deflationary period, not an inflationary period. Relatively small amounts of cash could buy farms and bankrupt businesses. The deflation spread across the world. Thus hyperinflation was relatively rare.
I was born in Mogis das Cruzes Brazil in 1958, my dad lived a few of these events. It was such a challenge for my Dad to survive through hyperinflation. We finally moved to Canada in the late 60s. I was small but remember Janio Quadro.
There is no alternative except to grow a deficit initially. Simply stopping on day one and not deficit spending would spin the economy into a whirlpool downward. Not my opinion just basic principles.
Including, fortunately, a basic principle which is false. Namely, that the government can spend your wealth more effectively than you can. To stop government deficit spending is to stop stealing so much from the citizens, either through lower taxes or lower inflation. Which makes citizens more wealthy, not less. Government jobs rarely improve the country proportionate to the salaries. In most cases, government jobs have a negative impact on actual production, as bureaucrats hinder production, not help. Government spending cannot benefit the people as much as those people spending their own money to meet their own needs as they see them. TANSTAAFL..
Dear Martin, If only people would listen to you. You saw it all first hand. I can only wonder what it will take for people to understand ?
Through your own eyes you have seen and you know, not from a book or the stories sitting on your grandfathers knee.
In the name of “Progress” and “Reform”, it seems obvious that this nation is bound on a similar path to that of Brazil and other nations of the Americas. To assume that WE are superior to such corruption is hubris of the first water. Remember what happened the last time we elected a businessman to the Presidency. We got infrastructure improvements — and the Great Depression. At least that was a deflationary depression. It didn’t hurt those who were savers as much as many, and the savers helped eventually to pull things together. Now, we already have an inflationary bias to the economy, and something similar to the Brazil story seems baked into our future. Property and precious metals seem to be the way to go for those who would prosper.
One of the great difficulties for retirees is low interest rates. Many are forced into higher levels of risk to maintain their wealth. The central banks are protecting countries like Italy with a trillion euros in debt. Low interest rates and extended maturities are what is influencing global interest rates until the bond market breaks apart.
“Of the first order”, you mean. “First water” makes no sense, unless I’m missing something? Good comment, though.
The phrase “of the first water” comes from an old term to describe diamonds. The clearest and palest were said to be “of the first water,” i.e., highly transparent, like pure water.
The negative correlation between a society’s level of corruption and level of success are well documented. We must stop corruption in the high places of government and finance peacefully or it will eventually be stopped by less peaceful means. A whole lot more criminals in suits than Bernie Madoff need to be jailed, not just fined.
When I was a kid, back in the 1930s, two cents would buy me a whole small bag of candy. A Nickle would buy a Coke, and was so overpriced it made the Coca Cola Company, and the city of Atlanta, a bastion of the economy. Now, the Penny and the Nickle are virtually worthless, and there is talk of eliminating them – as Brazil did with it’s Cruzeiro. Honestly…..
interesting points and good wake up calls
Even if unintended consequences from “draining swamps” occurs, what are the consequences of not trying to drain them? In Chile, General Pinochet established a dictatorship after the communists, lead by Allende, destroyed democracy and their constitution. Pinochet later helped restore a Chilean democracy and constitution; something the Communists would never have done. Donald Trump ran on the the core issues that have created the “Washington, DC centered swamp”–excessive legalism with unequal justice, cronyism, unlimited government guided by left-wing ideologies, contempt for the the 1st, 2nd and 10th Constitutional Amendments in particular, immigration that does not benefit our culture or economics, etc. History demonstrates that there are almost always unintended consequences from any great action that thwarts the power structure (political and economic) and corruption. Remember, power itself is a corrupting influence especially when self-serving and ideologically driven.
Very compelling and interesting first-hand account of the ravages of hyper-inflation. I’m not sure how the USA can avoid such a fate. We have printed ourselves into oblivion already.
Lovely article Martin.
harry,so true
martin-
your history is spot on -but as you know since 1994 the story hasn’t changed.
And how about the USA , do you think the American system is any more honest? your politics is as corrupt as everyone elses as it is funded from recycling government money through business/defense contracts to political lobbying and campaigning Your system appears to work because the CIA blocks most of the dirt and when in doubt someone arranges a posse to shot up the “bandit”.
we’re all in trouble just have to keep our fingers crossed- from a Scot in Brasil
Dear Martin,
Your argument is so clear, logical and convincing that, ironically enough, brings about disquieting feelings of impending doom despite your manifest noble intentions of desperately trying to save your readers from the catastrophic consequences hovering like a Sword of Damocles over their heads.
History repeats itself, unfortunately, and there is nothing anyone can do capable of changing this truth. Much better, realistically, to be strategically prepared and psychologically ready for the inevitable to happen while hoping for lady luck to mitigate our pain.
You did an excellent summary of super-inflation in Brazil and the whole of Latin America. I hope it does not happen here. Your personal account made the narrative fascinating. You must be fluent in Portuguese, aren’t you? Thank you for sharing.
The quality of the writing is spectacular.
Dear Dr. Weiss
Thank you for your reports, this one in paticular! Please repete it over and over so aneuv
Volks will be prepaired for the komming unpleasent disaster!
Tell us what we should do to protect the few savings we have.
Thank you Sir and God bless
Gerhard.
I very much appreciate your deep historical perspective. It seems that in the most difficult of times people are most likely to forget (or ignore) the lessons of history. They are also, unfortunately, most likely to be guided by wish fulfillment, ignoring the facts and throwing common sense to the wind. Your messages are sometimes like buckets of cold water, but they are far,far preferable to the nonsense generated by the popular press or politicians on the make and their sycophants.
Gre at Story !!!! I have been with you for 30 yrs or more. I am 80 yrs old.I owe 130K on
my home. Explain how my debt can be paid when the value of my
$$ declines ??? RON
I graduated in 1982 when in Canada a 5 year mortgage peaked at 21.46% & a 30 year mortgage in the US peaked at 18.45%. Nobody could afford to borrow money and those who had to renew their mortgage faced financial ruin. As difficult as the stagflation of the ’70s was to many, its hard to fathom the ruin of hyperinflation unless one has lived through it .
Thank your Dr. Weiss for sharing
Dear Dr. Weiss,
Thanks again for the article. I have followed your work for some time. I appreciate your perspective. One thing you never tell your readers is, however, how you and your parents survived all those years of turmoil and not only that; prospered and thrived all those years afterwards. Tell us your thoughts and share with us your wisdom.
Sincerely,
Creig A. Dunlap
Dr Weiss,
Thanks for the history lesson on South America. Lived many years in Colombia during that
era. However history repeats itself and the politicos seem to like to ignore factual history.
Tiro wrote in Cicero’s biography, in approximately 40 BC, that Cicero had advised the Roman
senate to NOT give everyone a free loaf of bread each week, because it would lead to laziness and could be used a vote buying scheme. The result was food shortages when the
farmers came to town for their “loaf”.
Welcome to LALA land.
In my paper money collection,I have several examples of German “Notgeld” currency,e.g.,50 million and 100 million mark notes-I can not imagine any living American who has had the experience of leaving home with a wheelbarrow full of currency only to find that it is worth a loaf of bread if you are lucky-If hyperinflation on that scale ever happens here may God help us-the resulting chaos will defy historical description,given the example of the spastic behaviour of the Left just because they lost an election!
Dr. Weiss,
What a great article with deep perspective on how things have not worked out in S.A. and same for the C.A. countries. How foolish for so many here in the USA to think we are beyond aforementioned results to happen to us here.
If only the masses here could all read your articles & really grasp the meaning of history. I’m afraid and even shameful that so many fellow American do not even know their own history here in the USA. By what they have & are being being taught in our public schools & colleges; its no surprise they wouldn’t be able to understand & bound to fall in to the same well. God help us to awaken our eyes to see.
Thank you. Your well written history helps me grasp our curent situatipn.
Lots of questions–no answers.
Thank you for your article. It IS good to read comments as well, driven from individuals with reasonable comments/ questions from greater intellect than Facebook splatter!
Great article. I would like to know why all Governments don’t dig for gold and silver rather than waiting to confiscate when times bad?. Government owned mines make sense to me. Government spending at it’s best.