“A student at Freiburg University ordered a cup of coffee at a cafe. The price on the menu was 5,000 Marks. He had two cups. When the bill came, it was for 14,000 Marks. “If you want to save money,” he was told, “and you want two cups of coffee, you should order them both at the same time.” George J.W. Goodman

The reference above relates to the condition in Germany following the Second World War. The country was devastated by a currency that had no value and an economy in ruins. The country was wealthy – it had farms, homes, factories, but the medium for exchange of goods and services was no longer accepted at face value inside or outside the country because it had lost its monetary backing – gold. Before the war began, the German currency was backed by gold and held equal sway with its neighbors.

Once the war began and the country needed resources for its efforts it abandoned the gold standard and began to print money to buy goods. It financed its war efforts by means other than savings or taxation. In other words it just created money out of thin air and without the gold to back it, the money was worth less than the paper it was printed on.

Most of the modern world, the United States included has been operating on this system of Fiat Currency for decades. Because it is a widespread occurrence, a conspiracy if you will, the chances of hyperinflation occurring in one of the developed countries is slim. Look around you. The British Pound is crashing, the Euro is about to, and the Yen is also weakening. All three countries/regions are doing the same thing that we are: stimulating and bailing out the economy by printing money. The net result is that the US dollar has become the least smelly of the bunch. It’s a race to the bottom and we’re not in first place!

There is something all fiat currencies have in common. Eventually they all go to zero in relative terms. Prices of goods and services increase but so do incomes that support the buying of the same goods and services. The key is not inflation, but beating it. This is not a new phenomenon. Modern recorded history shows that it first occurred in the Roman Empire…and we all know how that ended up! Here is an excerpt from an article penned for the Cato Institute, which it in turn excerpted from several economic historians. It’s a timely reminder of history repeating…

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As early as the rule of Nero (54-68 A.D.) there is evidence that the demand for revenue led to debasement of the coinage. Revenue was needed to pay the increasing costs of defense and a growing bureaucracy. However, rather than raise taxes, Nero and subsequent emperors preferred to debase the currency by reducing the precious metal content of coins. This was, of course, a form of taxation; in this case, a tax on cash balances (Bailey 1956).
Throughout most of the Empire, the basic units of Roman coinage were the gold aureus, the silver denarius, and the copper or bronze sesterce. [8] The aureus was minted at 40-42 to the pound, the denarius at 84 to the pound, and a sesterce was equivalent to one-quarter of a denarius. Twenty-five denarii equaled one aureus and the denarius was considered the basic coin and unit of account.
The aureus did not circulate widely. Consequently, debasement was mainly limited to the denarius. Nero reduced the silver content of the denarius to 90 percent and slightly reduced the size of the aureus in order to maintain the 25 to 1 ratio. Trajan (98-117 A.D.) reduced the silver content to 85 percent, but was able to maintain the ratio because of a large influx of gold. In fact, some historians suggest that he deliberately devalued the denarius precisely in order to maintain the historic ratio. Debasement continued under the reign of Marcus Aurelius (161-180 A.D.), who reduced the silver content of the denarius to 75 percent, further reduced by Septimius Severus to 50 percent. By the middle of the third century A.D., the denarius had a silver content of just 5 percent.
Interestingly, the continual debasements did not improve the Empire’s fiscal position. This is because of Gresham’s Law (“bad money drives out good”). People would hoard older, high silver content coins and pay their taxes in those with the least silver. Thus the government’s “real” revenues may have actually fallen. As Aurelio Bernardi explains:
At the beginning the debasement proved undoubtedly profitable for the state. Nevertheless, in the course of years, this expedient was abused and the century of inflation which had been thus brought about was greatly to the disadvantage of the State’s finances. Prices were rising too rapidly and it became impossible to count on an immediate proportional increase in the fiscal revenue, because of the rigidity of the apparatus of tax collection. [9]
At first, the government could raise additional revenue from the sale of state property. Later, more unscrupulous emperors like Domitian (81-96 A.D.) would use trumped-up charges to confiscate the assets of the wealthy. They would also invent excuses to demand tribute from the provinces and the wealthy. Such tribute, called the aurum corinarium, was nominally voluntary and paid in gold to commemorate special occasions, such as the accession of a new emperor or a great military victory. Caracalla (198-217 A.D.) often reported such dubious “victories” as a way of raising revenue. Rostovtzeff (1957: 417) calls these levies “pure robbery.”

Although taxes on ordinary Romans were not raised, citizenship was greatly expanded in order to bring more people into the tax net. Taxes on the wealthy, however, were sharply increased, especially those on inheritances and manumissions (freeing of slaves). Bruce Bartlett – Senior Fellow with the National Center for Policy Analysis.

We have already gone past the point of no return when the US and other nations took the path of least resistance and moved away from the gold standard. The issue now is not if we will have inflation. We already have it. The question that needs to be addressed is how to stay well ahead of the curve. The inevitable is here and it is not about to recede.

We are entering the second half of the decline of Rome, where spending money that doesn’t exist is the new normal. It ended badly for the Romans and there is no evidence that it will end any better for the new Romans. The solution is to be invested in hard assets of all types long before the dreaded conclusion is upon us. It means investing in opportunities that will outstrip inflation.

Today that may not mean buying a farm in Nebraska and fortifying yourself with arms, ammo and soup. No, it means you need to globalize your holdings by having investments in the new and growing economies of the globe, the ones that have not yet had the gall to call themselves modern and sophisticated. And, of course it wouldn’t hurt one bit to actually have some of those “commodity” holdings in places where they are also free from confiscation from governments who consider their continued well being as their only reason for existence.

Best Regards,

Kevin Raymond