Devalued currencies hurt the working poor and holders of 'paper' assets …


A few months ago I wrote that rising prices would soon become 'everyone's problem'. Shortly after that, Russia invaded Ukraine, and the West erected a new Iron Curtain in response.

This cuts off Europe from the world's major suppliers of natural resources, energy and manufactured goods. Restricted supplies of goods combined with unprecedented levels of money printing to create spiraling superinflation. As the name suggests, superinflation is worse than high inflation, but not as bad as hyperinflation.

Some blame this inflation spiral on Putin's war. Others blame poorly thought-out sanctions … Whatever the truth, the Western debt Superbubble is close to popping.

And Superinflation is a major step towards that destination … Last month Eurozone hit 7.5%, the highest inflation level recorded.

Few people have a theoretical understanding of what inflation is or why happens. But that doesn’t matter, because people feel it.

  • When inflation hits 8.3%, a worker loses one monthly paycheck,
  • 16.6% inflation means two paychecks go up in smoke, and
  • 25% inflation swallows a quarter of an annual salary.

And taxes have to be paid on those lost earnings, so a lot more income might vanish, depending on where you are.

Few Westerners can afford to lose a paycheck … Two, or more, and they'll hit the roof. When the price of necessities rises faster than salaries, the world's poor are hit hardest. They are first to react, and we are seeing signs of a backlash all around the world:

  • Peru: President Pedro Castillo imposed curfews across the country as protests erupted over rising fuel and fertiliser prices.
  • Greece: Thousands protested in Athens during a day-long nationwide strike over a deepening crisis of rising prices.
  • Sri Lanka: fed up with shortages of food and fuel, protesters took to the streets, demanding government action to address rising costs.

As global food prices increase by 13% to record highs, we can expect rising unrest. Here’s a list of countries experiencing rising protests against high fuel prices: Albania — Argentina — Cyprus — Eswatini (Swaziland) — France — Germany — Greece — India — Indonesia — Ireland — Italy — Kazakhstan — Kenya — Morocco — Pakistan — Peru — Spain — Sri Lanka — Sudan — UK.

"When things get serious, you have to know how to lie" —Jean-Claude Juncker, former EU Commission President

Governments are incentivised to understate the true extent of inflation. According to Portfolio Manager Mike Taylor [🔒]:

"They're lying to us on the inflation numbers. Real inflation is double digits, they say it's 7.6% … If you take the available data, it's way over that. Between housing, autos and food, all of them are double digits, year on year."

Double digit inflation is Superinflation. And if it is not here already, it's well on it's way.

Not only that, there are signs that inflation is not just an accident, it may be government policy. I'm updating this list of signs that superinflation is the easiest way for Western governments to escape unpayable debt loads. Of course no politician or central banker can say it out loud, but the evidence is mounting that this is their chosen solution. That could mean a very rough few years for workers, savers and the world's poor.

"The first panacea for a mismanaged nation is inflation of the currency; the second is War ... Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists" —Ernest Hemingway

With economic history as our guide, it's easy to predict that people are going to go apeshit as the war/inflation spiral worsens.

Rising food prices are the number one cause of revolutions. And food shocks have been behind many uprisings, rebellions and revolutions:

  • Rising prices after years of drought drove the 1848 French Revolution.
  • Food protests fueled the 1917 Russian revolution from which the USSR was born.
  • Food crises also kick-started the Arab Spring of 2011.

This creates what I call the populist spiral.

The 1930s were an equivalent period of multiple sovereign debt crises, geopolitical tensions, and threat of global war. Most major nations' economies crashed in the run up to World War II, and populist leaders took advantage.

Populists surf to power on waves of inflation. But it rarely ends well. The spiral begins when politicians print money and hand it out in response to high inflation. That money fuels further inflation, causing more money to be printed. On and on it spirals, until – in the worst cases – currencies collapse.

The improved performance of Marine Le Pen in the French election is a sign of things to come – if the election was three to six months later, her chances would have been much higher.

How much is too much?

Westerners – so far – seem to accept the stories that a) rising inflation is Putin's fault, and b) rising prices are worth paying to harm the Russian economy.

But some point it's going to become very simple: how many paychecks per month will people give up, to allow their leaders to signal disapproval of Russia?

Five rounds of EU sanctions – they're working on the sixth – have not affected Putin's war machine so far. Here I collect evidence that EU sanctions are strengthening Russia’s economy and currency, more than weakening it.

Exit government promises

As governments and central banks go wild, the safest strategy is owning things that they cannot print.

What can governments not print?

Real things. Stuff made of atoms. Not bits or pixels or paper-promises or fairy dust. Real things are dug or drilled from the ground, refined, and manufactured, often in far away places.

Civilization requires this stuff and governments cannot print any of it. And these are the things you may have noticed going exponentially upwards in price in recent months.

Politicians make promises and central banks print money to help keep those promises. That works well until currencies are devalued, as they always. That is the point we have arrived at now.

This chart shows the consistent decline in value of major currencies relative to gold since 1900.

I have received questions from readers about why gold has not – yet – responded like other natural resources with skyrocketing prices.

That question is a can of worms at the bottom of a rabbit-hole. It explains a lot about the dysfunction of the global monetary system, so I will write about it shortly.

Stay tuned.

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