Preserving or increasing my purchasing power has been a big reason why I am investing in commodities. At the moment there is no agreement on what the massive amounts of money printing will lead to: Will we have massive inflation or deflation (or will we have stagflation)? For this week I have focused on the Inflation King.
I love reading about historical figures like the Robber Barons: I’ve read about the Vanderbilts, Rockefellers, Carnegies, Mellons and Morgans. The topic of today is Hugo Stinnes, the Inflation King, or “Inflationskönig” in German. I did not know that much about this Tycoon. Most of the information on Hugo Stinnes has been in German. Not before I read the book ”The New Depression” by James Rickards did I get to know about this man.
If you have grown up in the West and paid attention at school, you know that Germany in the 1920s suffered hyperinflation. This led to a devastating loss of purchasing power for the general population in the country. People lost all their savings they had in the bank, and they had to pay for products with more and more of their currency. There are pictures of people carrying cash in wheelbarrows and kids playing with their useless currency.
The hyperinflation was caused by massive money printing for paying reparations for the First World War from the Treaty of Versailles. The result of this devastating loss of purchasing power for the population. The depression that followed sowed the seed for what came to pass in the 1930s and 1940s.
The reichsmark became worthless. The exchange rate between it and the US dollar went from 208 to 1 in early 1921 to 4.2 trillion in late 1923.
Hugo Stinnes was born in 1870 and was from a prosperous German family who had interests in the coal mining industry. Later Hugo inherited the business, and expanded it by buying more mines and diversifying into shipping, buying cargo lines. He could then use his own vessels to transport the coal. (With John D. Rockefeller making a lot of money on transporting oil, it was probably not a bad idea to be in charge of your own transportation). He also expanded the shipping to include lumber and grains.
Prior to the Weimar hyperinflation, Stinnes borrowed vast sums of money in reichsmarks to make more purchases in the different sectors. (I have not found out if he was just a very big gambler, or if he had read up on the works from the Austrian School or similar). When the hyperinflation hit, the value of coal, steel and the price for shipping retained their value, while the reichsmarks fell in value. (Hugo Stinnes also had investments outside Germany where the currencies had not lost their value on the same scale).
Stinnes was able to repay his debts in worthless reichsmarks from his profits from his investment in commodity production and shipping. The price of the product (commodity) and the shipping of the products went up while the debts stayed the same. Stinnes made so much money during the Weimar hyperinflation that his German nickname was ‘Inflationskönig’, which means ‘Inflation King’.
The reason why I bring up the example of Hugo Stinnes is that we have heard mostly about the middle classes being destroyed. If you are prepared you can take advantage of this instead of becoming a victim. Hyperinflation has happened in several places. Three examples are in Hungary, Venezuela and in Zimbabwe. There are cautionary tales throughout history which illustrate the consequences when too much money gets printed.
Writing this I have not run to the bank and borrowed as much as possible to do the same. (However, I did increase my mortgage a bit. I had already paid down a lot on it, and the mortgage is less than two times my yearly salary). I am also using most of my monthly salary to add to my commodity investments. With countries printing trillions of fiat currency with no end in sight, the value of the currencies will go down. The deflationary pressure we have experienced since the 1980 and forwards with products imported from low cost countries will not be enough. The price of labor might still be low, but the price of the commodities that go into the products will go up. For commodities we have no new supply coming online at today’s prices.
As for currency default, my home currency is one of the few in the world that is not printing itself into oblivion. I am more worried about the USD than the Norwegian Krone. I have most of my investments outside my home currency in CAD, USD and AUD. I do not expect hyperinflation but a steady devaluation of most currencies and the commodities going up or keeping their value.
Printing new money (stimulus) is far easier for governments than the alternative, which is a full-blown deflation, crashing markets and a subsequent depression. In a depression, prices of everything fall and the purchasing power of the currency actually goes up, which encourages savings and hoarding cash. Why buy a car today (if you have the money), when you can buy the car next year for less currency. The thing with inflation is that it hurts people that have been good savers the most.
Inflation is already here. I go by the definition that inflation is an increase of money supply. “Inflation is always and everywhere a monetary phenomenon.” Increasing prices, which we often call inflation, is a result of the inflation. The question is if we will see increasing prices on goods and services. For anyone who has seen the price of copper or lumber, or anything that is not included in the reported CPI, the answer is yes. We get a decline of purchasing power of a given currency over time.
I do not care if you are a Tin Baron or Uranium-, Silver-, or Gold bug. We will all be inflation kings.