Hyperinflation and non-retirement savings

[Lusitan]

Based on the trillions of dollars our govt is creating out of thin air, I'm worried about hyperinflation in the not-too-distant future.

I've stuck with my retirement asset allocation and will continue to do so, so I'll be invested in the stock market as I've always been.

But I'm considering what to do with other non-retirement savings that we have, that are earkmarked for future goals within the next 5 years or so(e.g. buying a new car or two, doing major renovations on a house, buying another house) and emergency savings.

The impression I've always had is that keeping your money in "safe" investments like FDIC insured bank accounts and CDs will not protect you against the ravages of high inflation. But if this is money I may want to use within the next 5 years or so, where should I park it?

I'm guessing that we'll see stagflation, i.e. prices rising but salaries staying flat.

I've got some student loans at about 5%, which looks pretty tempting to pay off right now given the measly returns otherwise. And it'd be nice to reduce my monthly outlay by paying off those student loans. But I'm having trouble deciding whether that's a good idea in a stagflationary environment (as opposed to a traditional inflationary environment, where salaries are rising along with prices).

So where would you put your plan-to-use-it-in-5-year-or-less money during a stagflationary period? And where would you hold your emergency fund?

 

[FIREd]

Maybe you should look at i-bonds? You have to hold them at least 1 year, and you lose 3-months worth of interests if you sell them in the first 5 years, but otherwise they seem to be ideal if you want your money to be 100% safe, mostly liquid and protected against inflation.

 

[OAG]

CD Ladder?

 

[Lusitan]

Thanks FIREdreamer -- I'll take a look at i-bonds.

OAG - my emergency fund is in a CD ladder, but I'm guessing that inflation will outstrip the interest I earn on those CDs. Although for ease of use I would prefer this type of option.

 

[OAG]

Has not done it for me over 30 years now. But is it "different this time"; I don't know. My CD's are, more or less, in long term (5-7 years) earning 6.25% from which I take the interest earnings from time time. I hope that rate will at least keep up with inflation at least until the rates go up, if they do.

 

[Grep]

"Hyper" inflation would be Germany in the 30's or Zimbabwe today, in which the value of money might be halved over the space of a day, every single day, until it costs $10,000,000 to mail a post card and you get paid twice a day so you can race to the black-market dealers during lunch and buy something, anything, before the price doubles by night-fall yet again.

The "high" inflation of the 80's was nothing compared to that. It's only semantics, but let's not call it "hyper" unless we really mean it.

By the way, unless you are a tenured professor or something like that, I'd just pay the minimum on any loans that are say 5% or less until the immediate crisis is over.

 

[lucija]

"Hyper" inflation would be Germany in the 30's or Zimbabwe today, in which the value of money might be halved over the space of a day, every single day, until it costs $10,000,000 to mail a post card and you get paid twice a day so you can race to the black-market dealers during lunch and buy something, anything, before the price doubles by night-fall yet again.

The "high" inflation of the 80's was nothing compared to that. It's only semantics, but let's not call it "hyper" unless we really mean it.

By the way, unless you are a tenured professor or something like that, I'd just pay the minimum on any loans that are say 5% or less until the immediate crisis is over.

This brought back my memories... such as handing over 15,000,000 worth of bills for a pack of chewing gum!

When I was a kid (not in the US) some 25-30 yrs ago, I remember govt not being able to print bills/add sufficient number of zeros fast enough... at one point, 3 types of bills were in legal circulation (where 1 = 100,000 = 1,000,000).

Yes, hyperinflation, such fun! I remember none of the stores had price tags displayed (too labor intensive to constantly update). Also, all things monetary (ranging from a classified add to a formal govt budget) were tracked in foreign currency.

 

[Grep]

Wow, Lucija, it's interesting to hear your memories. Where was this? How did it all end?

 

[lucija]

Grep, sorry to take so long to get back to you... At the time I was living in what is today Croatia.

I was quite young at the time (about 10 and under), but I do remember simply knowing things should not be this way. I remember hearing folks say that they are getting richer while the country continues to slide downhill - since the domestic currency was worth less and less each day (at a pace even outpacing the actual insane inflation of more than 1000%/yr), the buying power of their savings (which was in foreign currency) kept on growing.

Eventually, things slowed down, Croatia seceded and established it own currency. I believe, the new currency was (at all cost) pegged to German Mark and later on to Euro. I believe, nowadays, by comparison, things are much more stable.

 

[Kabekew]

TIPS were designed for this (treasury inflation-protected securities) -- the higher the CPI, the higher your return.

 

[Grep]

Very interesting, lucija, thanks.

What was making people feel that they were getting richer under those circumstances, or were they just being grimly ironic?

My only personal exposure to hyper inflation was receiving, as a young child, a couple of stamps for my little collection (I mentioned this in another thread). They were multi-million Deutschmark stamps. This tortured and baffled my young mind, since I knew the then-current exchange rate and it seemed to mean either that what I had was very valuable (the stamps were uncancelled), or that "money" can actually be essentially worthless. The former seemed improbable and so the latter was my eventual conclusion. Although it was a very minor eposide, it made a lasting impression on me.

 

[Lawrence of Suburbia]

(Hyper)inflation has been weighing heavily on my mind, as well; although my fears of Weimar/Zimbabwean hyperinflation have been tempered by the fact that all this printed money seems to be going down a black hole never to emerge again and, in the estimation of some economists*, we're actually experiencing deflation at the moment. Chmn. Bernanke, for one, is known to be more concerned in that direction. (He's a supposed student of the 1930's "Great" Depression.)

Really, unless someone is immensely wealthy already and well-connected politically (I'm thinking guys like Soros who can shift billions at the touch of a mouse, and short the $), hyperinflation is the end of the accumulated wealth of ordinary people. I'm thinking of buying some TIPs in a fund and maybe PRPFX or the GLD ETF, but merely to help me sleep. Warm milk and a turkey sandwich** would be cheaper...

For me, the sad fact is that the market plunge in the past year has probably put retirement out of reach until I'm six months away from the big croak, so I have other concerns.


*Q: How many economists does it take to screw in a lightbulb?
A: Twenty; ten to argue that it goes in clockwise, ten to argue that it goes in counter-clockwise.

**Thick-cut turkey breast, butter, a dash of pepper on Milton's multi-grain bread.

 

[CuppaJoe]

....

**Thick-cut turkey breast, butter, a dash of pepper on Milton's multi-grain bread.

You devil, you. That settles where I'm having lunch today, the NY Deli, hold the Dr. Brown's cream soda for lemonade in honor of "The Movie."

 

[Animorph]

A couple of other things for high inflation:

Buy durable goods now while the price is still cheap.

Don't pay off that loan (if it is fixed rate)! At 5% you'ld be making a real return if inflation exceeds 5%, which certainly is below hyperinflation rates. You could pay it off slowly by buying a CD in the future that pays 10%-20% instead, use the interest to pay the loan, and have extra left over. You want to owe as much as possible at low fixed rates if you think severe inflation is coming.

 

[Lawrence of Suburbia]

Q: If hyperinflation comes, will the gov't hyper-inflate TIPs to keep up?

 

[Lawrence of Suburbia]

You devil, you. That settles where I'm having lunch today, the NY Deli, hold the Dr. Brown's cream soda for lemonade in honor of "The Movie."

"The" movie being, of course, my #1 film of all-time:

Lawrence of Arabia

Enjoy a cup of Sumatra Mandheling before you load up the DVD!

(Sorry for the threadpoop.)

 

[Rich_by_the_Bay]

In the early 80s CDs were paying 13, 15, 18% if I recall. They kept up. If you really need the money in the next 5 years, you might keep it in CDs, just keep the maturations short or ladder for no more than a few years.

I figure TIPs for the early year or two of inflation, then just rely on my stocks which by them will hopefully be keeping up after that initial lag.

 

[Gone4Good]

I figure the best bet is still a balanced portfolio. Deflation is still a current threat. Inflation is a longer-term threat. Lots of other things can happen in between.

Equity allocation for some inflation protection and long-term capital appreciation.
Bonds for deflation and because Equities also go down.
TIPS because inflation eats bonds alive and because equities also go down.
Cash because a guy's got to eat.

You won't hit a home run, but you'll likely do better over the long-run than if you pile into one asset class thinking you know better than everyone else what the next big risk/opportunity is.

 

[Dennis]

Well my Advisor has me in FFRHX-Hyld Short term , VFSTX-Short Term Bonds and GNMA's and is Waiting to Reduce these and move some into TIPS ..bottom fishing..Doesn't think hyperinflation will come till things Start to Really Recover..in aother yr yet... but, who knows..Can only Hope that happens..Soon..

and BTW? A recent Article came out from a Equity Fund mgr..Past 30 yrs, Bonds have outperformed Stocks..as they have now in the past 10 yrs....so Not so sure I'd go with your safe $ into stocks, regardless of the Divs..

Last yr my Advisor had my Bond 62% allocation in GNMA and Treasuries..the other 38% was in Conservative Bal. Funds -symbols HSTRX and PRPFX funds..

Hope that helps

 

[tinlizzy]

I just noticed high yield reward checking accounts a couple months ago. My own credit union advertises their's on the home page and I never even paid any attention to it. I think these accounts have been around for about 3 years and are gaining popularity nationwide.

Here is how mine works: in exchange for direct deposit, e-statements, online bill pay and using my debit card as a credit transaction at least 12 times a month, I earn 5% on my checking acct. up to $25,000.

I found a link from a blog that lists the banks/credit unions that offer high yield accounts. High Yield Checking Deals - Reward Checking

It won't hedge against inflation but your money will remain liquid.

 

[Meadbh]

I'm thinking of buying some gold. Haven't decided yet whether to go with bullion or gold certificates. Maybe a bit of both.

 

[pedorrero]

I second the gold recommendal. I am a lifelong gold bug, and in my current incarnation it is a hedge against my retirement portfolio (over which I have no control). Unless you are super-rich, the traditional recommendation is to buy gold coins, in your possession, and not in any place the government could seize them (yes, they can/have done this).

i too have some student loans (I wish mine were 5%, more like 8% I think). I say hold on to them ... unless you come into a huge flood of money, either 7% will look pretty good in a few years, or else we will be in something like a Japan style depression and ... well ....

 

[DAYDREAMER]

To me, the gold/silver coin buying and selling seems a little shady. The coin dealers I've seen have a little hole in the wall store, and you give them money to purchase gold/silver coins, and a week later, they give you your coins. Hmm, if i have to trust that process for my investments, no thanks! These coin stores look like they could go out of business at anytime. I also get the wierd feeling they have Anarchists swasticas and huge arsenals in the back room. Not a system I trust.

 

[haha]

I also get the wierd feeling they have Anarchists swasticas and huge arsenals in the back room. Not a system I trust.

And this feeling is based on what?

Ha

 

[Meadbh]

To me, the gold/silver coin buying and selling seems a little shady. The coin dealers I've seen have a little hole in the wall store, and you give them money to purchase gold/silver coins, and a week later, they give you your coins. Hmm, if i have to trust that process for my investments, no thanks! These coin stores look like they could go out of business at anytime. I also get the wierd feeling they have Anarchists swasticas and huge arsenals in the back room. Not a system I trust.

I was thinking of buying Canadian Maple Leafs (0.9999) from the Canadian Mint Welcome - Royal Canadian Mint or gold wafers from the gold department at my own bank (Scotiabank) http://www.scotiamocatta.com/products/investment.htm. These are anything but shady establishments!