Multiple hyperinflation phenomena have occurred throughout human history that teach useful lessons to those willing to learn. One of the most recent chapters of such a tragedy was written by Zimbabwe, which serves to remind us that – regardless of the corner of the world in question – real assets, that is, goods (physical or now virtual like bitcoin) with value Real, they are the refuge of value in which we must be.
As the planet faces significant economic challenges following the Covid-19 pandemic, it is worth reviewing some of those episodes of hyperinflation. It should not be lost sight of the fact that the lockdowns broke global supply chains, but, in addition, central banks together embarked on the largest round of stimulus injection of money and credit on record, with interest rates at minimum levels. historical (again).
Of course, the majority of these central banks have already begun to withdraw such incentives and to “tighten” their monetary policy with increases in interest rates, but it is equally true that inflation rates in the world, in most cases , remain well above the target limits of these authorities.
And that is where it is worth reviewing past experiences.
By the way, this week the renowned financial expert Simon Black published on his blog Sovereign Man a very interesting article about Zimbabwe that is worth commenting on.
Black says that he visited the African country in 2010, just a year after the end of its hyperinflation, so extreme that it reached an official inflation peak of 80 billion percent per month (yes, as you read, the figure is correct!).
How did the country reach this extreme situation? Simply, due to bad (rather disastrous) economic policies.
The Zimbabwe dollar was worthless, to the point that people used it as fuel or wallpaper on their walls.
The government then led by Robert Mugabe implemented measures that included price fixing and a controversial land reform, which, together with the confiscation of citizens’ assets and the excessive increase in public spending and debt, contributed to the economic collapse.
The result was that the Reserve Bank of Zimbabwe began printing huge amounts of money, exacerbating inflation. All of this has some common characteristics with what we see today in different parts of the world: economies with an abundance of banknotes manufactured by the monetary authorities, accompanied by waste and public debt at record levels.
Hyperinflation had a devastating impact on the daily lives of Zimbabweans. Food shortages, long lines at banks, supermarkets and pharmacies became the norm, as product prices were constantly adjusted and consumers had to rush to buy them before they rose again.
Thus, economic uncertainty took hold of the country, and then the desperate population looked for ways to protect their wealth.
Real assets as a refuge
In the midst of the economic chaos, a surprising phenomenon emerged: an essential element of the daily diet, bread, became an “investment” asset that retained its value. One person told Black that he used to buy two loaves a day, one to consume and one to sell at the market at a considerably higher price that same day in the evening. Bread was easily salable for a very simple reason: it met a critical need in times of scarcity.
The point is that this example illustrates well the concept of real assets as a haven of value: they provide essential value by satisfying a need, whether in the form of food, energy, economic productivity, or just as a store of value and even investment.
And although the case of Zimbabwe is extreme, the lessons learned from its history are applicable today.
Although we are very far from a hyperinflationary reality like that of that African country, we recently reached record inflations in more than 20 years in Mexico and in more than 40 years in the United States, while it is assumed that at the moment we are not even going through a “great crisis”.
“Let’s think about consumer behavior: during periods of economic boom, inflation is low. Unemployment is low. Interest rates are low. People are confident and optimistic about the future, so we tend to borrow more and spend more freely. And the best-performing assets during these boom periods reflect that sentiment,” says Black.
However, he adds, “today’s tougher economic times are forcing changes in people’s approach and behavior. It’s just natural. Most people have started to pay much more attention to their spending. Spending $2,000 on a new iPhone suddenly doesn’t seem like a great idea when oil is approaching $100 a barrel,” and it’s true!
All of this leads us to review Zimbabwe’s extreme experience with real assets, which should make up the main portion of the smartest investor’s stock portfolio.
“Priorities are finally starting to change. And this means that real assets, which are critical to solving the world’s challenges – says Black – will become much more important than recreational assets,” and that is what makes them not only an excellent refuge against inflation , but – perhaps – in the best investment instrument, as bread was in Zimbabwe.
Editor’s note: This text belongs to our Opinion section and reflects only the author’s view, not necessarily the point of view of High Level.
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William Barba Master in Economics from the Austrian School; liberal, gold market specialist and editor of the investment newsletter Top Money Report