From: pratyush@sequent.com (Pratyush Jaiswal)
Subject: Re: Investing around hyperinflation
Organization: Sequent Computer Systems Inc.
Distribution: usa
Date: Fri, 22 Jan 93 00:26:58 GMT

In article <185075@pyramid.pyramid.com> breid@pyrhard2.eng.pyramid.com (Bill Reid) writes:
>In article <185056@pyramid.pyramid.com> pcollac@pyrnova.mis.pyramid.com (Paul Collacchi) writes:
>>
>>Putting aside the question of whether the US is headed towards 
>>insolvency and some kind of hyper-inflation, what is a good 
>>investment strategy to protect investments through a period of
>>hyperinflation.  Is it as easy as "getting out" of dollars?
>>
>If the situation in Brazil over the last decade is any guide, the 
>goal is to have as many dollars as possible, and invest the 
>vast majority of them in short term money funds.  The rich in Brazil 
>have managed to keep their money this way, while moderate to low 
>income people have been decimated by inflation, because they don't 
>have the minimum capital requirements to invest (every cruziero goes 
>for sustanance, not savings).  The interesting thing is that a 
>deflationary spiral (also possible) would have a similar strategy, 
>but either not invested at all (probably the best strategy), or 
>going to the long end of the bond spectrum.

The common wisdom has been to hold commodities (read gold), or the currency
of other countries that you expect to be stable. Note that in the past,
governments have tried to even close that avenue, e.g. Mexico essentially
took all dollars deposited in banks, and gave the owners local currency at
official exchange rates. (Lotsa Americans got burnt by this, since it had
been pretty popular to get great returns on CDs of banks doing business in
Mexico.)

I tried to answer the above question sometime ago, for myself, and couldn't
come up with a very coherent solution. The problem is quite complex.
In the process, I read several books that talked about such topics, from
Paul Volcker's new book, to Figgie's, to books about the Debt crises of the
past (not limited to the eighty's).

One of the reasons for the difficulty is that there is really no good
historical precedent for such a scenario. *All* of the past such cases
have been where the debtor country does not control the currency in which
the debt is denominated. Over the past couple of decades, the yen and the
mark have come up in the financial markets, but the US dollar is still
the predominant currency for transactions.

Another unique aspect is that in the past cases, most of the debt was owed
to "outsiders". I don't have exact numbers, but most of the US debt is held
by Americans, in one form or another. It does make the case somewhat more
complicated. What seems to surprise me is the ease with which the US treasury
is able to borrow. Perhaps the end is near, but a lot of people have believed
that for quite some time now.

For various reasons, I consider a collapse of the US ecenomic system, a la
Latin America seems most improbable to me. The dollar influences too many
aspects of the international financial system for something like that to
happen, since such a collapse will not leave anyone unaffected.

I'd be interested to hear of other people's opinions. (I know it's not
allowed on usenet, but) Please try and make a rational case for your
opinions, and not pick up on just one point.

Pratyush Jaiswal.

p.s. I learnt some interesting history from a couple of my books. Here's a
sample:

1. Did you know that earlier this century, British and German ships bombed
   Venezuela to convince it to make its debt payments?
2. Or that the US marines were sent to the Dominican Republic to collect
   customs fees, and impound a part of that as payments for its debt to
   European banks?