And what you should do about it
If you’ve been living under a rock, the US government is sending every man, woman, and child (through their parents) a fatty stimulus check.
This is very, very bad. Let me break down why.
Why is it bad?
In the short term, this will be a nice shot in the arm. Many of us are out of work. Our economy is in the toilet. A little free cash will be just what the doctor ordered.
But what if it leads to hyperinflation?
Back in “the day” the US was on the gold standard. That meant that your dollar was equivalent to a small amount of gold. If the US wanted to print money, it had to have gold to back it up.
Tricky Dick (Nixon) “fixed” all of that. He took us off the gold standard in 1971. When that happened, our money became worthless. It only had value because we all agreed it had value.
If America were to crash tomorrow, you would be stuck with a bunch of paper. It’s not likely, but a few weeks ago, who woulda thought a virus would cause havok?
The failure of America is a “black swan event,” but we all know now:
Black Swans Happen #blackSwansHappen
So we all use dollars to trade. These are effectively shares in the America Corporation (NASDAQ USSUX). As the dollar value fluctuates across the globe, so does the fortune of Americans. Most sheeple, I mean Americans, don’t notice the daily ups and downs of the dollar. For those of us who send remittance payments to our families overseas, we are very aware of the current value of the dollar.
If our dollar has any actual value, it is based on the GDP of the US government. Our government has the ability to print money. That makes the dollar fiat currency. It has a value we all agree to set on it. The world uses dollars as the base currency (luckily).
What happens if the dollar suddenly became worthless?
It could happen. If a government prints too much money, it causes the currency to become worthless. This is also known as hyperinflation. A government prints and prints and prints. After awhile, all of the money is worthless. This can happen to any government. This happened to Germany in the 1920s. This happened to Venezuela in the 1910s. It happened in Argentina, Bolivia, Brazil, Nicaragua, Peru, and Zimbabwe. Check out the silly uses of cash during the hyperinflation of Germany.
Say it with me, “Not in Amer’icah!”
Any time that a government decides to print a whole lotta money, there is a danger of hyperinflation.
So what should you do with your stimulus money?
There is a high danger that this money will lose its’ value quickly. I’m not one to raise an alarm without recommending things you can do to protect yourself.
1 Reduce your expenses. If you aren’t already working from a budget, what are you waiting for? You should know how much money is coming in and how much money is going out. If you don’t, you are wasting good foldin’ money. Look at this budget and trim out everything that is non-essential.
I am assuming a bad situation. You should, too. I’m going to assume that the dollar will drop 20% in value. That means that every dollar I have will only go 80% as far.
Your task is to reduce your monthly budget by 20%. If your monthly budget was $1000, make it work with $800. You will have to make some sacrifices.
2 Pay down your debt. This kind of ties in with the first step, above. If you can use your stimulus check to clear a credit card, do it! There might come a time (sooner than later) when you don’t have money to pay your bills. Get rid of your high-interest credit card bills.
Have any other medium-ticket bills that you can pay off in full? Do it!
3 Put some money in savings. Many Americans don’t have money in savings to cover emergencies. Some financial advisors advise having an emergency fund of 6 months of expenses saved up.
Yeah, buddy, I’ll do that.
You want at least something to draw upon if the s* hits the fan. I recommend you have $100 in cash (at least). Leave it all as a single bill. You want it to be as hard as possible to spend that sucka. If you can afford to save all your stimulus check, do it! If so, invest it as soon as you can (see below).
4 Invest in hard assets. Let’s imagine a horrible scenario. The dollar is worthless. The banks are closed. Dog and cats are sleeping together. Mass hysteria. That’s the time you want to be invested in hard assets.
A hard asset is company stock. Real Estate. Precious metals (gold, silver, etc.). If the dollar plummets, a house will be worth more dollars. The same is true of stocks and precious metal. If you spend $20 on an ounce of silver today, it could be worth $20,000,000 when everything comes crashing down.
Bonus points if you have a hard asset that pays you money, like a rental property or a dividend stock.
Let me explain how an investment in precious metal would work. You spend $15 on an ounce of silver today. Tomorrow, the world explodes (it could happen). It now costs a small fortune to buy bread. You calmly walk down to where you purchased your silver. The price today for silver is 30 gazillion dollars per ounce.
Ok, I’ll take that.
Put it on your debit card. Go buy bread. Done and done.
Hope for the best. Plan for the worst.—John Jay, (1813)
May 2020 Update
My father had a horrible idea that rang eerily true:
What if the government wants hyperinflation?
My father is a fan of all the right-wing nut jobs (Rush Limbaugh, Glenn Beck, or any talking head on Fox News). I usually roll my eyes at the latest hate-filled conspiracy theory being floated by Republicans, but this one made sense.
Let’s pretend that you are a rich, greedy politician. You realize that the government owes trillions of dollars. You are greedy, but not stupid. You are evil, but not stupid. You care nothing for your fellow man, but you are not stupid.
What if there were a way, if even a long shot, to pay that debt? What would you do?
If we all woke up tomorrow to massive hyperinflation, what would that do to our national debt?
If our trillion dollar debt was cut in value next month, it would still be over a trillion dollars. If it were cut in half again, and again, what would it look like? In about six months, the value of our debt would be in the billions instead of trillions.
After one very brutal year of hyperinflation, our debt would just be a few billion dollars (in real value). In another very brutal year, that debt now has a value around a couple million.
Of course, that is after two years of a very brutal depression for the common folk. The rich really care about the common folk. Don’t they?
How I got these numbers (and you can, too)
Our inflation has averaged 3% since 1913. In this same article, it says that economists call it hyperinflation when inflation is over 50% for a month.
In layman’s terms, that means your $1 now equals $0.50. That means that the national debt of 24 trillion dollars now has the value of 12 trillion dollars.
Pull out your trusty calculator and put in 24000000000000. It will likely fill the whole screen (or most of it). Divide this number by 2. When you hit the equal button, you have just theorized what our national debt would be after a month.
Now, hit the equal sign again. This is two months. Now, hit the button 10 times. This is the debt after a year. Want to see the number magically reduce? Keep hitting that button.
But that means depression for the rest of us
You’ve heard about the doomsday bunkers of the rich. They have food and entertainment stocked up for an emergency.
Kinda like now?
Imagine if you woke up tomorrow and you could not buy anything. The banks were closed. But even if they were open, your money would be worthless.
Could you live off what’s in your house? For a month? For a year? For two years?
While the rich are hanging out in their luxury bunkers, the rest of us are left to flounder until everything settles down in…
Why our government can do this
Right now, the dollar is the world-standard for money transactions. It has been historically stable and the government always paid its debts (eventually).
We owe the other countries of the world $74 trillion dollars. Not British pounds ₤. Not Japanese Yen ¥. Not India Rupee ₹.
$74 trillion dollars.
Since our money system is the world standard, the debt is likely set up that way, it matters little what the value of the dollar is.
If we all wake up tomorrow and the dollar is worthless, whadayagonnado?
The Monopoly Guy pulls out his empty pockets and shrugs his shoulders.
Will this really happen?
It could happen.
What I’m saying is that to our government, it wouldn’t be the end of the world.
If this stimulus money restarts the economy, it’s good for the rich. Live will continue blissfully until the next crisis (pick a card, any card).
If this stimulus money crashes the economy, it’s good for the rich. The rest of the world will hate us, and it might lead to war, but it will be good for the rich.
What should I do about it?
Dave Ramsey is a famous money guy. He wrote some good advice out on his blog.
The real problem with this advice is that it assumes that regular life will resume (and shortly). If that is the case (and that’s a big if), this is good advice.
If life continues to throw curveballs at you, you should stay nimble. I will be going by my advice above.
Thanks to Minority Mindset on YouTube for inspiring this article. Here’s the video:
Matt doesn’t consider himself to be a brilliant economist, but he does keep an eye on his money. In fact, “brilliant economists” are to blame for 2008 money crisis. We should all know at least the basics of the economy (and how to use caution).