Preparing For Double Digit Inflation

This morning I read an article on Forbes that said, "Multibillionaire hedge fund operator John Paulson, the investment genius who made a killing going short subprime mortgages a few years ago, told a standing room only crowd at New York’s  University Club that double-digit inflation is about to rear its ugly head by 2012"

We're watching the value of our homes plummet, and see incredible bargains as the desperate unemployed unload their expensive cars, boats, and toys. We're seeing DEflation, not INflation!

The experts know the economy has a cycle. When people have jobs they have money to spend, demand on commodities increases and prices rise. That is inflation. At some point prices get so high demand falls. People lose their jobs, there's less money to spend, and prices fall. That's recession. Then the cycle begins again. Unless the government gets involved. TARP funds, bank bailouts, entitlement programs, and trillions in national debt have flooded the market with dollars.

Historically, extreme inflationary periods and even hyperinflation, are not unusual. Extreme inflation is caused by a flood of currency in the market and a failure of confidence in that currency. In other words, people hold so much paper money that it has very little value. In the picture to the right, taken in Germany in 1923, a young woman stuffs money into a furnace, because a bucket of coal had more value than a pile of currency. Today the same situation exists in Zimbabwe. A decade ago Argentina suffered through hyperinflation. Dozens of countries around the globe have an inflation rate over 20%.

I lived through double digit inflation in the US in the 1970's, a result of the 1973 gas price increases and Nixon's price controls. Lemme tell you, it was not fun. My husband and I were newlyweds. Our dream house had a price tag of $46,000 so we needed around $15,000 for a down payment and closing costs. We banked our wedding presents and his salary and lived very frugally off of my paycheck. It would only take one year of giving up vacations and restaurants and all of the usual things young people do for fun, to reach our goal - or so we thought. As our savings closed in on the amount we needed, the price of the house went up. $46, 48, 54, 50, 60, 68,000... there was no end. The price of our dream house was not the only thing going up. Mortgage interest rates were also skyrocketing. Gasoline, heating oil, food, insurance, clothing - across the board we saw prices rise higher and higher. The only thing NOT going up was our paychecks. Unemployment was high and employers held that over our heads. If we weren't willing to work without a raise, unpaid overtime, or even with cutbacks, there were plenty of unemployed people who would be happy to fill our seats. What we thought we could reasonably afford at the beginning of the year was out of reach by year's end. At the end of the second year we were no better. Worried about continued inflation, we paid $73,000 for a very modest "beginner" home and struggled for several years to make ends meet.

Financial experts and investment gurus are lining up in agreement that inflation is in our future. Perhaps even hyper-inflation. So let me tell you how to prepare now for what lies ahead.

Think about how you spend your money. You probably have rent or mortgage payments. Taxes. Utilities. Car payment. Insurance - house, car, health, and life. Furniture. Clothes. Sheets and blankets. Towels. Toiletries. Cleaning supplies. Foodstuffs with a long shelf life, such as canned goods and rice. Perishables such as fresh fruit, dairy and meat. School supplies. Gardening supplies. Gasoline. While some things can be purchase ahead of time, others have to be purchased as you need them. Now think about how well you can cope if everything goes up 10%, or 50%, or 99%.

Inflation has the same result as reducing your paycheck. If the price of gasoline goes up 50%, the cost of your commute goes from $200 per month to $300 per month. That is like getting a pay cut of $1200 this year. If food goes up 50% and you normally spend $800 per month to feed your family, you'll lose $4800 from your yearly disposable income. During double digit inflation, it ALL goes up - gasoline, utilities, food, and clothes - and goes up quickly. Your credit cards are maxed out, you can't earn more because of high unemployment, and robbing Peter to pay Paul won't work because Peter has empty pockets.

What do you do?

Prepare NOW. If you see a train coming you don't continue walking on the tracks until the train is on top of you. You react as soon as you are aware you're in danger.

David Ramsey, the economic guru, coined a saying that is very appropriate for the times we live. "If you will live like no one else, later you can live like no one else." Ramsey explains: “If you will make the sacrifices now that most people aren’t willing to make, later on you will be able to live as those folks will never be able to live.” If we see double digit inflation or hyperinflation, "living" may be literal. When others cannot afford to buy necessities, you want to be living comfortably.

Now is the time to learn how to live lean and prepare for times when that will be a necessity (if it isn't already).

According to Karl Denninger of the Market Ticker, in the last 60-90 days prices on commodities are in double digit, if not hyperinflationary territory. Prices have increased so much they are adding "20-80% to the cost of the materials that go into your food in the last three months alone" Corn, 54% increase in price. Wheat, 63% increase in price. Soybeans, 26% increase in price. Rice, 31% increase in price. Oats, 83% increase in price. Don't think you can avoid eating these grains and buy cheaper foods - these are the things that feed our cows, and pigs, and chickens. Meat and dairy prices will skyrocket. Prepared foods makers will substitute ingredients, and packages will get smaller, lighter, and more expensive.

Imagine you have $50 in your pocket. But due to inflation, you need $50 to buy enough gas just to get to work. You also need $50 to feed your family dinner tonight. You also need $50 for your son's allergy pills - and he has really bad hay fever. But you only have $50, not $150 - and you don't have any way to get the rest. Wouldn't it be nice to have a bicycle in your garage that can take you to your office, enough food stored in your pantry to make a hearty dinner, and then you can use the $50 for those allergy pills?

The trick to surviving inflation - the period of time between the day prices go up, and the day your salary goes up to compensate for those increases - is to eliminate everything that you can, drastically reduce what you cannot eliminate, and find cheaper substitutes for anything that costs money.

We have a whole section on Tips and Tricks to save money and eliminate waste in the kitchen. See what works for you in your home.

Eliminate - Simply do without. Turn the AC off.  Do you have screens on your windows so you can open them up in the summer? Do you have fans to circulate air throughout your house? Turn off the heat until there is a hard freeze, and then only keep it warm enough in your house to keep the pipes from bursting. Do you have heavy clothes, bed linens, and drapes you can layer to keep warm? Do you have a fireplace or wood burning stove and a supply of fuel? Can you close off rooms to concentrate and preserve the heat? Go to bed early and get up early so you don't burn the lights all evening. Keep the lamps turned off and use a wind up or solar powered flashlight or lantern for moving around at night. When it is time to replace your carpet, choose wooden floors, tile or linoleum that can be cleaned with a broom and mop, rather than carpet that needs to be vaccuumed and steam cleaned regularly. Walk or bike, or use public transportation, and leave your car at home. If you can live without a car completely, better yet. You will save a lot of money.

Reduce - Adjust your cooking to avoid overuse of appliances. Avoid recipes that call for long simmers and baking. Research recipes that are no cook, quick cook, or grilled, to avoid over using the stove in your kitchen. Do you remember the water saving bathroom mottoes of the 70's: 'If it's yellow let it mellow, if it's brown flush it down.' and 'Save water, shower with a friend.' Put a brick in your toilet tank to save water. Instead of rinsing and washing dishes several times during the day, fill your sink with hot sudsy water and let your dishes pile up during the day. Wash them all before you go to bed. If you turn your oven on to make bread, wrap a brick in flannel and put it in there. Then put the flannel wrapped brick in your bed to warm it on a cold winter's night.  Mend your clothes, darn your socks, repair what breaks, repurpose what you have to fill your needs rather than buying new. 

Substitute - You CAN live without electric appliances. They are convenient, and it is fine to use them now if you can afford them. But in times of extreme frugality an electric can opener is a luxury. Do you have a manual can opener to use? If not, the time to get one is now. You can pick one up for 25 cents at a garage sale. Heck, get 2 or 3 as backup. A hand grater can replace your food processor. A french press replaces a coffeemaker. A whisk replaces a Kitchenaid mixer. Keep the kettle off, make sun tea. Make your own solar oven or rocket stove and use them instead of your kitchen stove.

Freezers are great for food storage. They allow you to stock up when produce is in season and meat is on sale. But if the cost of electricity skyrockets, you may want to reconsider. Learn how to can and dehydrate. Can you live with a smaller, more efficient refrigerator, or live without one completely? Buy condiments in small sizes for your food storage so you do not waste large amounts if you have to live without refrigeration.

What about your washing machine and dryer if the cost of utilities skyrockets? Get a couple of deep plastic tubs, a clothesline and clothespins. Stock up on bleach, hard soap for removing stains, detergent, and fabric softener.  Use dishwashing liquid and wash your dishes in the sink. Buy abrasive pads, scrub brushes, and crochet or knit washcloths to use instead of expensive sponges that retain germs and odors and do not last long.

Keep your internet connection and drop your telephone and cable tv. Google phone can replace your telephone and it is free. Netflix and Hulu are much less expensive than cable tv for entertainment. Make sure your computer is in good working order and your monitor is energy efficient.

Prepare - Get what you need now while prices are relatively low. Search for sales, visit garage sales, advertise on freecycle and craigslist, and barter with friends and relatives.

You don't have to buy everything - but everything you obtain now is something you do not have to buy when you are counting every penny. These are hard times, and the future looks even more challenging. Think ahead, be smart, and be frugal.