This morning, I’ll let the Washington pundits have their fun, while I turn to an entirely different kind of story from a different place and time.
I do this for two reasons. I want to give you — and myself — a break from the cacophony of voices covering President Trump. And more importantly, over the next few weeks, I want to return to some big questions that seem to have gotten lost in the transition:
Will President Trump allow a new bulge to appear in the federal budget deficit? To finance it, will he press the Federal Reserve to resume its 8-year money-printing binge? If so, will that drive the country on a new path to inflation? The story starts with …
Hyperinflation in Latin America
My father first announced that we were going to Brazil shortly after we took this photo. It was 1952, and I was six years old.
He was on a mission for clients to find new investment opportunities in underdeveloped countries. At the same time, he was also on a personal quest for a second home in the tropics.
We were soon in Brazil’s central highlands, nearly 1,000 kilometers inland from Rio. It was the cerrado — verdant forests, pristine rivers, cascading waterfalls, and vast open savannahs with 800 species of birds and 160 of mammals.
Many years later, the new super-modern capital, Brasília, would spring up on a nearby plateau. But at that time, on our ranch, we had nothing of the kind. No paved roads, no telephone and no electricity.
Two Hollywood superstars, Janet Gaynor (“A Star Is Born,” 1937) and Mary Martin (“Peter Pan,” 1954), along with her son, Larry Hagman (“Dallas,” 1978-91) followed in our footsteps and also found a place nearby.
But Hollywood glitter meant nothing to me. I was too busy with my favorite after-school pastimes — stalking animals in the forest and collecting Brazilian money, especially 1- and 10-cruzeiro notes.
The former activity wasn’t nearly as dangerous as you might think. Collecting Brazilian money, however, was another matter entirely.
“You can save your cruzeiros if you want” said my father. “But years from now, you’ll need at least ten or maybe even a hundred to buy what just one will buy today.”
Sure enough, the pace of inflation in Brazil began to climb rapidly, and by 1967, the cumulative effect was so extreme the government had to do away with the near-worthless cruzeiro and replace it with the cruzeiro novo, worth 1,000 of the old.
But that was just the beginning. Brazil was forced to announce a second 1,000-to-1 currency conversion in 1986 (to the cruzado) … a third in 1989 (cruzado novo) … and still another in 1993 (cruzeiro real).
The climactic finish of this currency madness came in 1994, when a series of new laws created the real, each worth 2,750 of the prior currency. To buy just one real when it was first issued, I would have needed 2,750,000,000,000,000 (2.75 quadrillion) of my original one-cruzeiro notes. Laid side by side, those bills would extend for 429 billion kilometers — the equivalent of 36 trips from Earth to Pluto and back.
That’s a lot of near-worthless paper. But unless you experience it firsthand, it’s hard to imagine the social dislocation and political chaos that can be caused. Consider, for example these scenarios …
A boy quits school when he’s 14 to help support his family. He finds a job working for the municipal government as a street sweeper. But the city’s payroll is always months behind. What’s worse, by the time the boy finally gets his paychecks, the money buys 10%, 20%, even 30% less than it could have bought when he first earned it. He probably could make more money by scavenging some of the garbage he sweeps and selling it off to a dealer. But that’s forbidden.
An agronomy student is more fortunate. He gets a night job in a supermarket and joins a team of clerks who race around the store from closing time to opening time the next morning, marking up the price labels on every single item on the shelves. The team does this every weekday night, sometimes on Saturdays, too. And they still can’t keep up with daily price hikes.
Inflation sweeps through the country like a locust plague, consuming almost everything, everyone and every aspect of life. Some of the consequences are tragic, even fatal.
Imagine a teenager in biology class on a hot afternoon with no air conditioning. The teacher opens the windows. A warm, humid breeze flows gently into the classroom.
Suddenly a thunderous roar pierces the air. The largest building in town — still under construction — has suddenly collapsed. A Portuguese literature teacher, who lives next door to the construction site, bolts from the school in panic. He finds his home crushed under the rubble, his wife inside.
Again, inflation is the underlying culprit: Cement prices were soaring, and to save money, contractors tried making their cement go farther by mixing in more sand. To help cover surging costs, they also decided to add several stories beyond the original plan.
A year later, the president of the country announces an appeal to patriotism — “gold for Brazil.” The goal is to help pay down the nation’s debts, and all citizens are asked to collect any gold they have in their homes to donate it to the government. Remarkably, many people comply. The wife of a prominent doctor in town even pulls a wedding band off her fingers, drives to the central square, and drops it in a collection bucket, as local officials enthusiastically shake her hand.
One of Kondratieff’s disciples, Joseph Schumpeter, wrote: If the shorter cycles come into phase with each other — and if they, in turn, join with the K Wave — the “amplitude” of the resulting wave would be enormous. It would result in an economic catastrophe of epic proportions. In other words, it would be a TIDAL WAVE of economic change. The last time all these cycles converged was during the Great Depression. And now, it’s happening again. Read more here … -Larry Edelson
But it’s soon revealed that most of the gold winds up in the pockets of politicians. The whole campaign backfires. Brazil’s debts continue to mushroom. Inflation accelerates.
When inflation surpasses an annual rate of 2,000 percent, the government gets so desperate it doesn’t even bother making public appeals. It summarily announces that everyone’s bank account is frozen, their savings confiscated. A computer programmer explains it this way: “The government says it’s giving us ‘all our money back.’ But they’ve replaced the old currency with a new currency. So what we’re really getting is money that’s worth a lot less.”
Hard to believe? Well, I can assure you every one of these stories is true — because I experienced them personally. The young boy who went to work as a street sweeper was Sebastião, our housekeeper’s son. The college grad who got the job changing prices in the supermarket was Joaquim, the friend of a friend. The biology class was my class; the teacher whose home was buried in rubble was my teacher. The woman who donated her gold to the government was my friend’s mother. The computer programmer whose savings were confiscated late wrote software for my company.
Rampant money printing helped create inflation. Inflation trashed the value of fixed salaries. And fixed salaries were the sole form of compensation provided to officials at all levels of government. So whether you worked in City Hall, Congress, the federal courts, or the presidential palace, the only way to maintain a decent lifestyle was to find “other income sources.” For the relatively “honest” officials, that meant illicit moonlighting. For the “not-so-honest,” it meant influence-peddling, racketeering, and other high crimes.
|Brazil’s Jânio Quadros and corruption-sweeping broom|
By the early 1960s, just eight years after our first arrival in Brazil, government corruption was so widespread that it created an unusually ripe environment for a political outsider with a very “radical” idea: To sweep out government corruption. His campaign symbol was a broom. His name was Jânio Quadros. And he became president in a landslide.
Nevertheless, inflation got worse, corruption remained deeply ingrained, and his reform agenda was staunchly rebuffed by the entrenched establishment. He felt cornered with no way out. So on August 25, 1961, in a gambit to steamroll his opponents, he shocked the nation by doing something no other Brazilian president had ever done in the past or would ever do in the future: He resigned.
It was the most deliberate, disruptive act in Brazil’s modern history. In fact, on that day, his left-leaning vice president was literally on the far side of the planet, visiting Communist China. And that tidbit is cited by historians as evidence that Jânio expected both houses of Congress to reject his resignation. They didn’t. Jânio was history. And soon after the vice president returned, he took over the reins of power, printed still more money, and drove inflation skyward at an even faster clip.
From that point forward, the sequence of events was clear: Jânio’s abrupt resignation created financial and political chaos. That chaos led to a military coup d’état in 1964. The coup then launched 20 long years of brutal dictatorship, the near-destruction of Brazil’s democratic institutions, and worse.
The generals had come to power saying they were the only ones in the country with the discipline to truly control inflation and wipe out corruption. But they did nothing of the kind. Corruption remained deeply ingrained. Inflation continued mostly unabated.
Throughout Latin America, military dictatorships spread like swarms of the Africanized killer bee: Bolivia, from 1964 to 1970 and 1971 to 1982. Argentina, 1966-1973 and 1976-1983. Peru, 1968-1980. Panama, 1968-1989. Ecuador, 1963-1966 and 1972-1978. Guatemala, 1963-1966 and 1969-1985. Honduras, 1963-1966 and 1972-1982. Chile, 1973-1990. Uruguay, 1973-1984. Plus several more. Everywhere, the military juntas vowed to clean up the corruption. But everywhere, the swamp was a lot deeper than they imagined. And invariably, powerful socio-economic trends were far more closely intertwined than anyone realized:
- Overspending to promote economic growth and social reforms was financed by government overborrowing.
- The overborrowing was accompanied by accelerated money printing and money-supply growth.
- All of these factors helped generate rampant inflation, which fed corruption, and in turn, fed even larger fires of inflation.
- Disparities between rich and poor grew progressively worse.
- Day-to-day politics was transformed from rational debate to brick-throwing and dogfights. Divisiveness reigned supreme.
- When citizens protested, they were repressed. Peaceful protests became violent. Violence led to revolution. Revolutionaries took up arms. Armed guerrilla movements multiplied.
Nearly everywhere in the region, massive debts and soaring interest costs continued to make poor nations poorer. Inflation continued to devalue the fixed salaries of the lower classes and to drive up the property values of the higher classes. Combined, all of this widened social and political divisions. And, it destroyed democracy.
No matter what they tried, the wannabe Mussolinis of Latin America and all their king’s men could not put the Humpty Dumpty of corruption-free institutions back together again. With all their military discipline, they could not contain the government overspending, the rampant money printing, the big debt build-up, and the resulting currency collapses.
New Gold Law to Impact 1.6 Billion People
A new global law in effect this March could deliver an unexpected shock to the markets.
No less than 32 major central banks are scrambling to prepare for the inevitable fallout.
They’re shifting their money into one single asset that could explode in value, even as everything else plummets.
$3 TRILLION is set to change hands virtually overnight.
You must prepare now – there’s no time left to wait.
In the 1960s and early 1970s, whether under democratic governments or dictatorships, Brazil, Argentina and Mexico borrowed huge sums of money. Smaller countries avidly sought their share of the debt as well. And by 1982, a year when military rule in the region was near peak strength, their borrowing zeal culminated in the most serious debt crisis in Latin American history. Result: Incomes plunged further, unemployment surged, and inflation gutted whatever was left of the shrinking middle classes.
I traveled through most of these countries during that dark era. I saw, in person and on site, how their democratic governments destroyed their economies, and then how the military destroyed their democracies. So in an upcoming issue, I will invite you to join me on those travels — to see what I saw, to meet the people I met, to feel the emotions I felt, and to draw your own conclusions.
But before we go there, some important lessons for Trump (and for investors):
- Don’t underestimate the potential damage of budget deficits, government debt pileups and unbridled money printing.
- Also don’t assume that, just because those impacts can take years to incubate, it means they’re dead and buried.
- To say draining swamps is “easier said than done” is the understatement of the century. The pushback can be ferocious, the unintended consequences even more so.
- History often seems like a long chain of random events, each connected by a hidden synapse. Sometimes, you’ll find out why strange things happen only after the fact. Sometimes, you’ll never know.
Good luck and God bless!