Have you considered this method for the approaching financial calamity?

“Inflation is on the rise,” or so the headlines say.

If we infer from the above article — or do a quick search for its definition — we’d see that inflation is “a rise in prices” or “decline of purchasing power over time.”

This is intentionally misleading.

Historically, inflation was defined as the increase in the supply of money, which is now called Monetary Inflation to avoid confusion with Consumer Price Inflation, which is reflected in the Consumer Price Index (CPI).

CPI is a lagging consequence of Monetary Inflation. Newly created currency units enter a market and ‘chase’ the same amount of goods and services, thus resulting in more dollars to purchase the same good or service.

Please consider reading Inflation Without Government Is Impossible by Mario Innecco to learn more government created inflation.

The current monetary system is a debt based monetary system, where currency units are created by borrowing money into existence through fractional reserve banking. Deposits are used to back each newly created dollar at the reserve ratio — usually 1:10 — which is counter intuitive to the public perception of full reserve banking, where credit is issued 1:1 for every dollar in deposit.

This is why banks try so hard to avoid withdrawals from deposits, because deposits are used to back ledger dollars created after issuing loans.

After 2020, there is now a zero reserve requirement.
i.e., No deposit is required to borrow currency into circulation.

The intrinsic value of our currency is based on the ability of borrowers to service their loans. Loan defaults would immediately collapse the money supply. A lender can either hold the loan as a fixed income asset or sell the loan through a security. Virtually all investments are debt based.

The value of your pension is mostly the principle value of collective debt.

Our entire financial system operates on borrowed money and the ability to service that borrowed money through the production of real goods and services.

The debt is not payable, otherwise it would deflate the currency and all investments.

We do not have a wealth based system, but a slave system based on debt.

How is interest on debt paid if currency is continually borrowed into existence?

We’re at the point where currency must be borrowed into existence to service the existing debt. It’s like paying off a credit card with another credit card. This produces rollover risk and creates an economic system sensitive to interest rates.
(Interest rate changes are done by a Central Bank directly participating in the credit market).

What happens if debt security holders liquidate en masse?

The interest rate is a function of how much an entity is willing to pay for a debt instrument, which is called the bond market. If participants decide to liquidate vast amounts of debt holdings — i.e., loss of confidence in a bond issuer such as a corporation or government — then the principle value of bonds drop.

A bond market selloff would dramatically increase the interest rate.

In the event of a large scale bond market selloff:

1. Interest rates would spike and credit freezes.
   This implies all access to deposits and investments will be locked-in.
   (This almost happened in 2008 and was the real panic).

2. Over-leveraged banks and institutions will be unable to service liabilities.
   This results in a bail-in, which uses your bank deposits to cover liability.
   (FDIC Bankers Discuss ‘Bail-Ins’ To Deal With Impending Market Collapse).

3. All assets deriving value from debt will deflate in real terms.
   This includes pension funds, equity markets, etc.

4. Physical cash will be the most liquid medium of exchange for a short period of time to purchase goods and services.

What happens after a bond market selloff? It’s anyone’s guess. There may be a CBDC issued to control access to deposits and command resources. We can only speculate.

However, currency devaluation and hyperinflation is almost certain. Hyperinflation occurs when the public loses confidence in government and the currency, making it effectively worthless.

Below are a few notable instances of hyperinflation in history.

Inflation and the Fall of the Roman Empire

Monetary policy always serves the perceived needs of the rulers of state. Enhancing the prosperity of the people is a secondary benefit — if at all.

The rulers of Rome and its people experienced several crises over the course of 500 years. The demise of the Roman Republic and Empire was slow and brutal. Rulers discovered that clipping precious metal coinage allowed them to finance political ambitions and wars without raising taxes.

This is the first known form of currency debasement.

“The basic coinage of the Roman Empire to this time — we're speaking now about 211 AD — was the silver denarius introduced by Augustus at about 95 percent silver at the end of the 1st century BC. The denarius continued for the better part of two centuries as the basic medium of exchange in the empire.

By the time of Trajan in 117 AD, the denarius was only about 85 percent silver, down from Augustus's 95 percent. By the age of Marcus Aurelius, in 180, it was down to about 75 percent silver. In Septimius's time it had dropped to 60 percent, and Caracalla evened it off at 50/50.

But the real crisis came after Caracalla, between 258 and 275, in a period of intense civil war and foreign invasions. The emperors simply abandoned, for all practical purposes, a silver coinage. By 268 there was only 0.5 percent silver in the denarius.”

— Joseph R. Peden

Coin clipping produced a gradual reduction in the standard of living for the public as wealth was covertly transferred to the ruling class. Prices rose by nearly 1,000%. Bronze coins dipped in silver were issued, but were quickly replaced by other currency units. Prices continued to rise and the standard of living continued to plummet as the citizens were forced into a state of perpetual servitude.

“The Roman state survived. The liberty of the Roman people did not. When freedom became possible in the West in the 5th century, with the barbarian invasions, people took advantage of the possibility of change.

One of the reasons why the Roman state collapsed in the 5th century was that the Roman people, the mass of the population, had but one wish after being captured by the barbarians: to never again fall under the rule of the Roman bureaucracy.”

— Joseph R. Peden

Hyperinflation in Germany

In 1914, the German Reichsbank issued bank notes to support the central government’s financing of WWI and suspended gold redeemability of its notes.

After the war, the amount of currency in circulation increased 4x and prices rose approximately 140%. The bank continued monetizing debt to pay for war reparations as per the Treaty of Versailles, which significantly increased the currency supply. By 1923, the Reichsbank issued 496.5 quadrillion marks and its purchasing power dropped one-trillionth of its 1914 gold value.

Figure 1 — Value of 1 gold Mark in paper Marks

After the currency collapse, Germany entered into a severe economic depression.

“The same German officials who denied the very existence of inflation lamented the depreciation caused by speculators, or they blamed the Allied reparation burdens and simultaneously denounced speculators for the depreciation. Dr. Havenstein, the President of the Reichsbank, embracing every conceivable theory that exculpated his policies, also pointed at the speculators.”

— Hans F. Sennholz

The economic and financial collapse provided an opportunity for extremist ideologies to take root in the public mind. It was this very destabilization that sowed the seeds of Mass Psychosis and provided the foundation for the atrocities of WWII.

Romanian Hyperinflation — Star Path Academy Anecdote

Arpad lived in Romania during the 90s. He discusses his experience surviving a hyperinflationary economic collapse with Mario Innecco.

This is a short introductory summary of the interview:

1. Romania was under communism after WWII until 1989.

2. Romania experienced hyperinflationary events during the events of WWII and after the collapse of the Soviet system in the 90s.

3. Economic and monetary changes were accompanied by political changes.

4. Transition of political power resulted in lock-downs and a shutdown economy.

5. The value of the local currency lost over 10,000x its value.

Listed below are more videos from Arpad.

Surviving hyperinflation

How my family survived hyperinflation - what to expect when expecting high inflation

Interview with Mariel on the collapse in Venezuela

Government price control on gasoline - Lessons from Venezuela Interview - Part 1

Life after a currency reset - hospitality - Lessons from Venezuela - Part 2

Cash and banking after hyperinflation - Lessons from Venezuela - Part 3

The Supermarket After a Currency RESET - Lessons from Venezuela Part 4

What can we do to protect ourselves?

In physics, a closed energy system can be modelled using the Hamiltonian.
i.e., Total energy is equivalent to kinetic energy and potential energy.

This can be simplified to:

\(H = (H_{in} - H_{out}) = V + T\)

At steady-state conditions, total energy is comprised of V — potential energy, H — transferred energy, and T — kinetic energy (inertia).

What does this have to do with a possible financial and economic collapse?

The transfer, divisibility and storage of energy is the true essence of money, as I described in a previous article.

Is Money A Deadly Weapon Of War?

It’s a very useful heuristic, because it allows us to approximate any complex system of energy transfer into three categories:

1. Storage (V).

2. Earning - Consumption (H).

3. Production (T).

(Note: I usually organize it as V, H, T initially, because it temporally relates to t-1, t and t+1).

This is called The HVT Risk Assessment Method.

Let’s take for example money:

1. Savings (V).

2. Cash flow (H).

3. Income (T).

Same can be done with economics:

1. Resources (V).

2. Goods (H).

3. Services (T).

Finally, a more pragmatic example:

1. Stored food (V).

2. Harvested - Consumed food (H).

3. Produced food (T).

This gives us a powerful tool to assess risks to our standard of living.

Let’s say there was no food at the grocery store (T). To maintain the same energy consumption rate (H) you’d have to pull from food storage (V) — much like a capacitor would in a circuit. If food storage depletes, then either consumption drops (H) or a new inertia source (T) is required to transfer energy from, which is often “kinetic” in nature.
i.e., Alternative market, hunting, stealing, etc.

The HVT Method provides the logic behind preppers storing food (V), encouraging self-sufficient food production (T) and developing homesteading skills to manage consumption and harvest (H).

This logic extends to any source of energy used to maintain your standard of living.

When services (T) are unavailable, you have to transform your resources (V) and modify the quality of goods you consume (H).

The economy is composed of participants exchanging their specialized units energy for other units of energy. The exchange is made using currency, like the current in an electrical circuit.

If the currency is corrupted, then our task is to restructure our standard of living to become more self-sufficient and self-reliant, and ideally replace the currency with a stable marketable commodity. Historically, that’s silver as currency and gold as reserves. Below are suggestions to consider when thinking about a crisis scenario.

Please do your own research and plan based on your specific situation and needs.

Storage (V):

1. 6 months of finances.

2. 6 months of food and water.

3. Savings in a marketable commodity — e.g., gold, silver, wood, metal, feed, etc.

Production (T):

1. Produce your own food and drinking water locally.

2. Produce your own energy or secure a local source.

3. Produce a marketable commodity or service.

Earnings - Consumption (H):

1. Homesteading skills.

2. Local market.

3. Exchange with neighbours.

Minimize the middle man — or counter party risk — for all H, V, T components.

A hard pill to swallow is that almost everything we learned about money and the economy is misleading or wrong — intentionally. We’re misled to trust banks, government and institutions through the perception of complexity and authority.

The real economic and financial system is very simple.

However — it’ll take hard work from everyone to deconstruct our mental barriers and restructure our lives to become resilient. If you’re reading this, then I’m sure you’re well on your way to making the changes you need.

Remember that the most important asset class is each other.