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Saturday, July 4, 2009

Reading List: The Hyperinflation Survival Guide

Swanson, Gerald. The Hyperinflation Survival Guide. Lake Oswego, OR: Eric Englund, 1989. ISBN 978-0-9741180-1-7.
In the 1980s, Harry E. Figgie, founder of Figgie International, became concerned that the then-unprecedented deficits, national debt, and trade imbalance might lead to recurrence of inflation, eventual spiralling into catastrophic hyperinflation (defined in 1956 by economist Phillip Cagan as a 50% or more average rise in prices per month, equivalent to an annual inflation rate of 12,875% or above). While there are a number of books on how individuals and investors can best protect themselves during an inflationary episode, Figgie found almost no guidance for business owners and managers for strategies to enable their enterprises to survive and make the best of the chaotic situation which hyperinflation creates.

To remedy this lacuna, Figgie assembled a three person team headed by the author, an economist at the University of Arizona, and dispatched them to South America, where on four visits over two years, they interviewed eighty business leaders and managers, bankers, and accounting professionals in Argentina, Bolivia, and Brazil, all of which were in the grip of calamitous inflation at the time, to discover how they managed to survive and cope with the challenge of prices which changed on a daily or even more frequent basis. This short book (or long pamphlet—it's less than 100 pages all-up) is the result.

The inflation which Figgie feared for the 1990s did not come to pass, but the wisdom Swanson and his colleagues collect here is applicable to any epoch of runaway inflation, wherever in the world and whenever it may eventuate. With money creation and debt today surpassing anything in the human experience, and the world's reserve currency being supported only by the willingness of other nations to lend to the United States, one certainly cannot rule out hyperinflation as a possible consequence when all of this paper money works its way through the economy and starts to bid up prices. Consequently, any business owner would be well advised to invest the modest time it takes to read this book and ponder how the advice herein, not based upon academic theorising but rather the actual experience of managers in countries suffering hyperinflation and whose enterprises managed to survive it, could be applied to the circumstances of their own business.

If you didn't live through, or have forgotten, the relatively mild (by these standards) inflation of the 1970s, this book drives home how fundamentally corrupting inflation is. Inflation is, after all, nothing other than the corruption by a national government of the currency it issues, and this corruption sullies everybody who transacts in that currency. Long term business planning goes out the window: “long term” comes to mean a week or two and “short term” today. Sound business practices such as minimising inventory and just in time manufacturing become suicidal when inventory appreciates more rapidly than money placed at interest. Management controls and the chain of command evaporate as purchasing managers must be delegated the authority to make verbal deals on the spot, paid in cash, to obtain the supplies the company needs at prices that won't bankrupt it. If wage and price controls are imposed by the government (as they always are, despite forty centuries of evidence they never work), more and more management resources must be diverted to gaming the system to retain workforce and sell products at a profitable price. Previously mundane areas of the business: purchasing and treasury, become central to the firm's survival, and speculation in raw materials and financial assets may become more profitable than the actual operations of the company. Finally (and the book dances around this a bit without ever saying it quite so baldly as I shall here), there's the flat-out corruption when the only option a business has to keep its doors open and its workers employed may be to buy or sell on the black market, evade wage and price controls by off-the-books transactions, and greasing the skids of government agencies with bulging envelopes of rapidly depreciating currency passed under the table to their functionaries.

Any senior manager, from the owner of a small business to the CEO of a multinational, who deems hyperinflation a possible outcome of the current financial turbulence, would be well advised to read this book. Although published twenty years ago, the pathology of inflation is perennial, and none of the advice is dated in any way. Indeed, as businesses have downsized, outsourced, and become more dependent upon suppliers around the globe, they are increasingly vulnerable to inflation of their home country currency. I'll wager almost every CEO who spends the time to read this book will spend the money to buy copies for all of his direct reports.

When this book was originally published by Figgie International, permission to republish any part or the entire book was granted to anybody as long as the original attribution was retained. If you look around on the Web, you'll find several copies of this book in various formats, none of which I'd consider ideal, but which at least permit you to sample the contents before ordering a print edition.

Posted at July 4, 2009 22:09