like money falling from the sky

In 1986 I was living in (then) West Germany as an exchange student. I was lucky enough to get a visa to visit (then) communist East Berlin with my German and American classmates. Exchange rules were very strict, and the amount of money (and type of currency) you were allowed to change were very tightly controlled. I changed a fair amount of Deutschmarks, not knowing how much I would need for a day trip. We had to return to West Berlin each night – presumably for security or because 16-year olds posed a threat to the regime.

mayakovsky moscow

So after paying the equivalent of $1.50 for a massive lunch and buying the few souvenirs we could find (I never did locate any good t-shirts with the logo “I went to a Warsaw Pact country and all I got was this lousy t-shirt”) I was left with a fair pile of change. Because of the currency exchange rules, it couldn’t be changed BACK into West German currency, so as we boarded the train our chaperone came around and told us we’d better not be holding any currency, because we’d get in trouble with the border guards. Since I had already endured one frightening yell-down from the East German guards while crossing back into West Berlin because of my (apparently banned) souvenirs, I decided to comply.

We hurriedly bought Fanta and assorted snacks but still had some change left. We then noticed that there was a throng of people shouting and gesturing at us on the end of the platform, yelling at the train. We noticed a shower of glittering coins flying out of the windows ahead of us. Assuming this was the thing to do, we chucked our coins out the window, too.

This was the first intimation I had, despite East Berlin’s immaculate, clean and very pleasant appearance that communism’s rosy presentation of economic stability might be a false front. Today, it also gives me pause when I reflect on the fate of one of the world’s mightiest, and shortest-lived, empires.

When I first returned from Russia I was invited to give a lecture on the Russian economy at a local university. At the time I was considered somewhat of an “expert” (please take careful note of the quotation marks) on the accounting theory surrounding foreign currency translation – particularly regarding the ruble – and the difficulty in making a true “translation” of Russian accounting information into Western accounting standards. For this class of beginning accounting students, I started with an anecdote: imagine if you walked into your local McDonald’s today and bought a Big Mac for $3. Your salary might be, say, $40,000 per year.

Now imagine you walk into that local McDonald’s a year later and a Big Mac now costs $200, but your company upped your salary to salary has gone up to $2.6 million per year to keep pace with hyperinflation. You can still manage a Big Mac. Two months later your salary is still $2.6 million – the company’s not going to readjust monthly, only annually – but hyperinflation continues apace. Now a Big Mac costs $25,000. It has become an impossible luxury, almost 1% of your gross salary. That’s as if it cost $400 when you were making $40,000 per year. And your savings? Your lifetime savings of $2 million are now barely enough to pay for 80 Big Macs.

Does that sound ridiculous? Yes, but that’s exactly what happened in Russia in the early 90s. Prices changed daily, even hourly. Savings effectively disappeared. With private ownership of land impossible, all net worth other than STUFF disappeared. A good TV was a better investment than a savings account. A freezer could preserve more value than a bank. Banks were offering 100% interest rates or more and it wasn’t a good deal.

That can never happen in America, could it? Chances are it won’t. But if you think about it, the conditions that created hyperinflation are possible in the US. Don’t believe me? Imagine another oil embargo. How much will your food cost if the trucks that deliver it have to pay $12 per gallon for gas? What if a terrorist attack in a US port causes the US borders to be closed? Many of the fruits and vegetables in your local supermarket this time of year are imported from Latin or South America. How much will a tomato cost if the borders close? What happens if major institutions like Citigroup start collapsing? Do you think it’s impossible for the US to attack Mexico to gain access to its oil? I know you are picturing me wearing a tin foil hat, but bear with me.

This is the worst possible case. For the record, I don’t believe it will happen. But then I remember my friends in Russia, who grew up during the last years of the Soviet Union. When they were children the twin cancers of a bloated, inefficient and incompetent central government and a disastrous, expensive foreign war were eating away at the core of their nation. The Soviet Union was a country so powerful in the late 1960s that the United States felt it had to fight wars all over the globe, not to stop but just to slow its spread. The “evil empire” had gone from a backwards agrarian dictatorship to the second-most advanced military and technological power in human history in two generations; there was no reason for the average Soviet citizen to doubt that rate of advancement could last forever. They heard it on the news – calming words from the central government that it could avert a depression. The total collapse of their country in less than a decade caught every single person in the former Soviet Union (and in the world) by surprise. I don’t think even the most optimistic anti-Communist hoped for this in their fevered dreams. Today only the most rabid anti-American would hope for a collapse of the world’s largest economy, but for the first time in my life I think it is imaginable. I hope history will not repeat itself, but that hope has been futile since history began.

When I think of my friends in Russia and their hoarding of US dollars under mattresses and their almost complete and utter distrust of every single financial institution, I also remember that odd sensation in East Berlin in 1986. I remember throwing money out of the window, almost seeing it melt into nothing as it flew through the air. I hope I never see that again, but I particularly hope I never see it in my own country.

(this post was inspired by a comment I left at plonkee money; photo credit by me)

13 comments

  • I remember the fall of the Berlin wall, and the end of communism, it surprises me even now.

    It takes a lot for a country to succumb to hyper inflation and most of the examples I can think of were linked to political and structural instability. It’s unlikely to happen in any stable democratic state, but it’s not impossible. The good news is that hyper-inflation doesn’t last. At the end of the day, money isn’t real it’s a token to exchange for things of value and it’s possible to change the token.

  • Interesting story about the coins. I lived in Russia for several years as well. It amazed me with all the problems that they had with hyperinflation after the fall of the Soviet Union that the communists were not able to take back control. I also am surprised that they stayed as infatuated with the US as long as they did.

    McD’s is a luxury so to speak in such times and some people seem to be able to imagine away the real problems hyperinflation causes by thinking they could go without the hamburger. Imagine milk costing $10 grand a gallon 18 months from now. Also, the government is 4 months late paying your parents social security check and they have no other savings to speak of because it has been wiped out already. So how do you buy your kid’s milk and help out your parents?

    Also, around the same time, the world’s largest pyramid scheme (MMM) was run in Russia so many people who did have money lost much of it there. A friend of mine whose parent’s owned a bank, lost the entire bank in that scandal.

    Russia went through some rough years. It seems to be much better there now — except for the price of housing in Moscow which is outrageous.

  • I suppose you’ve seen this?

  • Funny enough, we were talking about the fall of the Russian empire today – how at the end, they were embroiled in foreign wars, had gone in debt, etc.

  • Interesting post – I knew I had read your “coin” story somewhere else, but I couldn’t figure out where. 🙂

    Mike

  • Hyperinflation is scary…I frequently worry about inflation….with the federal reserve and banks lowering interest…my savings accounts may not be the best place for my savings…

  • There is some serious inflationary concerns in the US economy at the moment. There is some talk that the Fed should stop dropping interest rates and just let the economy bleed itself out to stop the upward pressure of core prices. Scary stuff

  • We don’t have to wait for another attack. We are imploding from within. Our banks are totting tin cups and are going around the world begging for cash, otherwise they’ll go under. Our own massive use of unsustainable debt and credit will be our own demise.

    Excellent post. Thanks for writing it.

  • the same thing happened in Zimbabwe in 2006.

    they kept printing more and more ZDollars which led to hyperinflation.

    check out Ron Paul’s video as he berates Bernanke for pursuing the same “monetary policies”

  • Thanks all, for the comments. There are certainly a million possible scary scenarios out there for how it could go down, and I’m enough of a rosy-colored glasses patriot to think it won’t happen that way here. At the same time, I have a cynical view from my own experience in Russia – as LOD mentions – and from Bubelah’s experience growing up in the waning days of the Soviet Union. Things fall apart rapidly when they start falling apart, sometimes. Americans assume – probably like Soviets, Ottomans, Romans, etc. – that the good times will roll forever. I hope they will but know they won’t…

  • MBB: “There is some serious inflationary concerns in the US economy at the moment.”

    That is why Bernake’s recent comments about pumping money into the system worry me. Sure it boosts the economy but it also increases the money supply causing more inflation.

    The standard salary increase at my work is 4.5% this year, but I recently read that inflation is 6% (only one article so I am not sure if this is correct). Plus, my health care premiums went up by 23%* and my out of pocket expenses went up by $5 for prescriptions and doctor visits.

    Steve, it is impossible to not live in Russia long and it not make you cynical. I also completely agree with your statement: “Americans assume – probably like Soviets, Ottomans, Romans, etc. – that the good times will roll forever. I hope they will but know they won’t…” It always happens.

    * Last year was the first year they offered the plan that I am on and I believe that they had it under priced, so I am not as upset as you might imagine at that increase.

  • I grew up in West Germany in the belief that everything was set and would stay as it is. One of our older teachers, I think he was our sociology teacher, once asked me after classes how I thought about reuunification of Germany. This question seemed absurd to me. The iron curtain had gone up long before I was born and to me chances anything would change that balance of powers seemed so slim that it wasn’t even worth thinking about it. But to the teacher in hins mindset – all this years – it was a temporary situation that he surely felt would at some time change back to a unified Germany.
    That was the early 1980th.

    We all know what happened in the end of the 80th.

    BTW: The same year you were exchange student in Germany I spend a year as exchange student in the US

    Claus
    http://www.wiseclerk.com