What You Must Know About Zeros in the Years Ahead

Billionaire investor and American folk hero Warren Buffett’s been lying low.  This is a change from the 2008-09 financial crisis.  Back then he eagerly supplied cash to Goldman Sachs and Bank of America in exchange for high interest rates and warrants.  But not now.

Instead of making deals, Buffett says he’s “…drinking a little more Coca-Cola” to ward off coronavirus.  Yet is that really all he’s doing?  Buffett admirer Bill Ackman doesn’t think so.  Ackman – who’s been aggressively buying stocks – thinks the Oracle of Omaha has a few tricks up his sleeve.  When recently asked:

“Ackman said he suspected his mentor was quietly putting his $125 billion in cash to work buying stocks.  He was keeping a low profile to make sure the stocks stayed cheap while he is buying.  ‘After he invests that $100 billion and change,’ Ackman says, ‘he’ll let everybody know.”’

Maybe so.  And good for Buffett and Ackman.  If they want to put billions of dollars into stocks right now, good on them.

Most people have bigger fish to fry at the moment than buying stocks.  They’ve lost their jobs.  Their constitutional rights have been trampled on by the authorities for their own protection.  Hence, Howard Buffett – Warren’s dad – offers far superior insights into what’s going on…

The elder Buffett, who hasn’t been among the living for over a half-century, was a member of the U.S. House of Representatives in the 1940s and early 1950s.  He was a Republican back when Republicans had principles.  According to Howard Buffett’s wife:

“He considered only one issue when deciding whether or not to vote for a bill: ‘Will this add to, or subtract from, human liberty?”

Money and Freedom

With the exception of Thomas Massie, today’s Representatives failed to consider Howard Buffett’s one issue when they voice voted on the CARES Act.  And only a few bothered when voting on this week’s Interim Economic Stimulus Package.  Thus, with trillions of dollars in government bailouts underway, and the resultant servitude of Americans, we’ll take a moment to consider another Howard Buffett insight.

This insight is fundamental, and almost elementary in nature.  But it is lost on practically all of today’s government officials.  In his 1948 article, Human Freedom Rests on Gold Redeemable Money, Representative Buffett opened as follows:

“Is there a connection between Human Freedom and A Gold Redeemable Money?  At first glance it would seem that money belongs to the world of economics and human freedom to the political sphere.

“But when you recall that one of the first moves by Lenin, Mussolini and Hitler was to outlaw individual ownership of gold, you begin to sense that there may be some connection between money, redeemable in gold, and the rare prize known as human liberty.

“Also, when you find that Lenin declared and demonstrated that a sure way to overturn the existing social order and bring about communism was by printing press paper money, then again you are impressed with the possibility of a relationship between a gold-backed money and human freedom.”

Representative Buffett went on to connect the relationship between money and freedom; that without a redeemable currency, the individual’s freedom to sustain himself or move his property is dependent on the goodwill of politicians.  Buffett also points out that paper money systems always end in collapse and economic chaos.  And that a gold standard restricts government spending and gives people greater power over the public purse.

Since Representative Buffett’s writing, the consequences of irredeemable paper money that he warned about have become increasingly pressing.  Moreover, the CARES Act, and its massive escalation of printing press money, has finally brought us to the critical stage.

At the moment, the pressures of deflation are mounting.  Oil demand has collapsed, taking the price of oil negative.  Many businesses are toast.  Unemployment claims are off the charts, with 26 million in five weeks.  Mortgage delinquencies are piling up like cow pies at a dairy farm.  And hopes for a V-shaped recovery have vanished.

To offset these deflationary pressures the Fed’s emitting vast quantities of printing press money.  The Fed’s balance sheet is rocketing towards $10 trillion by the end of the year.  The objective is to bailout credit markets, bailout businesses, levitate the stock market, pay for unemployment checks, and whatever else, to avoid massive defaults on the U.S. economy.

Helicopter money is also being dropped on consumers.  This is prescription for massive inflation…though the timing is uncertain.

With all this money printing, and in the absence of corresponding production, deflation will at some point give way to inflation.  To understand what’s in store in the years ahead we’ll juxtapose the plight of money over the last 100 years between the U.S. and our neighbors to the south.

Pesos and Dollars

Currencies, both north and south of the Rio Grande, ain’t what they use to be.  Several generations ago they were as reliable as a rooster’s call at dawn.  Now they’re as crooked as a politician’s spine.  We know this not by reading the history books, nor by hearsay, but by the honest, verifiable, silver dollar and silver peso we’re holding in our hands.

One coin, the Peace Dollar, is a United States silver dollar minted in 1921.  At the time of its mint, one coin equaled one dollar and each dollar contained 0.77344 troy ounces of silver.  The other coin, the 1922 Un Peso, is a Mexican silver peso.  At the time of its mint, one coin equaled one peso, and each peso contained 0.3856 troy ounces of silver.

The exchange rate was real simple.  Based on their silver content, two pesos equaled one dollar.  Nowadays, both pesos and dollars are merely paper promissory notes issued by their country’s central banks.  The value of pesos and dollars are derived by their government’s track record of stewardship, the size of their country’s military, and the international currency market’s perception of their government’s ability to make payments on their debt.

Today it takes roughly 24.77 pesos to buy one dollar.  As you can see, the Mexican government has been less upright in managing its currency than the U.S. government has over the last 100 years.  More importantly, when you use silver as the measuring stick, the picture dramatically changes for both dollars and pesos.

It took about $1.29 to buy an ounce of silver in the 1920s, while today it takes about $15.17 to buy an ounce of silver.  This means silver presently costs 1,076-percent more in dollar terms than it did in the 1920s.  In pesos, however, it’s a downright disgrace.  It took 2.58 pesos to buy an ounce of silver in 1922, while today it takes 375.76 pesos to buy an ounce of silver.  Astonishingly, in peso terms, silver now costs 14,464-percent more than it did in the 1920s.

Price inflation in the U.S., while insidious, has been much more subtle than in Mexico.  Yet with the Fed’s present efforts to destroy the dollar to save the economy, there could be a swift transition from subtle price inflation to a more hyper price inflation.

No doubt, the peso will be trashed along with the dollar.  But residents of Mexico have been through this repeatedly since 1980.  Just last week, for example, Fitch downgraded Mexico’s sovereign rating to one notch above junk (i.e. BBB-).

The point is, Mexicans have a better understanding of zeros than Americans do.  Over the next several years, however, it’s likely Americans will come to understand zeros too…as the relentless forces of inflation ravage the economy.

What You Must Know About Zeros in the Years Ahead

The way zeros work when money is being destroyed by governments is the same way mold spores work on wet drywall.  They multiply.  They make an unwanted appearance at the back of all prices.

When visiting relatives in Mexico City we get to experience the proliferation of zeros first hand.  During one visit in 2004 the exchange rate was roughly 10-to-1.  You could buy 10 pesos for $1.  The conversion was real simple…just the way we like it.

We could quickly discern if the peso price was fair in terms of our well established dollar reference point.  For example, if a merchant quoted a price of 10 pesos for a can of Coca-Cola (Warren Buffett’s drink of choice), we could quickly cover up the zero on a 10 peso note with our thumb and recognize the price as being $1; generally the equivalent of what we’d pay in the USA.  And 500 pesos for a nice pair of handcrafted leather shoes was merely $50; a bargain.

This may seem irrelevant, especially with oil prices being negative.  But at some point over the next several years the U.S. economy’s going to become oversaturated with the trillions of dollars of Fed printing press money.  Deflation will give way to inflation.

At first, as prices rise, economists at the government’s statistical bureaus will mistake it for an economic boom and recovery.  By the time it’s clear that price inflation has taken hold, it will be too late to stop.  That’s when Americans will come to understand zeros…as they show up at the back of consumer prices.

Your $3 cup of coffee at Starbucks will cost $30.  The $1 can of Coca-Cola will cost $10.  The $50 pair of shoes will cost $500.  And so on and so forth.

In fact, an inflation rate of 1,000 percent is all it takes to add a single zero to the back all prices.  This may seem extreme, but it’s really not.  When inflation goes hyper, 1,000 percent is actually quite tame.

Hyperinflation in Weimar Germany reached rates of more than 30,000 percent per month in 1923.  Prices doubled every few days.  Zeros were everywhere.  But that’s nothing…

Hyperinflation in Zimbabwe from 2007 to 2009 peaked at 79 billion percent per month – that’s a lot of zeros.  And in Hungary, in 1946, daily inflation exceeded 200 percent.  This equates to an annual inflation rate of over 13 quadrillion percent; prices doubled every 15 hours.  Now that’s too many zeros to count.

And if you’re eager to have your $350,000 mortgage inflated away to a relative $35,000, we caution you to think again.  Over time your burden will be lessened.  But the initial pinch – when consumer prices jump and wage growth lags – will be brutal.

Perhaps if you can make it through the initial squeeze you’ll make out okay.  Though any benefit you garner will be overwhelmed by the chaos and social disorder the inflation wreaks.  For example, that $1 million IRA you saved up over a 40 year career would be quickly reduced to a purchasing power of $100,000.  It would be like a zero was lopped off the back of your life savings.

Indeed, Howard Buffett was right all along.  This is how zeros work when governments conspire to destroy money.


MN Gordon
for Economic Prism

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21 Responses to What You Must Know About Zeros in the Years Ahead

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  18. Alex says:

    Thank you for this article. For me, it is hard to know if we will see inflation or deflation in the near-term. Rents will decrease which will be deflationary, however I am already experiencing (lack of) supply-driven inflation in some areas. For example, food. In prepared food, this seems to be driven by lower demand meaning that take-away outlets are charging a premium for staying open to serve a greatly diminished customer base. Our supermarkets have also increased prices for some items – a mix of supply and demand – for instance delivery prices have increased. Air ticket prices have increased. The cost for all the mechanical and electrical components for my project is rising, driven partly by lack of supply from China and partly by difficulties in logistics from other countries.

    When everyone finally emerges from their homes, and a good portion of the oil supply has been shuttered (some of which will never be able to be restarted), we will most likely see a price shock. This will compound the other supply-driven inflation described above.

    If our governments had any sense, they would be looking for any old shuttered storage facilities, disused salt mines and other potential oil storages and buy, buy, buy so that we don’t see wells shut down and a price shock. Are they doing this? Last I heard, Australia only had two weeks’ fuel in our strategic reserve. Perhaps other countries administrations are smarter? Wishful thinking I reckon.

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