The terrifying truth about your future

by Neil Faulkner on 06 November 2009  |  14 comments
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Take steps now to protect yourself from this financial nightmare.

On this day, 6 November, but back in 1972, the Conservative Government ordered a freeze on the economy, due to high inflation.

Businesses were banned from raising prices. Wages, dividends and rent were all capped. This led to large-scale industrial unrest, a three-day working week (caused by power shortages due to strikes) and ultimately the fall of the government.

We could be facing a similar period of high inflation. Here's what you need to do now to protect yourself.

What's wrong with high inflation?

During high inflation, the value of money declines so rapidly that people would rather spend it than save it. Anyone relying on income from their savings during these times will struggle, even if they're swapping savings account every eight weeks. Those with gold, property, or pretty much any asset other than cash do better than those who keep all their money in their current accounts.

High inflation also brings demands for higher pay by workers. This means that those with fixed-rate debts (such as fixed-rate mortgages) will benefit, as the cost of their debt will stay the same but their wages will rise. Those with variable-rate debts (such as mortgage trackers or credit cards) will see the interest rates rise along with their incomes.

Hyperinflation

And that was just high inflation. A more extreme form is hyperinflation. When the inflation rate is being reported on a six-monthly or even a monthly basis, instead of an annual one, you know we're hitting this level.

In this instance, company planning is completely messed up, reducing productivity further, causing shortages, increasing costs (e.g. if they must keep printing new catalogues with fresh prices), leading to further redundancies and those companies with the stickiest prices go bust. Furthermore, amidst the noise of inflation, businesses find it harder to work out what it is that consumers want, and often end up producing the wrong things or the right things in the wrong amounts, causing further shortages of goods.

People's wages rise faster than tax boundaries, causing massive fiscal drag - when people are taxed more for doing the same jobs simply as a result of inflation. A similar effect can happen to capital gains on investments.

To control hyperinflation in the past, in addition to price and pay controls, gold has been confiscated. Perhaps these days the measures will be more subtle, but no doubt just as extreme.

Super-hyperinflation

When inflation gets out of control it becomes hyperinflation, but what happens when hyperinflation gets out of control? It can lead to super-hyperinflation, as seen in Zimbabwe and Germany in the 1920s. This is when the inflation rate is so high, the value of money is halving every 24 hours or so.

This is when wheelbarrows are used to cart around the money, and when no one counts notes any more, they buy their loaves using rolls of bank notes (with lots of zeroes on them) that are weighed versus, say, a couple of bricks.

The streets start to look like Communist-era scenes, with queues two-blocks because people need to spend this morning's pay (they're paid daily now) as they know that by the afternoon it'll buy half as much. In the meantime, businesses are so screwed that they can produce just half what they used to, adding to the panic, the queues and the old ladies fighting in the supermarkets.

Heck! I'm scared....

Don't worry. I'm not saying hyper or super-hyperinflation will happen here in the UK this time round. At the moment we're facing low inflation and even deflation.

However, deflation (or, rather, the measures used by the governments to fight it) often leads to high or hyperinflation. Over the next few years we'll face the highest chance - by quite a long way - of high inflation since the 70s.

What can I do?

The best thing you can do is have a little think about it now so you can react to it quickly if you start reading reports in the papers about the economy or prices heating up. You want to react before you read too many of those reports, as once hyperinflation ignites it may be too late.

There are some simple measures you can take then, which, in my opinion, aren't particularly drastic.

One of these is to stock up on your favourite durable goods (cereals, long-life milk or whatever), perhaps buying a little extra each week till you have three to six months' supply and then keeping those levels steady.

You'll have to leave some savings where you can access it easily, but if you have significant savings, move them. A good place to look is to National Savings & Investments inflation-linked savings bonds.

You can invest. Buying almost anything is better than holding cash. Property is usually good in the long run. Gold and silver will likely be good and maybe a wheelbarrow to cart your stacks of notes to the shops with. (A golden wheelbarrow would probably be the best investment overall!)

I tend to favour shares still. They'll have a very bumpy ride, particularly if they can't change prices quickly, and some companies will fail, but if you have a diverse range of shares, including shares that get a lot of their profits from overseas, over the long-term you should do fine. Shares do particularly well when inflation is still positive but cooling fast from high inflation. A FTSE 100 index tracker will see you investing in lots of shares with foreign profits, and you could also buy a few trackers that invest directly in both foreign developed and emerging markets to spread your risk some more.

Consider how you'll negotiate with your employer over pay or, if you're self-employed, have a think about how you'll re-negotiate your contracts with your customers.

Get help from lovemoney.com

We can help you get some savings now, whilst we're facing low inflation.

First, adopt this goal: Build up an emergency savings pot

Next, watch this video: How to save when you've got no money

And finally, why not have a wander over to Q&A and ask other lovemoney.com members for hints and tips about what worked best for them?

More: The top 18 savings accounts | The five biggest pension scandals

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