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Chris Martenson: Welcome to this Peak Prosperity podcast, I am your host, Chris Martenson. Well, here we are in 2015, the world is now carrying over two hundred trillion dollars in debt. Central banks are busy printing money to bail out a hopelessly off-track system of crony capitalism, and an even larger problem looms in the not too distant future. Namely, money and debt are growing exponentially. But those are just claims against real wealth, which cannot grow exponentially. The world, after all, is finite.

But the lure of an easy fix today has proven entirely too hard to resist for politicians in diverse cultures across all of history. Romans, Germans, Chinese, North, Central and South Americans, and many others have succumbed at one time or another, sometimes repeatedly, to the lure of printing money, with equally terrible and predictable results every time.

But today, you, we, are being asked something extraordinary, which is to believe that this time is different. This time, the central bankers are going to get it right. They will print just enough to encourage growth and stave off deflation without igniting a currency-destroying event. Now, to help us understand where we are in that delicate path with nirvana on one side and currency destruction on the other, and to understand what it’s actually like to live through a hyper inflationary event—which is really just a loss of faith in currency—we have invited Philip Haslam, author of the new book, When Money Destroys Nations, to speak with us.

The book is a fascinating mix of ground level stories of hardship, survival, and skillful maneuvering by ordinary Zimbabweans as their currency imploded, as well as very easy and understandable explanations of the economics and decisions that drove the process.

Welcome Philip, it is really great to have you on our program today.

Philip Haslam: Hi Chris, and greetings to your listeners.

Chris Martenson: Oh, well thanks for that. So you wrote much of the book from the ground level at the experiences of ordinary people in Zimbabwe. Why did you take that approach?

Philip Haslam: I have been interested in monetary economics for the last fifteen years, and have been going around doing presentations on the global banking system and how the economic world works, particularly from a monetary focus.

During one of those presentations, my current coauthor, who was a colleague at the time, said "you know, we have an example of what happened when a country printed money on a large scale in Zimbabwe, right next door to us." I live in South Africa and we had heard a few stories, but nothing really substantial.

He then followed on to say that he believed there are stories that had not been told, that are just waiting to be told, and I thought that was very interesting, and I decided to interview some Zimbabweans that I knew, and the more I interviewed, the more I was gripped.

The stories were fascinating. They keep me up at night. I would just lie in bed thinking about them, you know… "wow. This actually happened right next door to us." Then I decided to go through to Zimbabwe to interview people on the ground, as many people as I could.

At the time, I interviewed seventy-five people in detail, just with the goal to hear their stories, and the book, When Money Destroys Nations, is a combination of that process, trying to document: Wow… this is what happens to ordinary people on the ground as the government begins to print money.

Chris Martenson: Can you share one of these illustrative stories with us?

Philip Haslam: Yes, I think it is good to highlight the high-level perspective of what happened. Then I can share individual stories of people as they endured it.

Money printing began to put pressure on all those companies that produced goods and services and who delivered goods to the market. So it was your retail and your manufacturing sectors who came under a significant pressure.

Obviously, when you print money it is very easy for consumers because you get this newly printed money and they can go and buy real goods and services. But it’s the stores on the other side that actually have to bear the brunt of that newly printed money.

So businesses came under significant pressure, and by 2006 most of the stores began to empty. The fuel stations began to run dry, did not have any fuel, and could not get any fuel. Water ran out, electricity was cut, and so you had this real secession of supply and produced many fascinating economic things if you look at it with an economic hat.

But individuals going through that were under significant pressure. Most people who lived in the cities had based their entire lives around being able to go to stores to buy food and to be able to turn on the tap to get drinkable, potable water. Now suddenly those supply systems were removed and the economy then descended into a barter economy. You couldn’t… it was very difficult to purchase things from the stores and the only way you could get proper goods and services was to find friends who had various goods, and you would bring your goods to your meeting place. Typically, they would meet around social networking places, such as golf clubs and those sorts of things. In the back of the golf club, people would meet and physically barter milk in return for wood, or grain in return for fuel, that sort of thing.

One of the guys I interviewed, his wife did all the sourcing of the food. He was a CEO of a large company in Zimbabwe, and his wife had to leave urgently because her mother fell ill. And so she said "look, just look after the house for a week and I’ll be back hopefully at the end of the week. Can you feed the kids and do all of those things?" And suddenly, he was in a bit of a pickle because he’d go to the shops, couldn’t find anything. Could not get anything. He was not connected into the network as his wife was, so he tried to find some food. Could not get any food, and very quickly his sons consumed whatever there was in the house. He then managed to source through one of his friends, a large kilogram of cheese. So for three days they lived on cheese. And eventually, he got so desperate, he could source fuel through his company, so he got fuel, drove to the border and went and did a huge shop at the border in South Africa, because he just couldn’t get anything. He said it was a remarkable time, and he did not… he had no idea what to do, given that he could not go to the stores to fetch his food.

Chris Martenson: That seems counter intuitive that more money equals less stuff. It happens a lot, but I think for a lot of people they’re going to be wondering what that process is. People who have not lived through that inflation. I am certain that people in Venezuela understand this process at the moment. Why is it that printing money leads to things vanishing from stores?

Philip Haslam: We have to assume a small island economy where you just have a few people on the island and each person specializes in different things and there was a currency being used. If we go and increase the amount of currency that is being used on that island, everyone who did not have that money before now has that money and can go spend freely. When I asked people what would happen if we went and printed money on this island, everyone says, well, that is obvious. Prices would rise.

There is actually an economic process for that. So first of all, people get all this money, they go and they spend the money to buy real goods and services, and businesses that supplied those goods then have to go restock their store. But by the time they restock their stores, prices have risen. So their net margins begin to decrease. And so it puts significant margin pressure on suppliers, manufacturers and store owners in an economy.

And depending on the level, certainly it begins to grow, so that pressure grows, and the margins begin to decrease and people are working harder and harder just to make the same amount of economic value. And the time comes, as the government prints money, and it begins to escalate, that those margins then become negative and stores begin to shut down.

Chris Martenson: So they are taking in a hundred units of money for something they just sold, but by the time they want to restock it, it costs a hundred and ten units of money, and that is just coming straight out of their bottom line. So really, it is a time problem. The inflation is going faster than your ability to run as a business, something like that. And that’s why we see … it’s really just pure economics, right? The stores are basically… the longer they do it, the more money they lose. They are making it down in volume, as it were.

Philip Haslam: Yes, I mean, there is this idea, hey we can go print money and give it to people and they can go spend it and everything is okay. But the reality is there is no economic value being created when money gets printed. So the benefit that consumers have is the cost to producers. Unfortunately, all of our economic numbers that you see by—measures and metrics that economists use to measure an economy and economic growth and all those things, those are all focused on consumption. Very, very little emphasis on real production. So, you can go print money and cause your consumption numbers to increase and everyone’s happy. But on the other side, it’s the suppliers and producers that actually are taking the pain.

Chris Martenson: Now this is a really important point, one that we’ve covered a lot at Peak Prosperity, particularly most recently I’ve covered it a lot around Japan. So Japan is busy printing money and they’re doing it specifically to drive the value of the Yen down. And they want to do this so that their exporters get this boost. And they’ve gotten this big boost. You have your Sony’s, Toyotas… they have had this big boost, but this is the thing that is missing from money for most people’s understanding of money: Money is not a real thing; it is a concept. And so, because it’s not a real thing, you can’t create purchasing power out of thin air. So when you print money and you transfer, in Japan’s case, benefit to producers or exporters, or in another case like Zimbabwe, where you transfer this benefit to consumers, from an accounting identity standpoint, one person’s gain is another person’s loss. All you’re doing when you print money is you’re just transferring purchasing power from point A to point B; you’re picking winners and losers in this story. Is that how it plays out? There is always a set of winners and losers?

Philip Haslam: Absolutely, we… in my book Money Destroys Nations, we have tried to highlight that and to show the winners and the losers. But as an economy begins to descend into hyperinflation, there are very, very few winners. The only winners are those that export into foreign currencies. But those who rely on local supply are hampered, so both consumers and producers locally. It really is an alternative path that a country can go to when faced with major debt. So as debts become due, a government can allow its country to default and to experience the pain of a significant contraction, and what some people would call deflation, et cetera. Or they have an alternative to print money on a large scale to pay off their debts. Then that manifests in quite a different set of economic processes, and yet it really is just a manifestation of debt default, but in the process, also collapsing of the currency.

Chris Martenson: I see, so let’s review this then with Zimbabwe. What errors did the central bank of Zimbabwe make, and how did those decisions get made? I am going to guess that there was some debt involved somewhere in this story for them.

Philip Haslam: Absolutely. Hyperinflations are always driven by debt and deficit spending, and it was no different in Zimbabwe’s case. By 1997, the country had been consuming significantly in debt, and they were in the process of facilitating a further credit line with the World Bank, who was getting a hundred million dollar facility for them. At the time, they decided to declare a pension payout for war veterans. And they also sent a whole lot of troops to the Democratic Republic of Congo, and those are expensive things, and the world bank was concerned about the Zimbabwe government’s ability to repay.

And I think there was also a significant amount of relational breakdown that actually happened at that time. But the net result was that in 1997 there was a credit crisis. All lenders withdrew their funding, and the government then decided to continue its spending on a daily basis, but funding this with newly printed money.

That started in 1997 and it took eleven years to work its way through the system and to result in the final collapse of the Zimbabwe dollar as a currency.

Chris Martenson: What was Zimbabwe like before all this began as a country. I mean, from the outside, after the hyperinflation people look at it as sort of a basket case, but it was actually a bread basket, wasn’t it?

Philip Haslam: Yes, Zimbabwe was one of the most prosperous countries in Africa at the time. They had a significant agricultural sector that exported a lot of produce to Europe and to the rest of Africa. They have, even currently to this day, significant mineral wealth, and a very developed mining sector. Their banking system was very developed, one of the most developed in Africa. It was a fiat currency system very similar to the currency systems that you see today in America, Europe, Japan, et cetera. And it was very developed. Very developed supply chains, cities had developed around good, healthy infrastructure, good dams and electricity, and access to basic services for most people. It was like how you would see most countries around the world today, although they had a slightly lower bank rate, probably in the region of sixty to eighty percent of people had bank accounts.

Chris Martenson: That is actually quite high by some standards. So, what… back to the errors then, so there’s some debt, there’s a need to accommodate this debt. Theoretically, they should have had decent external reserves with all that exporting. But the head of the Zimbabwe Central Bank at the time, that was Gideon Gono? Was that the character?

Philip Haslam: Yes, Gideon Gono was the reserve bank governor that was head of the reserve bank during the time of the hyperinflation. So from 2003 onwards to the end, he was the guy that facilitated the vast majority of money printing.

Chris Martenson: I saw some headlines where he basically said, "hey, I just was doing what you guys were doing. I just was first." So he's actually casting himself as something of a trailblazer when compared to the European Central Bank, or the Federal Reserve.

Philip Haslam: Yes, he stated on numerous occasions, "look, we are justified in the money printing that we did over these years because we lived the process." If you look in Japan and Europe and America, they are all doing exactly what Zimbabwe did in the late nineties, early two thousands. And he obviously would blame hyperinflation on other things, particularly he said foreign powers were the influences to hyperinflation. But far from being ashamed of what happened, he is proud of it, and openly comparing Zimbabwe to the other countries of the world.

Chris Martenson: Well that is… good luck with that career rewrite for him. But the serious part of this is: Is he right in any respect that there are parallels that are in any way comparable or reasonable between what Zimbabwe did and what Japan, the United States or Europe is doing?

Philip Haslam: There are significant parallels. Zimbabwe responded to its debt crisis with money printing. There have been fifty-two hyperinflations in the last hundred years. The standard process that leads a country to hyperinflation is that a government will consume a debt and everyone is happy while that happens. It’s great, a whole lot of vested interest groups are encouraging…" the government should spend on this, and government should spend on that." And a time comes when debt limits get reached. Creditors become weary and they pull their funding. It is the same thing that happened in Zimbabwe; it is what you see happening around the world. We are seeing debt, decreased liquidity, decreased incentive for lenders to lend, and governments, just like Zimbabwe, are responding to that by printing money to repay their debts and to continue funding their day-to-day expenses.

Chris Martenson: They have been getting away with it… I mean the scale of printing in Japan for example, utterly dwarfs anything that Zimbabwe tried. Yet Japan seems to be mired in anything but hyperinflation. How do we begin to account for the differences?

Philip Haslam: I think there are a couple of things. The first and most significant would be that money printing takes time to work its way through the system. In Zimbabwe, what happened is very similar to how it is working around the world. They printed money and initially fed it to pay off government debt, but fed it through the banking system. So the banks were the first recipients of the newly printed money.

In fact, by 2003, they were receiving newly printed money on a daily basis. That actually physically would go to the reserve bank and receive large suitcases of newly printed money. They initially sat on that money because they wanted to use it for the reserves, and they were worried about risks associated with banking, et cetera. And a time came when, as inflation began to grow, they began to realize, "hang on a second. We are sitting on all this cash, and it is all unproductive cash." And so there was a fair amount of money printing happening and it was all going into the banking system, and was being absorbed, and then a time came when that money was then released into society as banks tried to get rid of it.

Banks began to speculate heavily, and move away from their fundamental role of facilitating deposits to speculating in markets. So I think, if you’re looking at Japan and some of the other countries that are printing money, first of all, you see a lot of money going into the banking system and staying there.

Second thing is that it’s not only staying there, banks are certainly speculating significantly in property markets, in stock markets, and particularly in debt markets. And you see the asset price inflation and everyone doesn’t include that in their inflation figures, and won’t include that in their inflation figures because that would certainly skew the inflation statistics. When you see the asset price inflation and what you typically have is this rise in asset prices that facilitates a bubble. And a time comes when that bubble is burst, and then you need more increased rounds of money printing.

What we’re seeing at the moment in current world economies is vast amounts of asset speculation and increased bubbles fueled by debt and money printing. And that’s just one step in the process. If we were to take the longer-term view, we certainly would not be as confident in the process.

Chris Martenson: Then the process is sort of a stylized or extractable process that we can compare? Like here are the steps Zimbabwe took, here is how it ended. It took them eleven years there. Note that… Zimbabwe being… I think it is easier to note an inflation or hyperinflation within a single country where you have borders because then the currency can be in relation to something. But here’s my question: Is it possible for all currencies to die at once? How would that happen? So when you have the Yen, the Euro, and the Dollar all being printed like mad, how do we keep track of the process?

Philip Haslam: That is obviously the critical question that everyone has. "Tell me, when is this going to happen and what are the key statistics that we should be looking at?"

I think it is important to get away from quantitative measures. Everyone is like, "what is the key amount of debt that a country goes into that will lead it into hyperinflation when they start printing money?" And they _____ [00:25:33] key figures.

They are much more qualitative aspects of the economics that lead us into this. So we have taken Zimbabwe as a case study, and we have developed six what we call gorge moments. You know like in South Africa there is a river called Suicide Gorge where you can jump off from the top of the waterfalls, and you jump off each waterfall and you can go down. But the problem is once you jump off each waterfall, you can’t get back up again. so we’ve used this analogy to describe the process of hyperinflation.

So typically what you get is, as a government prints money, you get levels of inflation. But that’s inflation based on historic money printing. Every year, when you get your salary increase, you base it on historic processes. You take the latest consumer price index, you then build it into your wage increases. If you are a business owner, you will build it into rent increases and the increases of your products, but it is all based on historic inflation.

A time comes, when people… it is a cultural shift when people begin to say "hang on a second, I have got my increase based on historic inflation, but as soon as I got my increase, I am beginning to lose purchasing power and I am getting poorer and poorer. Stop giving me increases based on last year, and give me increases based on next year." So the inflation becomes based on a future money printing, rather than historic money printing. So that is what we call our first gorge moment.

That leads very quickly then into our second gorge moment, which is where the rate of price increases actually outstrips the amount of money in the economy and you get money shortages. The weird thing is that money printing—this scenario leads to money shortages. In 2003, the economy in Zimbabwe experiences fierce money shortages. You have massive queues at the banks, real shortages, everyone trying to take their money out of the banking system, and it became a real problem as people began to distrust the banks more and more because they actually wanted to hold their money directly, concerned that the banks actually did not have it. So that was gorge moment two where money printing led to money shortages.

Gorge moment three was when that pressure began to work its way into the real economy and margins began to decrease to the point where stores began to close. That is a real cultural shift. Before, stores were open, goods were expensive, prices were increasing, but you could still get food and you could still get goods and services. But at gorge moment three, the formal supply sector shuts down.

Gorge moment four was when the banking system generally began to stop lending. If you are lending money to someone and a day later, that money you lent someone has lost value, you are no longer wanting to make loans. You are going to use that money to go speculating and buy things that will hold value. So gorge moment four was very close to gorge moment three. Stores closed and credit dried up. People stopped lending. By that stage, they developed this curious consumption hysteria that we call "scorched money." People tried to take their money and get rid of it as fast as they could because if you held money, it was going to lose value by the next day and you could buy less and less. Everyone realized "if I want to hold money, I would actually rather buy something and get anything, milk, a game of golf with friends. I'll do anything to get rid of the money and find something that would at least give some value of some sort." And it’s a crazy, consumption hysteria where everyone’s buying everything. There is huge amount of demand, but in reality, production has stopped and you have this entire consumption of the economy and all goods and services get consumed.

So that’s the fifth gorge moment that finally leads to the sixth gorge moment which is the death of the currency, and final collapse of the money based system. Obviously, the last two, or the last four gorge moments would be typically experienced in hyperinflation. But all six are moments of cultural changes that lead an economy into currency collapse.

Chris Martenson: If we look at Venezuela today, let’s think… they are at least at gorge moment three, probably four at this point. I am not clear on what is happening with bank lending down there. But it certainly seems like they’re close. And so you would say that given where Venezuela is in this sequence, they are going to go to gorge moment six, which is death of their currency.

Philip Haslam: Well, their currently moving into the scorched money phase where people are trying to get rid of the currency as fast as they can, and as you said, they’ve been through the moment where it’s difficult to get goods from stores. Stores have emptied and there are significant queues and they are going through a significant credit crisis as we speak in terms of the ability to access capital and get loans—very difficult at the moment. They are not quite at the stage of entering the true hyperinflationary price increases, but they are certainly on their way.

Chris Martenson: Wow, interesting. Let’s imagine that you were in Zimbabwe, or you’re in Venezuela now, or you’re somewhere else where this hasn’t started and you can see that it’s going to start. How do you protect yourself in these… is there anything you can do? And here’s… let me tell you that some of our framing at Peak Prosperity is that these always get sold to the retail level. People are out there at middle class and down, this will be sold as like an act of God that happened, and it just happened to destroy a lot of wealth, and gosh, isn’t that terrible. When the truth is, if you watch carefully, wealth gets transferred extraordinarily from party A to party B, and that when the dust settles, often you find that the ownership structure of the country has changed a lot. Sometimes not all that surprisingly, but generally it changes quite a bit because some people saw it coming and managed to hold on to their wealth. The apocryphal story about the bellhop in Weimar, Germany buying the hotel he worked at for a gold coin or something like that. That people who had the wherewithal to see this coming, some of them actually do relatively well. I will put it that way. Is that accurate? And if it is, how would people… how would you counsel somebody in 1997 Zimbabwe what they should do?

Philip Haslam: It is a very good question and it is a question I get a lot. People say "okay, okay, I am concerned that there may be a risk of hyperinflation, just tell me where to invest. Tell me what must I do with my money and I will do this." But it’s not as easy to answer. There certainly are many stories of people that I interviewed who could see that hyperinflation was coming and they positioned themselves in such a way to do quite well, and they were very profitable.

But the first thing I would say to people is you need to educate yourself around how does printing the money effect you personally? The reality is that we all engage with prices on a day-to-day basis. Everything we do engages with prices. When we purchase fuel, you pay for the prices. When you have your salary pay, it is a price. When you pay rent, it is a price. And you need to ask yourself, "well, how exposed am I to significant price increases?" And obviously, everyone is exposed in various ways, but the reality is this matter is very personal. You are exposed in very intimate ways.

I will give you a practical example. When the stores emptied in Zimbabwe, one of the ladies I interviewed said she couldn’t get hold of any sanitary products. There were no tampons, and so she had to actually connect to her relational network to source these things when she needed them. She said it was a very vulnerable time. So the first thing to learn then is that those who are relationally connected to key sources of supply do very well. If you’re concerned that your country is going into hyperinflation and you are committed to staying in your country, then the best thing you can do is to develop relationships with people who can supply you with goods.

Where would you get fuel if you could not buy fuel? A lot of people say, well maybe we should go and invest in a whole lot of fuel. Well, that is fine, but what happens when your fuel runs out after two months, three months? Maybe you can survive off it for a year, but what happens once you have done that? So developing key relational supplies is very important.

The second thing would be to invest in hard assets. Invest in— it is a changing of the _____ [00:36:03] of thinking, to invest in asset-based investments rather than income-based investments. All income-based investments lost their value. Pensioners who invested in bonds expecting a regular rate of return, that invested in all forms of pension products, lost everything. Pensioners throughout Zimbabwe became significantly impoverished. They based the investments on income producing assets, which lost their value in…

Chris Martenson: I heard that the stock market—theoretically you should have been completely happy, because from '97 to 2008 or somewhere in that zone, I think it went up six hundred thousand percent. Who wouldn’t like that, you know. But I guess inflation went up fifteen million percent, or some other number that just totally made that six hundred thousand percent a complete loss almost.

Philip Haslam: Correct, yes. I have spoken to countless numbers of pensioners and it is tragic. Their stories are tragic. Some of them were enticed. Bank lending rates went up a thousand percent. So you could invest your money and get an eight thousand percent return, and yet it was a trick, because you… the pensioners who did that, and people who invested in the deposits at banks, ultimately lost the purchasing power of the money.
 

That is part of why educating yourself in what happens in hyperinflation is important because all your standard metrics that you use to gage day-to-day life change, and you need to understand, "well hang on a second, this is what actually happens in hyperinflationary society. This is how governments respond fairly standard across the board. This is how the supply chain changes and morphs and this is how I can actually profit from it." We look at this as both a risk aspect and a profitability aspect. There’s opportunity embedded in the money printing, and yet it all flows out of understanding how the system, how hyperinflation works, and being able to position yourself from being able to profit from it.

Chris Martenson: Absolutely, it is just a game, the rules change in the game. Some people figure out the rule changes earlier than others, but boy, it’s hard to keep your bearings when everything you’ve been conditioned for includes things like faith in the system, faith in authority, investments that are going up, "I must be doing well.&q