Premises: St. Louis Fed stats show that Fed has more than doubled the monetary base (high powered money) since October 2008. The reason there is no money in circulation (M1, M2, M3) is because (a) Fed is bribing banks to keep money on deposit with the Fed by paying interest on “excess reserves”; and (b) banks’ balance sheets are now bogus with changes in FASB 175 “mark to market” rule–banks are afraid to lend when they know that they have a bunch of falsely reported bad loans already on their books. Banks are stuffed to the gills with newly printed cash but are afraid to lend and the Fed continues to provide disincentives to lending.
Once the Fed changes its policy (e.g. by charging rent on excess reserves rather than paying interest), banks start lending and the money hits the streets, watch out. Interest rates and prices will rise, perhaps rapidly. Here is what biz can do about it:
1. Treat cash like a hot potato–get rid of it quickly, preferably to someone who is hungry and loves potatoes, and in exchange try to get something that has utility in your business and will hold value (inventory, equipment, or employee good will).
2. Note that depreciating currency will do serious damage to your traditional balance sheet and there is little you can do about it. Consider keeping two sets of books. In particular, depreciation expense (mandated by government schedules) will be understated. For example, you buy $1 million in new equipment and deduct it immediately with your 179 deduction or you depreciate the same equipment over 5 years. At the end of 5 years, the cost of replacing that equipment may be $5 million and your balance sheet depreciation will not catch the lost $4 million. The only way I see around this is to do what I know some of you are doing personally–dollar cost average with gold, silver, etc–or do the same thing with other commodities that are more closely related to your biz.
3. Anticipate future government wage and price controls and work around them. If you obey the letter of the controls, you will have pissed off employees who will be tempted to steal, etc. to stay even. Smart employers in Latin American currency crisis countries avoided the controls by paying bonuses, firing/rehiring, changing employees’ titles, etc. For price controls, smart sellers work around those too. Bolivia put price freeze on the sale of new equipment. Smart heavy equipment manufacturer took new front loader of the line, drove it around the yard, picked up some dirt and sold it as “used” for twice the price allowed for new equipment. Gentle as the lamb, clever as the serpent.
4. Right now start shrinking any AP periods and do not offer discounts if paid “net 30.” When the new cash starts coming through the pipeline, consider adding a charge to your invoices. Rather than call it “interest” (gov probably will not allow this), call it what it really is–a currency depreciation charge. You can either pick a number based on your best guess (unwise) or try to hook it to some objective standard. I invented a little gold/silver/oil index where in 2008 $1000 = .33 oz. of gold + 21 oz. of silver + 4.25 barrels of Brent crude. Based on this index, the dollar has lost 45 percent of it purchasing power in 2 years. So if you invoice on terms, your invoice could say something like, full amount due within 15 days, if not received within 15 days, customer will pay the greater of: (1) invoice plus X percent per month currency deprecation charge; or (2) invoice amount indexed based on the above currency depreciation formula. To survive a currency crisis you must be able to keep pace with rapidly declining purchasing power and not be caught with cold potatoes in your hands.