When a 5,300% gain = a catastrophic loss

Financial commentator Jonathan Hoenig, writing at SmartMoney.com, tells a sad (and recent) tale of how runaway inflation can destroy the value of earnings.

From May through October of 2008, Zimbabwean stocks skyrocketed, shooting from 72,000 to almost 400,000 by early November as measured by the S&P/International Finance Zimbabwe Index. For intrepid investors with a world bent, it would appear to be an attractive return of roughly 5,300%.

The only problem is that, while investors had indeed earned more Zimbabwe dollars, the value of those dollars over the same period had nearly evaporated amid the country's hyperinflation, meaning the "return" was actually a catastrophic loss. One Zimbabwe dollar in May of 2008 had lost 99.99% of its purchasing power by November of that same year. Investors made thousands of percent in stocks and were still wiped out.

Mr. Hoenig then focuses on valuation concerns about the American dollar - both in relation to other currencies and with regard to long-term purchasing power domestically.

I'm as delighted as anybody to see the Dow crossing 10,000 and now up sharply for the year.... [But s]ince March, U.S. investors have earned more and more of an increasingly devalued currency - stocks have risen 60% as the dollar has dropped about 15% [in relation to other major currencies].

That devaluation is a reality born in Washington, D.C., not from speculators on Wall Street, and exactly the reason why gold continues to knock up against all-time-highs. Official estimates are for the U.S. federal debt to reach $23 trillion by 2019, nearly double current levels. By 2011, the debt and will account for 100% of our GDP....

In 1980, the Zimbabwe dollar was actually worth more than the U.S. dollar. What deteriorated over those 29 years wasn't the weather or the water, but the political philosophy. Once known as Africa's breadbasket, [Zimbabwe saw its] government destroy...the currency to the point where even "billionaires" were starving in the street.

The point is that having more dollars isn't the same as having more wealth (emphasis added). As our own government continues to expand the money supply and further intervene in private markets, here's hoping they understand that basic but essential distinction before we [make the same mistakes that] it's too late for Zimbabwe to correct.

Jonathan Hoenig is a managing partner in the interestingly named firm, Capitalistpig Asset Management LLC.

For advice on investing during a time of inflation, read our recent articles Investing with Rising Inflation in View and A Dollar in Danger Leads Many to Gold.

Oh, want to see a $100-trillion(!) dollar bill? Click here (Zimbabwean currency).

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Joseph Slife is a contributing author and editor for SMI. Visit www.soundmindinvesting.com to learn more.