Interview with Milos Dedovic, Serbian-American Chamber of Commerce

by David Galland
Casey Research

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David Galland: Okay, we're here in Phoenix with Milos Dedovic, who is with the Serbian-American Chamber of Commerce. Milos is part of our crash panel at the conference, and I thought we'd just find a few minutes and sit down and talk to you a little bit about what you're going to be addressing at the panel, and more importantly, certainly, what it's like living through a major inflation and, for the audience, how bad did the inflation actually get?

Milos Dedovic: If you use a typical classification of a type of hyperinflation of 50% or more in a month, it lasted for a full 24 months. It's one of the longest ever in history; and at its worst in January of 1994, the monthly inflation rate actually rose to 313 million percent – a mind-boggling number.

David: And on a daily basis it was something like 69%.

Milos: The estimate is that it was about 64% on its worst during January of 1994. If you think about that, that means that prices doubled every day and a half.

David: How humans can manage in these situations, in any of these situations is amazing to me. But start at the beginning. When did you first notice that, when did people realize there was something really wrong with the currency?

Milos: Well, the country has a history of high inflation. For as long as I remember, as long as my parents remember, inflation was between 15 and 25% a year. It's high, but during 1991, as the country started to disintegrate, wars erupted, there was a big, big shock – an economic shock, a big shock on fiscal policy. When war started, government needed to finance, government started to print money to cover, because they were in no position to borrow. They were in no position to raise taxes – there's nothing to tax – and that was the period at the end of 1991 and beginning of 1992 when it really started growing all of sudden and crossing the boundary of 50% a month.

David: And so in the beginning you started seeing it going really badly. People start adjusting, obviously. You begin losing confidence in the money, and so as soon as you get the money you rush out to buy things. Were there things to buy at that point? Were people willing to take your money or paper currency that was obviously in the process of dying at exchange for – I don’t know, a motorcycle or –

Milos: What happened was gradually you would find less and less goods to buy for Yugo currency – dinar – less and less, so you would have to go outside of regular stores and buy from the black market. And everything was denominated in German marks, so there were supplies, there were goods, just not in regular stores that would accept the dinars. Of course, it didn't happen overnight. It was becoming gradually worse and worse, and towards the end of it – at the later part of '93 and January '94 – you would find many stores completely empty. Even stores that had something to sell, the managers of those stores would protect their inventories. If they sold it today, even at inflationary rates, by the time they deposit that money with 1.5 days until prices doubled, they lose everything.

David: So what about things like food? You need to buy food. There's a lot of people who need to buy food, but the currency is no good.

Milos: Yes, but food was subsidized. So as an essential, food was subsidized by government and it was also available on open markets.

David: So you didn't have a food problem. Were the farmers forced to sell the food for the dinar?

Milos: No, they were not forced – not that I know of.

David: They still did sell it?

Milos: Well, they did sell, but farmers when they sell food on the open market, the moment they sell they would convert into hard currency, and that was their way of preserving the value of what they get for the product.

David: So, on the hard currency question. If you had diversified ahead of this problem into the Deutschmark or whatever hard currencies, you were okay. You could then take that money and you could probably buy pretty much anything for a very cheap price, is that right?

Milos: Not everything was very cheap. At the same time, sanctions were raised against Yugoslavia, so you couldn't really get everything, even if you had money to buy. So at the same time, a lot of products were – actually most prices were denominated in German marks, so they were riding together with the German mark. Of course, labor in real terms was falling down; and many products did fall down in real terms, but not everything.

David: But I would imagine that typically in these hyperinflations, there are people that are severely disadvantaged – the people who didn't have the hard currency, who didn't have access to a hard currency. If they have a grand piano and it comes down to eating or selling the grand piano, they would be typically willing to sell their grand piano fairly cheaply. Did you see that?

Milos: Absolutely. But what was the demand for grand pianos in a country that's on the poverty line – in a country where the majority of the population was at the border of starvation? At its worst – I can give you an example with my family, why not? My parents were upper-middle class. My father was an engineering and production manager and my mother was a nurse – upper-middle class. Toward the end of the crisis, their combined salaries equaled about $100, provided they were quick enough to get goods for that. Otherwise, the day after it would be about $65.

David: So, did they literally get paid and run to the nearest store?

Milos: Yes. Well –

David: Again, the stores, but if it's in dinars, everyone paid in dinars?

Milos: If you're buying in state-owned stores – and majority of them were at the time – then yes, you would pay in dinars. You just rush and spend the money, spend everything you have in local currency before it loses value. And people who were able to do that more quickly, they fared better. The hardest hit part of society were people who were receiving Social Security checks, people who were already retired – they just couldn't cope with the dynamics of pricing doubling in a day and a half. So what people did – and that's an interesting phenomenon – what people did was also spend money before they even got it, writing checks that didn't have any backing. And if you think about that, that's a very interesting phenomenon, because you write a check without backing, you get goods – what you're essentially doing is creating money, similar to what government was doing.

David: But the checks would be no good and you would write these checks out to the typical store people – they still took checks, or just the government stores?

Milos: Government stores, they had to take checks.

David: They had to take checks.

Milos: They had to take checks.

David: Did they know that you didn't have a balance?

Milos: They wouldn't care because the banks at the time were allowed negative balances. Now, the bank would hit you hard with a few thousand, several thousand percent in interest, but inflation was measured in millions of percent, so if you let it ride you could write checks without backing – you let it ride for two months, you pretty much got everything for free.

David: So you're in January of 1994, inflation is running at 64% a day, and then it stopped.

Milos: Yes.

David: How did it stop?

Milos: Stopped in about a week, believe it or not. What the government did at the time was bring in a very respected economist, Professor Dragoslav Abramovic, who happened to be World Bank's chief economist for Latin America and the Caribbean. He is also their director of developing economics department, and he took the position soon after January of '94. He took the position of governor of the central bank. What he did was essentially introduced a new dinar that was pegged to German mark – but it was made convertible. You could go into a bank and bring your pile of dinars, exchange that for German marks, and it worked. It worked.

David: Where did the central bank get the German marks, because my understanding was that central bank had pretty much emptied out its hard currency years before.

Milos: It was puzzling me for many years; and then I looked into data and this is what happened. As real money holdings were going down and down and down, in January of 1994 M1 supply went all the way to 0.2% of GDP. If you look into the whole country, there was only about $40 million worth of M1 money. You don't need much of currency reserves in order to cover convertibility in such a case. I believe that the Treasury had about $300 million dollars in reserves – a negligible amount, yet given 40 million or so in M1, real money, it is more than enough to cover.

At the same time, he stopped printing money. He found different sources of taxing, primarily on consumption. And very important, he expedited the tax collection system, because in the past – and part of the reason why the government had to print at increasing rate – was that whatever government collected, by the time they got hold of that, it was worthless; and it was a self-perpetuating cycle. He ended all of that. Now, the biggest thing I think over there was the confidence that was built within weeks. Never before you would be able to go into a bank and convert dinars for hard currency. This time you are able to. That built confidence in businesses. They were able to sell goods and preserve value. Government started getting some real revenues for a change, which meant they didn't need to print. Reserves started growing. That was the same cycle that drove the economics down actually helped drive it back.

David: So do you see any parallels between the early days of what went on in Yugoslavia and what's going on today in America?

Milos: That's a good question. Certainly there are some parallels – a growing budget deficit, growing trade deficit, government to some degree losing the ability to borrow money. Obviously all of them were similar. Financing is worse, making the budget deficit even worse – all of these things, accommodating policy. If you think about what government is doing these days, you could classify that as accommodating policy and keeping higher level of employment than it should be. And so obviously, there are some similarities. At the same time, there are many, many differences. The US government can still borrow, so it doesn't have to resort only to printing. If you think about money supply and inflation, it doesn't necessarily happen if you sell bonds; if you borrow from the public to sell bonds to the public, it happens if you print money to cover that indebtedness.

David: Sell it to the Fed, and there has been a number of auctions where the Fed was the only –

Milos: Yes, but that I would call printing, yes.

David: Are you personally taking any actions with your investments or your – in terms of anticipating that perhaps inflation you could see – I mean it's unlikely we're going to get to the same level.

Milos: It is unlikely.

David: It's impossible, but are you taking any measures personally to protect yourself?

Milos: Well, I think stock itself can be a reasonably good hedge against inflation. Prices go up, revenues go up, evaluations go up. It's not 1:1 mapping, of course, but that's something that I am more comfortable with purely for not understanding the economics of precious metals better.

David: There is a theory that Benjamin Graham came up with, which is a good time to invest in stocks is when the economy is doing well, and it's okay up to inflation of about 6%. And then after that stocks get to be a little wiggly, you have to move a bit carefully, but at this point inflation here is probably running a lot higher than the government statistics, one would think, but –

Milos: Official inflation is, I think, under 3%. How much is the real one higher? I doubt it crossed 6%, but it's still in that neighborhood where I think the stocks are a decent hedge. I might be wrong; I might be right. Time will show.

David: All right, well, good. Thank you very much for your time.

Milos: Thank you. I'm glad to be here.

December 2, 2011

David Galland is the managing editor of Casey Research.

Copyright © 2011 Casey Research

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