"Nevertheless it was the natural reaction of most Germans, or Austrians, or Hungarians - indeed as for any victims of inflation - to assume not so much that their money was falling in value as that the goods which it bought were becoming more expensive in absolute terms"
That's a quote from the book 'When Money Dies', by Adam Fergusson, a British journalist and politician. People who are familiar with the economic history will know that this refers to the hyperinflation in these European countries after their defeat in the First World War. From June 1918 to November 1923, the total inflation in Germany was 9,248,560,000,000 per cent. From its pre-war (1914) exchange rate with the US dollar of about four marks to a dollar, the German mark was reduced to an exchange rate of 4,210,500,000,000 marks to one dollar in November 1923, when it was finally abolished. Of course, the currency had become meaningless by that time, so much so that you can find photographs online of people using currency notes as wallpaper because the notes were essentially just paper. For the few months in 1923 when hyperinflation was at its peak, the German people had reverted to mostly running a barter economy, or to using foreign currency as money. In 1914, you could buy 10 dozen eggs for 1 mark, whereas in 1923 if you wanted to buy 10 dozen eggs, you could pay for them with a pair of winter shoes in good condition.
The basic economic facts about this episode of hyperinflation (which was the first such event) had been known to me for a long time but I had never read anything that presented how people lived through it and what they thought was happening. Hyperinflation seems to be such an esoteric event that people's attitudes towards it didn't really seem important except to a historian. However, this book has been a fascinating revelation. One realises that much of how people reacted to hyperinflation is how they react to normal levels of inflation that we have.
Read the quote above. The key phrase is 'as for any victims of inflation'. When prices started rising in Germany in 1919-20, most people thought that they were getting richer. They had a real asset and its worth in the number of marks was going up, meaning they were getting richer. The idea that the asset was the same but actually the currency was losing value was not easy to comprehend. However, the ferocity of the inflation soon made them realise the reality.
It turns out that in the modern world, the same thing is happening to us, except in slow motion. And slow motion is not a good thing because it keeps so most of us from realising what is actually happening. You bought a piece of land 25 years ago. Now, you feel that your land is worth 40 times as much. However, that's actually not the case. Your land is worth four times as much but the rupee is worth 1/10th as much and that's how this illusion of 40 times is created. Forty times the rupees is not 40 times the value. To see this more vividly, don't measure your land's value in rupees. Instead, measure it in litres of petrol or months of household expense or litres of milk and see how that has changed. Mentally, revert to the barter economy I spoke about above and see what the results are. It's a good exercise in understanding the real impact of inflation on your savings and investments.
This segregation of the 40 times into a four-times rise in the land value and the 10 times decline in the value of the rupee is hard to do instinctively but is in fact the key to making good investment decisions. For example, the safety vs returns dichotomy of so many investments that people make all the time looks very different when you subtract the inflation rate from the investments. Once you do that, you may realise that the safest investments actually do not even manage to completely compensate for the inflation rate. This can be a good lesson in understanding what safety actually is and what real and false returns are.