06/19/09 London, England Rarely has The Daily Reckoning been criticized for understating trouble. But trouble keeps getting ahead of us. We can barely keep up with it. So often have we anticipated ‘disaster’ or ‘catastrophe’ that the words now fall like empty shells. We light the fuses; they don’t go off. Alas, we have become alarmists with no bell or siren. We break the glass and pull the lever every week, but no sound is heard…except the familiar words whispered with in a hoarse, weary voice…watch out!
So today we turn to the dead for eyewitness accounts:
Otto Freidrich described the period of German hyperinflation and its effects: “… People carried wages home in huge crates; by the time they could spend even their trillion-mark notes they were practically worthless… There was not a single girl in the entire middle class who could get married without her father paying a dowry… They saved and saved so that they could get married, and so it destroyed the whole idea of remaining chaste until marriage…the girls learned that virginity didn’t matter anymore.”
“Against my will,” wrote author Stefan Zweig “I have witnessed the most terrible defeat of reason and wildest triumph of brutality in the chronicles of history.” Zweig lived through the hyperinflation in Germany during the ’20s and sold stories to survive. Later, he moved to Brazil and blew his brains out.
Brutality triumphed because civilized life was smothered by inflation. The Treaty of Versailles condemned the Huns to pay more than 47,000 tonnes of gold in reparations. Taking that amount of real money out of the economy left the Germans with no choice. They had no money left. They had to create it. Result: hyperinflation. The size of the banknotes rose with the crisis. In 1922, the highest denomination was 50,000 Mark. By 1923, the highest denomination was 100,000,000,000,000 Mark. By December 1923 the exchange rate was 4,200,000,000,000 Marks to 1 US dollar.”
The German middle class was wiped out. More importantly, the handrails and guideposts wobbled, so there was nothing to hold onto and no way to know where you were going. Businesses, banks, military, police, even the government itself – everything tottered and fell down. In the tumult, war-hardened rabble rolled towards Herr Hitler like loose nuts.
“In economics,” begins the Wikipedia description, “ hyperinflation is inflation that is very high or out of control… Hyperinflation is often associated with wars (or their aftermath), economic depressions, and political or social upheavals. In both classical economics and monetarism, it is always the result of the monetary authority irresponsibly borrowing money to pay all its expenses.”
Who’s the biggest borrower today? The United States of America. At 12% of GDP, its deficit is more than twice as large as that of France. It already owes Japan and China as much as Germany owed its former enemies in reparations – adjusted to today’s money. But America’s debts are far grander than those of Germany in 1923 – even relative to the size of the US economy. Where Germany owed a little over $1 trillion; America – if you include private debt, official government debt, off-budget obligations and internal commitments – owes 100 times as much. And the United States keeps borrowing more. In a single year – 2009 – it will borrow $1.3 trillion, again, just shy of the debt that sank the Weimar Republic.
While the private sector during the bubble years brought U.S. debts to a record 3.7 times the entire nation’s output, now it’s the public sector that does the borrowing. The Obama Administration is adding to the accumulated U.S. debt at a suicidal pace – four times faster than the record set just last year. And America’s central bank hands the borrower a loaded pistol; it is adding bank reserves – which allow the money supply to expand geometrically – at a 4,500% rate.
That last number is not a typo. It’s an alarm. If the Federal Reserve were a heart patient, the defibrillators would be on already. If it were a normal bank, it would be closed down immediately.
But neither Karl Helferich nor Ben Bernanke set out to ruin their economies. Central bankers don’t do it intentionally; they do it inevitably. Not because they want to, but because they have to. Like the Germans in the ’20s, America has no politically acceptable way to pay her growing debts – except by printing more money. And now, her leading intellectuals urge her on. Cometh the hour when the feds begin to think about cutting back on their program of inflation, cometh the experts who will tell them to keep at it.
“The crisis seems to be easing, and a chorus of critics is already demanding that the Federal Reserve and the Obama administration abandon their rescue efforts,” writes Nobel winning economist Paul Krugman in the New York Times this week. “Those demands should be ignored. It’s much too soon to give up on policies that have…pulled us a few inches back from the abyss.”
“It’s déjà vu all over again,” he concludes, referring to the Japanese in the ’90s and the Americans in the ’30s. In both cases, he thinks their economies died because they turned off the juice too soon. But people come to think what they must think when they must think it:
“To follow the good counsel of stopping [the inflation machine] would mean… that in a very short time the entire public, factories, mines, railways and post office, national and local government, in short, all national and economic life would be stopped.”
Karl Helferich, Chairman, Central Bank of Germany, 1923.
Déjà vu, all over again. Once more.
Enjoy your weekend,
Bill Bonner
The Daily Reckoning
“Brutality triumphed because civilized life was smothered by inflation. ”
That’s completely misleading. BEFORE Weimar inflation started, the Germans and the Austro-Hungarian empire had engaged in a utterly stupid and deranged war, which the american military joined for the same deranged reasons they always do.
Western civilization took a big hit way before inflation become common. I’m not saying inflation is any good, but militarism is way worse.
Bill, you really should know better. German reparations were not paid in gold, and they did not leave the Germans without gold, nor did they lead to hyperinflation. Reparations were payable in deliveries of commodities, and in reality, as Kindleberger notes, no more than one fourteenth part of reparations were ever paid, and most of what was paid was in the form of credits for lost territories. Kindelberger notes that Germany even asked for a credit against reparations to compensate it for the loss of its battle-fleet. It did not get it.
Hyperinflation was a deliberate German policy to erase its internal, not its external debt. Germany fought the War on credit, the same way it fought its three previous wars of aggression. In the three previous wars, Germany was able to extract its costs from its victims, but it lost in 1914-18, and ended the war owing enormous sums to its own citizens. Hyperinflation erased those debts.
And we should also note that, despite urban legends, hyperinflation did not benefit Hitler. He tried to mount a coup in the twenties during hyperinflation, got no support at all, and ended in jail.
Hitler did not get support from the German people until the Depression started, nearly a decade later, and German unemployment soared.
The version of events you have presented is essentially Nazi pre-war propaganda, and I think that it’s outrageous that a serious blog would uncritically repeat such lies.
I think you should consider editing and correcting this piece.
As we live in a globalised world and all western countries (EU, UK, Japan, Australia and US) have chosen for quantitive easing, shortterm it will be almost impossible to trigger inflation. But if it does, eventually, it will be harsh, global and unstoppable.
But first we have a few years of deflation, no matter how much money is pumped into the market. Clear is that Governments exactly make the same mistakes as the banks: they will go broke – and who will then be there to save THEM???
Down with….Yeah, we know Bush did it you butt plug, country hating LIBDEM. Go push your boyfriends cinamon role hole in.
I agree with everything you’ve said about the pending inflation that we could face except for one thing. In order for inflation to take hold, the vast amounts of money the Fed has printed must reach the economy, the consumer, and the borrowers. However, the banks have been hoarding all the cash they took from the Fed, refusing to lend it, and because of that, this money will not enter the economy. What are the banks doing with this money? They are turning right around and buying short term Treasury bills where it sits, but allows the banks to meet FDIC standards of capitalization. Bottom line, none of this money is circulating in the economy and thus no inflation. As long as this scenario holds, inflation, in my opinion, is still years off.