In this two part series, we present this excellent essay by Gloom, Doom and Boom contributor Fred Sheehan. This is what Addison Wiggin called a perfect example of literary economics. Part two follows tomorrow…
The post-World War I German hyperinflation is well known to readers of The Daily Reckoning. (In November 1918, it cost 100 reichsmarks to buy one U.S. dollar; by November 1921, 276 marks per dollar; a year later, 4,456 marks; in August 1923, five million marks; and then the mark shot straight up – or is it down? – and soon passed a billion, then a trillion per dollar by November 1923.)
The concentration of this essay is on the social consequences of inflation, starting with Austria. Ludwig von Mises recalled hearing "the heavy drone of the Austro-Hungarian Bankundefineds printing presses, which were running incessantly, day and night, to produce new bank notes." Manufacturing machinery sat idle other than "the printing presses stamping out notes…were operating at full speed."
"The government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many dollars as it wishes at essentially no cost," said Fed Governor Ben S. Bernanke.
The Austrian inflation ran greater than 50% a month. Von Mises’ wife, Magrit, carried a suitcase containing money for the day, and the 41-year-old president of the Biedermann Bank "became insolvent in 1924, leaving him out of work with a pile of debts." Out of work, he followed a familiar 20th-century pattern and decided to teach. In this case, he taught economics: His name is Joseph Schumpeter.
The Social Consequences of Inflation: Virginity Didn’t Matter
To look at the degradation of Austro-Hungary’s ally, I quote from Before the Deluge: Berlin in the Twenties. Otto Freidrich wrote this journalistic history of the decade, in which the author captures the dismal nature of the times: A journalist believed "the inflation was by far the most important event of the period. It wiped out the savings of the whole middle class, but those are just words. You have to understand what that meant: 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. But what happened from the inflation was that the girls learned that virginity didn’t matter anymore…"
By the way, in 1923, the Reichsbank, in concert with a long line of propagandists from Mirabeau to Greenspan, was miffed at public opinion and denied that the central bank was "responsible for the enormous new burdens of increasing inflation and acute payments difficulties. We expect the Reich government will take care to inform the people and reject these incriminations as unjustified."
Whatever the government response, it mattered little to the people who were so malignantly served by both institutions. For those looking for a money-making opportunity in all this gloom and doom, I transcribe the advice of Alexandra Ritchie, from Faust’s Metropolis: "One could buy a row of elegant houses, or hire the Berlin Philharmonic for the night for a mere $100."
If Fannie Mae had been a German invention, instead of our own Faustian horror, what would that collapse in real estate prices do to its hedge position? Someone should pose the question to Franklin Raines [CEO of Fannie Mae]. Ritchie also identifies all of the common maladies we have seen in the French hyperinflation: "Hard work now seemed to mean nothing; one could only get ahead through crime, black marketing or prostitution: Girls of 12 or 14 prostituted themselves after school with their parents’ approval." To point out the obvious, we have come a long way from the obligatory dowry in a very short period of time. When Berlin blew up, there wasn’t much time to get one’s affairs in order.
As things grew increasingly dire, Berlin threw itself into an orgy…the higher prices rose, the greater the abandon, the madder the nightclubs, the faster the dance steps, the louder the jazz bands, the more plentiful the cocaine…
For outsiders, the city was a thrilling whirlwind of sensual pleasure, but for most Berliners it was a living hell. This sounds like halftime at the Super Bowl.
The Social Consequences of Inflation: Society Destroyed
Freidrich quotes from Alan Bullock’s book, Hitler: A Study in Tyranny: "[The inflation] had the effect, which is the unique quality of economic catastrophe, of reaching down and touching every single member of the community in a way in which no political event can. The savings of the middle classes and working classes were wiped out at a single blow with a ruthlessness which no revolution could ever equal…" Bullock goes on to say that the foundations of German society were not destroyed so much by the war, but by the inflation.
Ritchie revs up the Bernanke Model of 1923: "People carried wages home in huge crates; by the time they could spend even their trillion-mark notes they were practically worthless. Over 300 paper mills and 2,000 printing presses worked on 24-hour shifts to supply the Reichsbank with notes."
Okay, that’s more than enough of Bernanke.
The printing press is not always an enemy of sound money. True, John Law also ran eight printing presses around the clock, but this technology has proved a most satisfactory incubator for conservative finance – when those overzealous machines are destroyed. Most recently, the Kurds in Northern Iraq have used the "Swiss dinar" (called such, after the country where they were printed), of which the last was issued in 1988. The money supply could only grow dirtier and unreadable. In Hussein’s Iraq, the dinar supply grew by 25 times over a decade’s period. The "Swiss dinar" was worth 300 Iraqi government dinars.
And this, in the Kurdish territory with "no government, no central bank, no legal tender and no cash."
The Social Consequences of Inflation: The Fall of Argentina
In anticipation of accusations that the case studies employed are Euro-centric, we head south, to Argentina.
At the turn of the last century, the Argentinean stock exchange was of comparable size to the United States. The railways rolled inland; the cattle and wheat export industries boomed. The real wage of the Argentinean workman was 76% of the British worker in 1864 and 94% in 1913. The place to shop in Buenos Aires was Harrods.
Stephen Schwartz described this world of yesterday in the Atlantic Monthly: "In 1929, Argentina was one of the ten richest countries in the world. [It] was populated by a highly educated middle class. [It] was democratically governed. Its capital, Buenos Aires, boasted the largest opera house and probably the finest publishing firms, newspapers and universities in the Hispanic world. In fact, the only city in the Western Hemisphere that rivaled it for sophistication was New York – and Buenos Aires, with its broad boulevards and Beaux-arts architecture, was grander by far."
To make a long story short, democracy tottered. The coup of 1943 included Juan Peron. Handouts flowed to the people, funded by property confiscated from the malefactors of wealth. (FDR’s phrase. Peron may have liked it.) The average annual inflation rate between 1960 and 1964 was 127%. That’s a lot of inflation.
Like all nations shopping for today with no tomorrow, Argentina has suffered from a dearth of long-term investment. This was ham-handedly expressed by ex-U.S. Secretary of the Treasury Paul O’Neill: "[Argentina has] been off and on in trouble for 70 years or more. They donundefinedt have any export industry to speak of at all. And they like it that way. Nobody forced them to be what they are."
In December 2001, Argentina weaned itself from its dollar peg (to create stability, the Argentinean peso had been set at exactly one U.S. dollar, no matter what local hardship this might cause) by introducing a third currency: the "argentino." With great fanfare, Rodolfo Frigeri, the finance secretary, "said the government would be "prudent" in the way it issued the currency and would stick to austere fiscal policies. Interim president Adolfo Rodriguez Saa said the new currency would be backed by property owned by the Argentine state. undefinedAll the land, real estate, palace houses – the national congress, the presidential palace, all the embassies that Argentina has all over the world – will be the common guarantee of this currency." Oh no, here we go again.
But hark! Hot off the wire – an e-mail from Dr. Steve Sjuggerud, Investment U E-Letter #324, posted from Buenos Aires, March 30, 2004. He finds that from Patagonia to the Intercontinental Hotel, no one will take his dollars. Many Argentineans grew up thinking in U.S. dollars while dumping the peso. This is a country in which currency trading is learned along with basic arithmetic. Argentineans are aware that two years ago, a peso was worth a quarter. And today, it’s closer to 35 cents.
In early April 2004, the Argentinean central bank announced it is now buying up U.S. dollars in the open market, because the peso appreciates at an unwelcome rate.
Oh no, here we go again!
for The Daily Reckoning
August 11, 2004
Editor’s Note: This essay was taken from Marc Faber’s Gloom, Doom and Boom Report
"I can’t believe any human being could eat this breakfast," said Maria.
The family had stopped for breakfast in a Denny’s restaurant in Farmington, New Mexico.
In front of her father was the smoked sausage breakfast. For $5.49, he had two eggs, a large sausage, a mound of hash browns that resembled one of the foothills of the Rockies and a platter of three pancakes so big and fluffy they have been known to be used to catch people jumping out of burning buildings when no safety net was available.
This is very different from what we are used to. In Paris, we eat a croissant with a cup of coffee. That costs us about $7 or $8…and keeps us going until 1:00 p.m. or so.
But here, each time we order breakfast, we get far more than we can eat at a price that seems preposterously low. If the dollar is too high, you can’t tell it by food prices. Or by the price of gasoline. Or just about anything else. Living is cheap out here on the high Plains. Then again, you get what you pay for…more on Farmington below…
With news of the stock market, here‘s Tom…
Tom Dyson, at the Fairmont Hotel…
– We are here in Vancouver for the Supper Club Meeting (followed by the Agora Wealth Symposium). Your editor is at the bar sharing a refreshing beverage with none other than Addison Wiggin.
– Above the bar, emblazoned in large Roman script, is a quote from Louis Pasteur: "Wine is the most healthful and most hygienic of beverages." Not a fellow to argue with wisdom distilled through the ages, Addison suggested we sample the local vintage.
– Your two evil Baltimore-based editors have not crossed paths in over a month due to the rigors of travel. There is plenty to catch up on. We started with the FOMC meeting.
– Yesterday, Greenspan and his Fed henchmen raised interest rates by a quarter point.
– "With underlying inflation still expected to be relatively low, the FOMC believes that policy accommodation can be removed at a pace that is likely to be measured," it said in language analysts have interpreted as implying a string of modest rate rises ahead.
– You see, dear reader, the Fed must maintain the illusion that it can control the economy with the pull of a lever here and a push of a button there. "Six weeks ago," said Addison, explaining the situation to the bartender – a diminutive Frenchmen apparently lost in the B.C. wilderness – "the financial media was dead certain that inflation was imminent and the Fed was going to hike rates quickly. Now, and especially after Fridayundefineds dire payroll gains, they donundefinedt know what to think." And so they wearily turn to Greenspan for guidance.
– And not only do they have to maintain these illusions in the United States, but in Canada, too. "Canadian investors need some soothing words from the Fed," reckons David Parkinson, in the lead business article of Canada’s Globe and Mail. He writes, "A substantial and sudden shift in the Fed’s views could undermine both the Fed’s credibility and the market’s faith in the economic recovery."
– "The Fed will need to choose its words very carefully in its statement," continues Parkinson, "if it wants to strike a balance that wonundefinedt spook investors."
– The Fed must maintain the illusion of controlling the economy, despite what Greenspan himself called, on July 20, a soft patch. Fred Sheehan suggests that this trick is as old as the hills. In an essay in which he discusses the deleterious effects of excessive debt leading up to the French revolution, Mr. Sheehan notes:
"The king [Louis XVI] kept his head on his shoulders until 1792. Mirabeau’s [an architect of the French Revolution] goal was to create a constitutional monarchy, modeled after England. The king’s picture was intended as iconic collateral. The people would be assured he was still there. This is much the same reason that every time Greenspan speaks on any topic, it is front-page news and always accompanied by his picture." [Ed. Note: More from Fred below in today’s guest essay.]
– For their part, the lumpen remain bedazzled by the Great Conjuror. Yesterday, they pushed the Nasdaq up 34 points, or 1.9%. The rally was predictable, asserts your editor, after reaching such an oversold extreme last week. Last Friday night, after the Nasdaq had closed at 1,777, he bet a colleague $50 that the tech index would close higher in one week’s time. The Nasdaq is currently at 1,809, and the bet is looking good.
– The Dow snapped back, too, adding 130 points in a flurry of investor optimism following Greenie’s remarks. It now trades at 9,945. The S&P was also propelled higher; it added 14 to 1,079.
– Like Wall Street, currency traders were expecting the rate rise. The dollar only gained marginally, moving from $1.2275 to $1.2234 versus the euro. Against the Japanese yen, it buys 111.20, up from 110.7 at Tuesday’s open.
– Bonds were the day’s losers. The 10-year U.S. government bond added 4 basis points and now yields 4.29%. Gold shed 40 cents and sits precariously at $400 an ounce.
– All was not lost for your editors either; for his conversational efforts with our affable bartender, Jean-Francois, we received our ration of the healthful beverage…gratuit.
Bill Bonner, back in Farmington…
*** Driving from Santa Fe to Farmington, we passed through some of the most beautiful and dramatic scenery we have ever seen. The road laced through passes, along river valleys, up over the hills and onto the high plains. We passed through green pastures and rich orchards…then through desert-like rock formations…then a forest of ponderosa pines…then the wide open spaces of tumbleweeds and purple sage…and finally it ended in this town of malls and motels, founded by Mormon settlers on their way to somewhere else: Farmington, New Mexico.
After you get beyond 15 minutes of Santa Fe, the cuisine minceur of Santa Fe’s sophisticated restaurants disappears from the menus. Instead, it is replaced by cuisine grosseur…big dishes for big people.
Santa Fe’s million-dollar houses disappear quickly too. Here house prices are reasonable; we see no sign of a consumer spending bubble – except, perhaps, in the huge trucks people drive.
In their place are mobile homes and junky little hovels. New Mexico’s Hispanic population has always been poor. When Georgia O’Keefe and other artists arrived here early in the last century, the poverty of the "Chicanos" was picturesque. Now the people of northern New Mexico are a lot less poor, but a lot less picturesque, too. A crumbling adobe house beckons to an artist; he stops, gets out his watercolors, and before you know it, he has something he can sell in the galleries of Santa Fe. A dented, trashy trailer, on the other hand, calls out for a bulldozer.
Here in Farmington, you can still buy a decent, but by no means attractive, house (we’ve seen no attractive houses since we left Santa Fe) for less than $200,000. What puzzles us is why anyone would want to live in Farmington. Even if they gave the houses away for free, they would be too expensive.
One of the curiosities of life in small-town America is that it can be very pleasant, but it is a comatose kind of comfort. As T.S. Eliot once said of small-town women…"I could have married one of them, but I didn’t like being dead that much." There is no vernacular architecture worth seeing in Farmington. No local cuisine worth eating. No regional wine or alcohol worth getting drunk on. No music, no film, no culture at all that we could detect.
We have not seen so many mobile homes since we left West Virginia. In both places, it is as if people felt the need to balance out the majestic works of nature with ugly works of men. There is no shortage of building stone. The Anasazi, or "ancient ones," built handsome stone walls that no modern stonemason would be embarrassed by. Even after 10 centuries, the walls are still a credit to those who built them. Yet, the modern, enlightened, democratic, ever-improving, getting-rich, credit-card toting, Internet-using, church-going denizens of the Four Corners area live mostly in flimsy boxes that have the grace and style of a can of tuna fish.
Albuquerque was at least lively…booming even. Santa Fe was cultivated and pleasant. But Farmington? If the place had any charm at all, we missed it.
"I don’t see how people can possibly eat so much food. You’d have to be a monster to finish these breakfasts," Maria continued. And yet, sitting all around us were people putting away the French Toast Slam…the Denver Scramble Slam…the meat loverundefineds skillet…and other breakfast extravaganzas as if they did it every day.
"Eating like this is probably going the way of smoking," Elizabeth replied. "First, it will become unfashionable. Then, the government will begin putting up signs and warning people about overeating. And then places like Denny’s will have to alter their menus. And fat people will blame the restaurants and food companies for their bad health. And there will be lawsuits and huge amounts of money earned by trial lawyers such as John Edwards."