The Weimar Hyperinflation? Could it Happen Again?

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The Weimar Hyperinflation? Could it Happen Again?

Folks, I found this to be an excellent and extremely informative read. I thought I would share it here.

The Weimar Hyperinflation? Could it Happen Again?

 

“It was horrible. Horrible! Like lightning it struck. No one was prepared. The shelves in the grocery stores were empty. You could buy nothing with your paper money.” – Harvard University law professor Friedrich Kessler on the Weimar Republic hyperinflation (1993 interview)

Some worried commentators are predicting a massive hyperinflation of the sort suffered by Weimar Germany in 1923, when a wheelbarrow full of paper money could barely buy a loaf of bread. An April 29 editorial in the San Francisco Examiner warned:

“With an unprecedented deficit that’s approaching $2 trillion, [the President’s 2010] budget proposal is a surefire prescription for hyperinflation. So every senator and representative who votes for this monster $3.6 trillion budget will be endorsing a spending spree that could very well turn America into the next Weimar Republic.”1

In an investment newsletter called Money Morning on April 9, Martin Hutchinson pointed to disturbing parallels between current government monetary policy and Weimar Germany’s, when 50% of government spending was being funded by seigniorage – merely printing money.2 However, there is something puzzling in his data. He indicates that the British government is already funding more of its budget by seigniorage than Weimar Germany did at the height of its massive hyperinflation; yet the pound is still holding its own, under circumstances said to have caused the complete destruction of the German mark. Something else must have been responsible for the mark’s collapse besides mere money-printing to meet the government’s budget, but what? And are we threatened by the same risk today? Let’s take a closer look at the data.

History Repeats Itself – or Does It?

In his well-researched article, Hutchinson notes that Weimar Germany had been suffering from inflation ever since World War I; but it was in the two year period between 1921 and 1923 that the true “Weimar hyperinflation” occurred. By the time it had ended in November 1923, the mark was worth only one-trillionth of what it had been worth back in 1914. Hutchinson goes on:

“The current policy mix reflects those of Germany during the period between 1919 and 1923. The Weimar government was unwilling to raise taxes to fund post-war reconstruction and war-reparations payments, and so it ran large budget deficits. It kept interest rates far below inflation, expanding money supply rapidly and raising 50% of government spending through seigniorage (printing money and living off the profits from issuing it). . . .

“The really chilling parallel is that the United States, Britain and Japan have now taken to funding their budget deficits through seigniorage. In the United States, the Fed is buying $300 billion worth of U.S. Treasury bonds (T-bonds) over a six-month period, a rate of $600 billion per annum, 15% of federal spending of $4 trillion. In Britain, the Bank of England (BOE) is buying 75 billion pounds of gilts [the British equivalent of U.S. Treasury bonds] over three months. That’s 300 billion pounds per annum, 65% of British government spending of 454 billion pounds. Thus, while the United States is approaching Weimar German policy (50% of spending) quite rapidly, Britain has already overtaken it!”

And that is where the data gets confusing. If Britain is already meeting a larger percentage of its budget deficit by seigniorage than Germany did at the height of its hyperinflation, why is the pound now worth about as much on foreign exchange markets as it was nine years ago, under circumstances said to have driven the mark to a trillionth of its former value in the same period, and most of this in only two years? Meanwhile, the U.S. dollar has actually gotten stronger relative to other currencies since the policy was begun last year of massive “quantitative easing” (today’s euphemism for seigniorage).3 Central banks rather than governments are now doing the printing, but the effect on the money supply should be the same as in the government money-printing schemes of old. The government debt bought by the central banks is never actually paid off but is just rolled over from year to year; and once the new money is in the money supply, it stays there, diluting the value of the currency. So why haven’t our currencies already collapsed to a trillionth of their former value, as happened in Weimar Germany? Indeed, if it were a simple question of supply and demand, a government would have to print a trillion times its earlier money supply to drop its currency by a factor of a trillion; and even the German government isn’t charged with having done that. Something else must have been going on in the Weimar Republic, but what?

Schacht Lets the Cat Out of the Bag

Light is thrown on this mystery by the later writings of Hjalmar Schacht, the currency commissioner for the Weimar Republic. The facts are explored at length in The Lost Science of Money by Stephen Zarlenga, who writes that in Schacht’s 1967 book The Magic of Money, he “let the cat out of the bag, writing in German, with some truly remarkable admissions that shatter the ‘accepted wisdom’ the financial community has promulgated on the German hyperinflation.” What actually drove the wartime inflation into hyperinflation, said Schacht, was speculation by foreign investors, who would bet on the mark’s decreasing value by selling it short.

Short selling is a technique used by investors to try to profit from an asset’s falling price. It involves borrowing the asset and selling it, with the understanding that the asset must later be bought back and returned to the original owner. The speculator is gambling that the price will have dropped in the meantime and he can pocket the difference. Short selling of the German mark was made possible because private banks made massive amounts of currency available for borrowing, marks that were created on demand and lent to investors, returning a profitable interest to the banks.

At first, the speculation was fed by the Reichsbank (the German central bank), which had recently been privatized. But when the Reichsbank could no longer keep up with the voracious demand for marks, other private banks were allowed to create them out of nothing and lend them at interest as well.4

 

...read the rest here...

www.globalresearch.ca/PrintArticle.php

Morpheus's picture
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Re: The Weimar Hyperinflation? Could it Happen Again?

About the author.

Ellen Brown developed her research skills as an attorney practicing civil litigation in Los Angeles. In Web of Debt, her latest book, she turns those skills to an analysis of the Federal Reserve and “the money trust.” She shows how this private cartel has usurped the power to create money from the people themselves, and how we the people can get it back. Her earlier books focused on the pharmaceutical cartel that gets its power from “the money trust.” Her eleven books include Forbidden Medicine, Nature’s Pharmacy (co-authored with Dr. Lynne Walker), and The Key to Ultimate Health (co-authored with Dr. Richard Hansen). Her websites are www.webofdebt.com and www.ellenbrown.com.

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Re: The Weimar Hyperinflation? Could it Happen Again?

The only way we will have hyper inflation is if the banks raise the interest rates through the roof, and continue to borrow money to the people.

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Re: The Weimar Hyperinflation? Could it Happen Again?

Fascinating read, Pete. Thanks for posting.

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Re: The Weimar Hyperinflation? Could it Happen Again?

This from another forum I read.  Interesting read as well.

http://www.usagold.com/germannightmare.html

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Re: The Weimar Hyperinflation? Could it Happen Again?

The deal is that we do not have a free-market economy. The Fed controls it.

I recently read that in Zimbabwe bank interest rates soared to 800% when hyperinflation hit that country.

But with the Fed dictating interest rates, I don't really see how hyperinflation could occur in the U.S. Wouldn't they just lower them?

 

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Re: The Weimar Hyperinflation? Could it Happen Again?
jerrydon10 wrote:

The deal is that we do not have a free-market economy. The Fed controls it.

I recently read that in Zimbabwe bank interest rates soared to 800% when hyperinflation hit that country.

But with the Fed dictating interest rates, I don't really see how hyperinflation could occur in the U.S. Wouldn't they just lower them?

 

I've always understood inflation (and hyperinflation) as too much money chasing too few goods. If all the trillions of dollars being created by the Fed start chasing the relatively limited goods available to us, would that not cause inflation (and hyperinflation)?

I know that if I suddenly got my hand on hundreds of thousands of dollars from the Fed, I would certainly be looking to exchange them as rapidly as possible for hard goods - be it food, gold, silver, land, etc.

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Re: The Weimar Hyperinflation? Could it Happen Again?
Quote:

The deal is that we do not have a free-market economy. The Fed controls it.

I recently read that in Zimbabwe bank interest rates soared to 800% when hyperinflation hit that country.

But with the Fed dictating interest rates, I don't really see how hyperinflation could occur in the U.S. Wouldn't they just lower them?

The only price the Fed can fix is the rate of interest it charges member banks.  Other prices are determined by the balance of money supply vs. goods/services (i.e., the  "free-market" as it exists on top of a centrally-controlled money supply system).  If the Fed injects trillions of dollars into the economy, prices will go up.  Getting them to go down is not a matter of flipping a swicth.  They can only force member banks to raise reserve requirements, sell treasury bonds to soak up excess liquidity, or wait for the supply of goods/services to catch up with the newly created money.  Their track record in performing this balancing act is horrific, so I wouldn't be holding my breath.

In conclusion, we are not in any way immune to Zimbabwe-style inflation and for the moment, it appears to be Fed and DC policy to get there.

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Re: The Weimar Hyperinflation? Could it Happen Again?

It depends on how you define "inflation".  Pricing of products/services or increase in currency.  The US Gov't and Fed have been shoving the pricing model down our throats for quite a while but in real economics it's the amount of money in the system.

Check this one out on Weimar.

http://mises.org/resources/4016

You want to know what inflation really is, continue investigating the mises site and you'll see what proper economics (Austrian style) entail.

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Re: The Weimar Hyperinflation? Could it Happen Again?

Chris defines inflation in Chap 10 ( I believe) as an increase in currency with rising prices being a symptom of that increase,

I agree with both Sam and Patrick in that with this massive infusion of cash if hyperinflation can occur, it probably will before it's all over.

I'll also confess that I'm a little murky in putting all this buy/sell stuff together in my head concerning the Fed and Treasuries. I suppose they buy to infuse money into the economy and sell to suck it back out. Should inflation get out of hand, will we see massive Treasury sells to suck money out of the economy?

Of course, if hyperinflation occurs, there may not be enough Treasuries to sell to make a dent on it, I would suppose. And who would buy them. I think I would be buying series I bonds with some inflation protection built in.

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Re: The Weimar Hyperinflation? Could it Happen Again?
Quote:

I think I would be buying series I bonds with some inflation protection built in.

Are these the same as TIPS?  If so, don't bother: they're indexed to the CPI which is a make-belief number under the direct control of the people you are lending your money to when you buy a bond. 

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Re: The Weimar Hyperinflation? Could it Happen Again?
Patrick Brown wrote:

Are these the same as TIPS?  If so, don't bother: they're indexed to the CPI which is a make-belief number under the direct control of the people you are lending your money to when you buy a bond. 

No, but I had to google them to know the difference:

Quote:

Let me start by pointing out that Treasury Inflation Protected Securities, or TIPS, don't have the same security as Series I savings bonds. TIPS adjust the principal amount for inflation, but pay a set coupon interest rate on the principal. The coupon payment will increase over time as the principal increases with inflation. The investor receives semiannual coupon payments and has to decide whether and where to reinvest the payment. Federal income taxes are due annually on both the coupon payments and the principal balance as it accrues, unless the TIPS are held in tax-advantaged accounts.

In contrast, the Series I savings bond pays interest based on a combination of a fixed rate paid over the life of the bond and a variable inflation component based on the inflation rate. Interest is paid when the savings bond is redeemed. This avoids a reinvestment decision. Taxes on the interest can be deferred until the bond is redeemed or can be paid annually as it accrues. The interest income on both savings bonds and Treasury securities are exempt from state and local income taxes.

http://www.bankrate.com/brm/news/DrDon/20050621a1.asp

Of course, when they tack on the adjustment for inflation, I'm sure they also use the CPI as their indicator and, yup, those are fuzzy numbers.

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Re: The Weimar Hyperinflation? Could it Happen Again?

Does anyone consider the fact that all this new money is created as an interest bearing debt, there by increasing the interest load?

That is why Zimbabwe is having hyper inflation.  Can you imagine how fast you would have to raise your prices to keep up with an 800% interest rate?

 

The Weimar republic had an interest rate of 900%, and yes, they used an identical debt based money system that we use.

 

On the flip side......

 

If we had an honest money system why would an increase in a wealth based money cause price inflation?  I know we have all been told that the more money they print just de-values all the other money.  But lets think about that.  If Florida cranked out 1 million new dollars, just how would that de-value currency in Minnesota?  But now if that money was created as an interest bearing loan, increasing the cost of doing business, forcing businesses to raise their prices due to higher taxes, can you start to see where price inflation comes from?  Or if the business went 1 million dollars deeper in debt, at 6% simple interest they would have to raise the prices on their products to cover the 60k a year increase in servicing their debt load.

Lets review.....

100% of all money is now created as an interest bearing debt. Russel L. Munk U.S. Treasury "the actual creation of money ALWAYS involves the extention of credit by commercial banks"

As the debt increases so does the interest load(generally speaking).  Cleary the debt load would be greater on a 57 trillion dollar debt that a 570 dollar debt. 

When the principal part of the loan is paid back, that money gets extinguished.  John B Henderson - Senior Specialist in Price Economics - Congressional Research Service "Money is created when loans are issued and debts incurred; money is extinguished when loans are repaid".  This makes sense because when the promissory note that someone signed is paid back that promissory note gets destroyed, along with any money that had been created with it.

Final result...As soon as time and interest kicked in, the debt grew but the money supply did not.  Lets imagine I'm a bank, and you sign a promissory note, and this is the first loan ever created.  You borrow $100.  As soon as time and interest kick in on that money you now owe me more than which was created.  It has now become impossible for you to get out of debt to the bank, unless you give up everything you put up as collateral.

 

OR

With a wealth based money.

We the people monetize our production, free of debt, and free of taxation.  Destroying the debt, lowering the cost of doing business(interest and taxes). 

Just why would creating money as final payment create price inflation?  Someone please explain with a logical answer.

When gold and silver could be freely monetized and turned into money, did you ever hear about anyone getting worried that they would create to much money?  The only real problem with gold and silver is that there just isn't enough physical substance of it on earth to make a good medium of exchange.  With that being said, how about we apply the principals of gold and silver to our current monetary system and return it to a wealth based currency instead of a currency of what you owe at the bank?

 

Bottom line, Coining gold and silver is a good way to monetize the wealth of the people but it is not the only way that it can be done and it may not be the best way it can be done. 

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