Thoughts Aloud

Archive for May 23rd, 2009

There is an interesting comparison between the conditions leading to the hyperinflation in the Weimar Republic and those we are currently experiencing, by Ellen Brown in “The Weimar Hyperinflation? Could it Happen Again?:

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.

Brown goes on to make a case that it was short selling currency speculators who destroyed the German Mark, not seigniorage. She suggests that massive government inflation of the money supply need not cause price increases if the money is spent into existence for productive efforts like infrastructure projects, instead of being loaned into existence by bankers; and it can be kept within the borders isolated from the currency speculators. She cites early American Congressional regulated money and Lincoln’s financing of the civil war. I am not sure I agree with her premise; but it seems to be a moot point for several reasons.

Obama is a tool of the bankers, not an adversary of them. Besides, the last two Presidents to try to go around them, Lincoln and Kennedy, ended with abbreviated careers and much speculation that crossing the bankers was responsible for their demise.

Moreover, our currency is still the world’s reserve currency, and the speculators will always have access to it. Besides, the international speculators perform a valuable service. Fiat currencies can in fact be inflated or deflated without much notice within the borders of a country initially. It is the job of the speculators to keep track of such things and create a value for value international exchange rate in a global marketplace. This drives the governments / central banks to distraction over the way it thwarts their devious seigniorage; and that is a good thing.

The only reason we are not already in a currency crisis, is that we are the world’s reserve currency and other nations are inflating theirs too. It won’t stay that way, and sooner or later, the world will give up on our lack of discipline and abandon the dollar. When that happens, it will be all over. The dollar is already worthless, and the only reason anyone will take one in exchange for their labor, goods, or services, is their expectation that they will be able to turn around and exchange it for their own needs.

The moment there is the slightest fear that one cannot get a “dollar’s worth” of what they need spending FRN’s, nobody will want them and they will become very expensive toilet paper. There is not much point in dreaming otherwise. Gold is still massively undervalued. Think about it. ◄Dave►