Showing posts with label hyperinflation. Show all posts
Showing posts with label hyperinflation. Show all posts

Wednesday, May 20, 2020

A JP Morgan economist says U.S. is heading toward a "Weimar Republic Inflation Setup": What in the hell does that mean?

Earlier this month, Zerohedge.com published an essay by an unnamed JP Morgan economist who predicted that the national economy is headed toward runaway inflation.

According to this anonymous commentator, money in circulation is multiplying through various types of government handouts while "asset prices . . . [are] being propped up by central banks."  Thus, he reasons, it is just a matter of time "until inflation goes from 'subdued' to 'out of hand.'" Indeed, the economist predicts, "If central banks have no or a soft-washed inflation mandate we are headed toward a Weimar Republic style inflation setup."

That prediction sounds scary, but what in the hell does it mean?

I had only a hazy notion of the Weimar Republic in the 1920s when inflation in Germany got crazy out of control. I recall seeing photographs of people carrying German currency around in wheelbarrows. But what does the Weimar experience have to do with our national economy? I was clueless.

So I read some books on the German economy in the 1920s. The Weimar Republic, I learned, was created in 1919 after Germany lost the First World War. The German monarchy collapsed in November 1918, Kaiser Wilhelm fled to Holland, and a constitution was drafted in the Germany city of Weimar.

When World War I began, the German mark was valued at around 4.2 marks to the dollar.  When the war ended, the allies (France, Great Britain, and the United States) imposed harsh reparations on Germany, and the mark's value dropped to 7.4 to the dollar.

From November 1918 until the mark was finally abandoned in 1923, Germany was caught in a vicious inflationary spiral until the mark ultimately fell to 4.2 trillion marks to the dollar. In other words, it was worthless.

How did that happen? A multitude of factors were at work, but it seems that Germany's inflation during the early 1920s was mostly a result of carelessness, government subsidies to industry and state-owned railroads, and the government's effort to keep German workers employed and support a half-million war widows and 1.5 million disabled former soldiers.

In the end, German printing presses were running around the clock in a vain effort to supply paper currency that was deflating in value almost by the hour. Salaried workers and people living on pensions were driven into poverty, and hunger became widespread.

All this suffering and despair fueled radical political parties--Bolshevik-style communism, right-wing paramilitaries, and ultimately--the Nazis.  Hitler himself pointed out that Germans with billions of marks were starving.

Is the United States headed in that direction, as the unnamed JP Morgan economist predicts? Maybe.

Our accumulated national debt is now $25 trillion, and dozens of states and cities are running deficit budgets. A bill is currently working its way through Congress that would spew out $3 trillion, with part of this money going to prop up state and local governments. At the rate we are moving, the U.S. will see its national debt grow to $30 trillion within the next couple of years.

The federal government is also propping up the higher-education industry with student-loan money that has enabled colleges and universities to increase their tuition at twice the annual rate of inflation.  More than 45 million Americans are burdened by student loans that total $1.6 trillion.

Our spendthrift economy has enabled the U.S. to drop its unemployment rate to a historic low--last year it was only about 3 percent. If our government restores some fiscal discipline, that rate will inevitably rise. In the summer of 1923, when inflation was utterly out of control, the German unemployment rate was only 3.5 percent. Two months later, after the Reich restored fiscal discipline, unemployment rose to 23.4 percent.

Germany's inflation during the Weimar years destroyed the nation's middle class. The American middle class has been shrinking for the last 20 years, and many middle-income workers are losing ground.

I do not believe the United States can continue propping up more than 4,0000 colleges, universities, and trade schools with federal student-aid money. When all this comes crashing down, thousands of people with good jobs in the groves of academe will be out of work.

Small, liberal arts colleges are already closing at an accelerating rate, and regional public colleges are laying off staff and faculty.

When inflation breaks out in the U.S. economy, the wealthy and the financial speculators will do just fine. It is the middle class that will suffer, including a lot of people working in colleges and universities who now think they have bullet-proof job security.

The Weimar years: When German money was worthless


References

Ferguson, Adam. When Money Dies: The Nightmare of Deficit Spending, Devaluation, and Hyperinflation in Weimar Germany. New York: Public Affairs Publishing (2010) (originally published in 1975).

Friedrich, Otto. Before the Deluge: A Portrait of Berlin in the 1920s. Harper Perennial (1995) (originally published in 1972).

Taylor, Frederick. The Downfall of Money: Germany's Hyperinflation and the Destruction of the Middle Class. New York: Bloomsbury Press (2013).






Friday, May 1, 2020

Hyperinflation is coming to the United States: You're not going to like it

In olden times, middle-class people had checking accounts; and they kept close track of their account balances. No one wanted to inadvertently write a "hot" check that would "bounce" back to them. Oh, the shame! The embarrassment!

Those days are gone. Today, many Americans don't pay much attention to their checking account balances. If they don't have money in their account to buy a suitcase of Miller Lite, they just put their purchase on a credit card.

That's basically what our government is doing. The national debt tripled between 2008 and 2019 and reached about $20 trillion when Trump came into office.

By the third year of Trump's term in office, the national debt had risen to $22 trillion. Last summer, Congress passed a two-year deficit budget at a time when America had a booming economy with historically low unemployment.

Then came the coronavirus pandemic, and our government whipped up more than $2 trillion to deal with that. State and local governments are running massive deficits because tax revenues are down, and the Democrats want to dole out another $1 trillion to send to the states.

So that brings the national debt to what--$24 trillion? Folks, we can never pay back this money, and no one believes we can.

If the federal government can't pay its debts—and it can't—it only has two choices: It can default on its obligations or inflate the money supply.  It will choose inflation, and the consequences won't be pretty.

Inflation, the wise economists tell us, is a way for the rich to steal from the poor. When hyperinflation starts, the people who will be hurt are the elderly living on fixed incomes and young people whose wages won't be enough to pay for the inflated price of necessities like food and rent.

Germany suffered hyperinflation in the 1920s as it struggled to pay war reparations to the Allied powers after World War I.  The German government responded to this onerous burden by printing more money. This triggered hyperinflation that soon drove the value of the German mark to virtually zero. The mark became worth so little that people had to carry baskets of paper currency to pay for their daily needs.

Historians tell us that this period of hyperinflation destroyed the German economy, causing massive hardship for the German people, whose lives devolved into a day-to-day struggle for food. The anger and bitterness that resulted laid the groundwork for Nazism.

Adam Ferguson wrote a book about Germany's inflationary period titled When Money Dies. Ferguson warns us about the existential danger of hyperinflation. "The question to be asked," Ferguson wrote, "is how inflation, however caused, affects a nation: its government, its people, its officials, and its society."

If the experience of Germany is anything to go by, Ferguson cautioned, "then the collapse of a national currency unleashes such greed, violence, unhappiness, and hatred, largely bred from fear, as no society can survive uncrippled and unchanged." In Germany, racial passions were unleashed, and nihilistic sexuality prevailed in 1920s Berlin.

Already, our national politicians make hysterical and groundless charges of racism against their political opponents. State and local governments refuse to abide by federal immigration law even as they demand more federal money to prop up their sagging budgets.  Our elite intellectuals have cast off almost all sexual norms and obsess on transgender bathrooms.

Is contemporary America exactly like Germany in the 1920s? Of course not. But like 1920s Germany, our government is running up debt that it can't repay. Will this lead to a 21st century Hitler?  Probably not, but our future is definitely going to be unpleasant.