When Money Dies: The Great German Hyperinflation

[Ad Orientem]

http://www.goldonomic.com/When%20Money%20Dies.pdf

This is a very good book so far. (I am about 1/3 of the way into it.) It deals with the great inflation in Germany and to a lesser extent Austria and Hungary in the post World War I era.

Caveat: The book is getting a lot of pump in gold bug circles. But this is more of a social history than a discourse in economics and it is quite chilling in its anecdotes. A few criticisms... The language used by the author sounds a bit archaic and stilted. Also the author has grammar issues like his apparent aversion to quotation marks that can be absolutely maddening. And I think the author presupposes a basic knowledge of history that with Americans is not necessarily a safe assumption. I don't think that would be a problem for most people on this forum. But I could see where some recent graduates of our public school system might need to keep Wikipedia open in an adjoining tab.

[Ad Orientem]

As an add on to my previous comment, I can see why gold bugs are enthusiastic about this book. There are some very clear, and disturbing, parallels between German fiscal and monetary policy during and after World War I and our own today.

[AgAuMoney]

I second the recommendation.

I think most people have no grasp of how fast and how bad it got in the Weimar Republic.

How fast?  Devaluation was bad by june 1922, but the mark was still better than 1/40 of where it had started.  18 months later (Nov 1923) prices were doubling twice per week.  By mid-november a "book keeping" currency was introduced at 1,000,000,000,000 to 1.  Less than a year later (Aug 1924) stability had emerged and the new currency was made real.

How bad was bad?

a difficulty noticed and noted by Mr Lloyd George writing in 1932, who said that words such as 'disaster', 'ruin', and 'catastrophe' had ceased to rouse any sense of genuine apprehension any more, into such common usage had they fallen. Disaster itself was devalued: in contemporary documents the word was used year after year to describe situations incalculably more serious than the time before.

Oh, and lest you think debtors made out like bandits...  After 1924 the government restated debts in the new currency.  They did not do it at 1,000,000,000,000 to 1.  Mortgages were restated at 25% of original face value (4:1) if they were at least 5 years old.  Government bonds, on the other hand, only paid out 2.5% of face value (40:1).  Many people and companies went bankrupt because they trusted gov't bonds instead of paying off their debts.

[Ad Orientem]

I second the recommendation.

I think most people have no grasp of how fast and how bad it got in the Weimar Republic.

How fast?  Devaluation was bad by june 1922, but the mark was still better than 1/40 of where it had started.  18 months later (Nov 1923) prices were doubling twice per week.  By mid-november a "book keeping" currency was introduced at 1,000,000,000,000 to 1.  Less than a year later (Aug 1924) stability had emerged and the new currency was made real.

How bad was bad?

a difficulty noticed and noted by Mr Lloyd George writing in 1932, who said that words such as 'disaster', 'ruin', and 'catastrophe' had ceased to rouse any sense of genuine apprehension any more, into such common usage had they fallen. Disaster itself was devalued: in contemporary documents the word was used year after year to describe situations incalculably more serious than the time before.

Oh, and lest you think debtors made out like bandits...  After 1924 the government restated debts in the new currency.  They did not do it at 1,000,000,000,000 to 1.  Mortgages were restated at 25% of original face value (4:1) if they were at least 5 years old.  Government bonds, on the other hand, only paid out 2.5% of face value (40:1).  Many people and companies went bankrupt because they trusted gov't bonds instead of paying off their debts.

This book is packed with scary insights. But to highlight just one... anyone who doubts the importance of holding physical gold MUST READ THIS BOOK.

[moda0306]

I wonder how much of German hyperinflation had to do with higher velocity of money vs higher quantity of base money vs higher quantity of "horizontal" (credit) money.  This is not rhetorical or fececious... I really have no idea, though I am willing to bet quantity of base money exploded, followed by velocity increases.

Germany at that time had so much stacked against it... Losing a war AND having massive domestic and foreign war debt, lost productive capacity, lost control of productive regions, etc.  I have a hard time seeing any non-monetary/fiscal similarities between us and Weimar, and I am a firm believer that these are huge contributors to inflation.

[Gumby]

The book makes it quite clear that Germany's war reparations (to be paid in foreign currency) were mainly responsible for its hyperinflation.

Warren Mosler also summed this fact up in the following succinct paragraph:

And what did go on in the German Weimar republic, where if you parked a wheelbarrow full of money thieves would take the wheelbarrow and leave the money? Turns out it was those pesky war reparations that caused government deficit spending to soar to something like 50% of GDP annually, with most of that whopping deficit spending used to sell the German currency and buy foreign currency to pay their war reparations. As expected, that drove their currency down the rat hole in short order, and kept driving it down, causing that famous bout of hyper inflation that didn’t end until that policy ended. And when all that ended and policy changed the inflation stopped dead in its tracks. In one day.
Source: http://moslereconomics.com/2011/11/14/i ... inflation/

Furthermore, Keynes knew that high reparations (beyond what Germany could pay) would destroy the German Mark, a full three years before it happened. In his 1919 book, The Economic Consequences of The Peace, Keynes urged for more generous treatment for Germany.

See: The Economic Consequences of The Peace (1919)

The inflationism of the currency systems of Europe has proceeded to extraordinary lengths. The various belligerent Governments, unable, or too timid or too short-sighted to secure from loans or taxes the resources they required, have printed notes for the balance.

...

In Germany the total expenditure of the Empire, the Federal States, and the Communes in 1919-20 is estimated at 25 milliards of marks, of which not above 10 milliards are covered by previously existing taxation. This is without allowing anything for the payment of the indemnity. In Russia, Poland, Hungary, or Austria such a thing as a budget cannot be seriously considered to exist at all."

Thus the menace of inflationism described above is not merely a product of the war, of which peace begins the cure. It is a continuing phenomenon of which the end is not yet in sight.

...

The offer, as made, does not appear to contemplate any opening up of the problem of Germany's capacity to pay. It is only concerned with the establishment of the total bill of claims as defined in the Treaty—whether (e.g.) it is $35,000,000,000, $40,000,000,000, or $50,000,000,000. "The questions," the Allies' reply adds, "are bare questions of fact, namely, the amount of the liabilities, and they are susceptible of being treated in this way."

If the promised negotiations are really conducted on these lines, they are not likely to be fruitful. It will not be much easier to arrive at an agreed figure before the end of 1919 that it was at the time of the Conference; and it will not help Germany's financial position to know for certain that she is liable for the huge sum which on any computation the Treaty liabilities must amount to. These negotiations do offer, however, an opportunity of reopening the whole question of the Reparation payments, although it is hardly to be hoped that at so very early a date, public opinion in the countries of the Allies has changed its mood sufficiently.

I cannot leave this subject as though its just treatment wholly depended either on our own pledges or on economic facts. The policy of reducing Germany to servitude for a generation, of degrading the lives of millions of human beings, and of depriving a whole nation of happiness should be abhorrent and detestable,—abhorrent and detestable, even if it were possible, even if it enriched ourselves, even if it did not sow the decay of the whole civilized life of Europe. Some preach it in the name of Justice. In the great events of man's history, in the unwinding of the complex fates of nations Justice is not so simple. And if it were, nations are not authorized, by religion or by natural morals, to visit on the children of their enemies the misdoings of parents or of rulers.
Source: John Maynard Keynes: The Economic Consequences of The Peace

So, here we have Keynes warning everyone that high reparations will destroy Germany, and its currency, a full three years before hyperinflation began.

The irony here of course is that Austrians use Weimar Germany to debunk Keynesian economics when, in reality, Keynes was one of the few who actually knew what the reparations would do to Germany.

And in the end, the very economic mess that Keynes warned about — in his 1919 book — gave rise to Hitler.

Any time a country owes foreign-denominated debt (as Germany did with its high reparations) high inflation is a major risk. But, to equate that with a country that owes no foreign-denominated debt (such as Japan or the United States) is to completely misunderstand what happened in Weimar Germany.

[AgAuMoney]

The book makes it quite clear that Germany's war reparations (to be paid in foreign currency) were mainly responsible for its hyperinflation.

Warren Mosler also summed this fact up in the following succinct paragraph:

And what did go on in the German Weimar republic, ... Turns out it was those pesky war reparations that caused government deficit spending to soar to something like 50% of GDP annually, with most of that whopping deficit spending used to sell the German currency and buy foreign currency to pay their war reparations.

He's wrong.  He sounds like he's just making it up, but is probably just mis-remembering.

The peak of reparations was only 1/3 of their deficit spending.

Not to downplay the significance of 1/3, but it definitely isn't accurate to claim 50% and to blame all that happened on that expense.  In fact Britain even proposed a moratorium on the reparations but France invaded the Rhur (with Belgium) in 1923 to exact reparations in kind and that essentially shut down Germany's industrial output.  I'd be more inclined to blame that action, but of course by that time the mark was already about 1/2000 compare to 3 years before.

The various belligerent Governments, unable, or too timid or too short-sighted to secure from loans or taxes the resources they required, have printed notes for the balance.

...

In Germany the total expenditure of the Empire, the Federal States, and the Communes in 1919-20 is estimated at 25 milliards of marks, of which not above 10 milliards are covered by previously existing taxation. This is without allowing anything for the payment of the indemnity."

Notice that Keynes pointed out they were spending at least 2.5x revenues before reparations.

So, here we have Keynes warning everyone that high reparations will destroy Germany, and its currency, a full three years before hyperinflation began.

I don't see that.  I do see the warning that reparations are not going to have a good result.  Many, many, many people made the same argument.

But do you know why they decided on reparations?  Reparations were intended to be virtual servitude.  They were the more civilized (modern, what have you) approach instead of the 19th century and preceding practice to occupy, loot, pillage, rape and enslave.  A great number of people wanted that approach, and chances are it would have prevented Hitler with at least similar likelihood as that of no reparations preventing him.

And that is also why Germany was occupied after WW-II.

Any time a country owes foreign-denominated debt (as Germany did with its high reparations) high inflation is a major risk. But, to equate that with a country that owes no foreign-denominated debt (such as Japan or the United States) is to completely misunderstand what happened in Weimar Germany.

Reparations were NOT foreign denominated until AFTER the devaluation of the mark was widespread, ca. sometime between the middle and the end of 1922.  In late 1922 the representatives from Germany, Britain and France met and the latter accused Germany of intentionally devaluing the mark to diminish the reparation payments.  That seems likely to have had at least some basis in fact.  It was a result of that meeting that they changed the reparations to "foreign denomination".  Also a result was the earlier mentioned moratorium to which France did not agree and their subsequent invasion.

The whole situation was a mess.  But the bottom line is that Germany started "the War to end all Wars" and need to be put down.  Probably they should have been divided and occupied as was done after WW-II.  But there is no way to know how that would have turned out with the sentiment rampant in 1919.

[Gumby]

Interesting.. But, even at 1/3 GDP, the war reparations had a significant effect. German hyperinflation was mainly a product of WWI, and came forth from a series of complex events...

Severe (and unusual) exogenous circumstances lay the groundwork for the hyperinflation to begin, these severe (and unusual) exogenous circumstances initiate the cycle, severe government ineptitude furthers the hyperinflation, severe public mistrust exacerbates it and government ultimately completes the cycle when they desperately crank the presses in an attempt to flood the market with an unwanted currency. What’s important to note here is that the printing press exacerbates and ends the cycle rather than actually initiate it. What lays the groundwork for the hyperinflation is severe exogenous forces or a highly unusual environment that government either creates or responds to ineffectively or inappropriately. In sum, Weimar Republic was not merely a case of “money printing”? gone wild. In fact, it was the war, regime change, fragile state of mind, foreign denominated debts and productive collapse that resulted in the excessive “money printing”?, collapse in the tax system and ultimately hyperinflation.
Source: Hyperinflation - It's More than Just a Monetary Phenomenon

In other words, there are many factors that contribute to hyperinflation.

[moda0306]

Ok so every country's deficits during a war are likely quite bad, so is it any surprise their wartime spending to revenue ratios were awful?  

Another thing, we're reparations 1/3 of their spending in total, or simply 1/3 of their deficit?

Further, I'd like to know Germany's debt-to-GDP ratio during and after the war. What were their deficits after the war?  What limitations on productive capacity were there?  How stable/recognized was the Weimar government?  Lastly, when the government "printed money," did they buy domestic debt like we do or do something else with the money?

I sincerely think that with any fiat currency the stability of the currency has to be strongly tied to the stability of the government and productivity of the economy.  If we lost a war to some aliens, had a bunch of our productive capacity destroyed by said aliens, and then owed them war reparations and had some half-assed replacement government and new currency, we would probably in a similar situation trying to QE our way out of that problem.

Luckily, we're basically in nothing more than a demand-based recession in the greatest country in the world. I'm still quasi-bullish on U.S. equities.  I think the lest few years and months of non-inflation have to teach us to reexamine the topic, and after doing so I'm confident we're fine.

[Gumby]

Some good information on the reparations here:

http://en.wikipedia.org/wiki/World_War_I_reparations

Clearly it was an incredibly complex situation.

[Ad Orientem]

Germany was already experiencing brutal inflation well before they lost the war. For that matter so were the British and French. Even the US which entered the war quite late and was therefor spared the worst effects saw the cost of living more than double during the brief war period.

No, I don't see hyperinflation in our future (though I could be wrong). But we are making some of the same mistakes that the Germans made, i.e. financing our wars entirely on credit and printing money. In the long run this will end badly. Yes, there are degrees of "badly." But while inflation of 10-15% may be a cake walk compared to what the Germans went through, I am not looking forward to it. We better get a handle on our fiscal affairs or we may wake up in ten years and discover that the McDonalds $1 menu is now the McDonalds $5 menu.

[moda0306]

Interesting.. But, even at 1/3 GDP, the war reparations had a significant effect. German hyperinflation was mainly a product of WWI, and came forth from a series of complex events...

Severe (and unusual) exogenous circumstances lay the groundwork for the hyperinflation to begin, these severe (and unusual) exogenous circumstances initiate the cycle, severe government ineptitude furthers the hyperinflation, severe public mistrust exacerbates it and government ultimately completes the cycle when they desperately crank the presses in an attempt to flood the market with an unwanted currency. What’s important to note here is that the printing press exacerbates and ends the cycle rather than actually initiate it. What lays the groundwork for the hyperinflation is severe exogenous forces or a highly unusual environment that government either creates or responds to ineffectively or inappropriately. In sum, Weimar Republic was not merely a case of “money printing”? gone wild. In fact, it was the war, regime change, fragile state of mind, foreign denominated debts and productive collapse that resulted in the excessive “money printing”?, collapse in the tax system and ultimately hyperinflation.
Source: Hyperinflation - It's More than Just a Monetary Phenomenon

In other words, there are many factors that contribute to hyperinflation.

Excellent summary.  One of my most disposed quotes is Friedman's about inflation being always a monetary phenomenon... It seems to have a debilitating effect on our ability not only to analyze the economics of what's happening, but to invest and make money.  TLT FTW.

[Gumby]

But we are making some of the same mistakes that the Germans made, i.e. financing our wars entirely on credit and printing money. In the long run this will end badly.

It's really not the same situation — particularly since all money now comes from debt/credit, and interest rates are incredibly low. The only reason you would want to fund the wars with taxes would be if you wanted to actually divert economic resources to the war (which might be beneficial in some economic situations). There's no reason to divert financial resources to the war right now with so many people out of work.

Examples of high inflation always comes from complex exogenous circumstances that were only later exacerbated by "printing money". This is not to say that we can't have high inflation in this country. Of course we can! But, it's not going to be just because we printed a lot of money to fund a war. It's going to require a loss of confidence and other more complex exogenous circumstances — which I admit is why I hold gold!

The German currency was relatively stable at about 60 Marks per US Dollar during the first half of 1921. Because the Western theatre of World War I was mostly in France and Belgium, Germany had come out of the war with most of its industrial power intact, a healthy economy, and arguably in a better position to once again become a dominant force in the European continent than its neighbours. But the "London ultimatum" in May 1921 demanded reparations in gold or foreign currency to be paid in annual installments of 2,000,000,000 (2 billion) goldmarks plus 26 percent of the value of Germany's exports.

The first payment was paid when due in June 1921. That was the beginning of an increasingly rapid devaluation of the Mark which fell to less than one third of a cent by November 1921 (approx. 330 Marks per US Dollar). The total reparations demanded was 132,000,000,000 (132 billion) goldmarks which was far more than the total German gold and foreign exchange.

Beginning in August 1921, Germany began to buy foreign currency with Marks at any price, but that only increased the speed of breakdown in the value of the Mark. The lower the mark sank in international markets, the greater the amount of marks were required to buy the foreign currency demanded by the Reparations Commission.

During the first half of 1922, the Mark stabilized at about 320 Marks per Dollar. This was accompanied by international reparations conferences, including one in June 1922 organized by U.S. investment banker J. P. Morgan, Jr. When these meetings produced no workable solution, the inflation changed to hyperinflation and the Mark fell to 8000 Marks per Dollar by December 1922. The cost of living index was 41 in June 1922 and 685 in December, an increase of more than 16 times.
Source: http://en.wikipedia.org/wiki/Hyperinfla ... r_Republic

[MachineGhost]

Further, I'd like to know Germany's debt-to-GDP ratio during and after the war. What were their deficits after the war?  What limitations on productive capacity were there?  How stable/recognized was the Weimar government?  Lastly, when the government "printed money," did they buy domestic debt like we do or do something else with the money?

As I mentioned several times before, the Weimar government paid striking industry workers directly with printed up government bonds.  The increased duration vs cash played a role in magnifying the inflationary effects of monetizing unproductivity.  It was just batshit insane.

As I also mentioned several times before, hyperinflation is an effect not a cause.  It will come about through chronically misguided policy responses, typically in response to a loss of confidence (deflation).  Think of Rome.  It did not hyperinflate into nonexistence, it simply deflated over the centuries.  I think the difference between Weimer and Rome is that war reparations was simply a crushing deflationary burden with no realistic way to pay it off over a long period of time.  The ability to inflate is necessary to survive any kind of debt, but when it happens in a non-core economy, there are no "bond market vigilantes" to prevent it from turning into hyperinflation.  Capital flight to safety has an entirely different meaning under a hard money standard than in our present fiat system.

If compound interest is the most powerful force in the universe, then interest itself is the most corrupting force in the universe and so deflation is the most eternal threat in the universe.

[stone]

Moda

What limitations on productive capacity were there?

There was a general strike as Machine Ghost said. The German government supported the strikers because Germany hated the fact that France had commandeered German industry as a sort of foreclosure for unpaid reparations. Zimbabwe also had a total collapse in productive capacity (due to farm confiscations) at the time of their hyperinflation. Is there any example of a hyperinflation without a preceeding collapse in productive capacity? I don't count one off 80% currency devaluations as a hyperinflation.

[AgAuMoney]

Is there any example of a hyperinflation without a preceeding collapse in productive capacity? I don't count one off 80% currency devaluations as a hyperinflation.

Friend's who were in Brazil in the mid-/late-1980's never mentioned any loss of productive capacity.  Everything was still available, but it was hard to get the money to pay for it, even for them.  (They had foreign money available, but banks would not let them take out enough to get thru a day, and the official exchange rate was horrible.)

Brazilian coworkers in the late 1990's who had grown up during the 1980's inflation also never mentioned shortages of anything but cash.

Both groups talked about how the gov't would do a devaluation and wipe off some zero's, and for a few days it was easy to carry enough cash to ride the bus.  But quickly the amounts started getting too large again, and soon it required a bag of money for bus fare.

[Pointedstick]

Both groups talked about how the gov't would do a devaluation and wipe off some zero's, and for a few days it was easy to carry enough cash to ride the bus.  But quickly the amounts started getting too large again, and soon it required a bag of money for bus fare.

That's really amazing. I can't even imagine how society still functioned. How did they get enough of the new, devalued cash? Their wages didn't adjust day by day, did they? Did people just give up and resort to barter?

[stone]

Both groups talked about how the gov't would do a devaluation and wipe off some zero's, and for a few days it was easy to carry enough cash to ride the bus.  But quickly the amounts started getting too large again, and soon it required a bag of money for bus fare.

That's really amazing. I can't even imagine how society still functioned. How did they get enough of the new, devalued cash? Their wages didn't adjust day by day, did they? Did people just give up and resort to barter?

AuAgMoney, I think you are completely right about the Brazilian hyperinflation not being from a productivity collapse. I read something a while back saying that wages were inflation indexed so creating a feedback loop. Shops used coloured stickers rather than price markings and had a colour key at the front of the shop that they updated regularly to indicate what price each colour corresponded to. I'm sort of shocked at my "ability" to sweep all of that under the carpet when trying to form a tidy conception of hyperinflation in my mind . I guess there are a few routes to hyperinflation. Do you think the Brazilian example is actually like an extreme version of the inflation we had in the UK and USA in the late 1970s? Perhaps things here in the UK could have slipped into being like that if we had continued along the same policy track then

[Gumby]

John Mauldin on Brazil's hyperinflation...

"Companies and households typically deal with excessive debt by defaulting; countries overwhelmingly usually deal with excessive debt by inflating it away. While debt is fixed, prices and wages can go up, making the total debt burden smaller. People can't increase prices and wages through inflation, but governments can create inflation, and they've been pretty good at it over the years. Inflation, debt monetization, and currency debasement are not new. They have been used for the past few thousand years as means to get rid of debt. In fact, they work pretty well.

The average person thinks that inflation comes from printing money. There is some truth to this, and indeed the most vivid images of hyperinflation are of printed German reichsmarks being burned for heat in the 1920s or Hungarian pengös being swept up in the streets in 1945.

You don't even have to go that far back to see hyperinflation and how brilliantly it works at eliminating debt. Let's look at the example of Brazil, which is one of the world's most recent examples of hyperinflation. This happened within our lifetimes. In the late 1980s and 1990s, it very successfully got rid of most of its debt.

Today, Brazil has very little debt, as it has all been inflated away. Its economy is booming, people trust the central bank, and the country is a success story. Much like the United States had high inflation in the 1970s and then got a diligent central banker like Paul Volcker, in Brazil a new government came in, beat inflation, produced strong real GDP growth, and set the stage for one of the greatest economic success stories of the past two decades. Indeed, the same could be said of other countries like Turkey that had hyperinflation, devaluation, and then found monetary and fiscal rectitude.

In 1993, Brazilian inflation was roughly 2,000 percent. Only four years later, in 1997 it was 7 percent. Almost as if by magic, the debt disappeared. Imagine if the United States increased its money supply, which is currently $900 billion, by a factor of 10,000 times, as Brazil did between 1991 and 1996. We would have 9 quadrillion U.S. dollars on the Fed's balance sheet. That is a lot of zeros. It would also mean that our current debt of 13 trillion would be chump change. A critic of this strategy for getting rid of our debt could point out that no one would lend to us again if we did that. Hardly. Investors, sadly, have very short memories. Markets always forgive default and inflation. Just look at Brazil, Bolivia, and Russia today. Foreigners are delighted to invest in these countries.

Endgame is not complicated under inflation and hyperinflation. Deflation is not inevitable. Money printing and monetization of government debt work when real growth fails. It has worked in countless emerging market economies (Zimbabwe, Ukraine, Tajikistan, Taiwan, Brazil, etc.). We could even use it in the United States to get rid of all our debts. It would take a few years, and then we could get a new central banker like Volcker to kill inflation. We could then be a real success story like Brazil.

Honestly, recommending hyperinflation is tongue in cheek. But now even serious economists are recommending inflation as a solution."
Source: John Mauldin: Inflation and Hyperinflation

[AgAuMoney]

Both groups talked about how the gov't would do a devaluation and wipe off some zero's, and for a few days it was easy to carry enough cash to ride the bus.  But quickly the amounts started getting too large again, and soon it required a bag of money for bus fare.

That's really amazing. I can't even imagine how society still functioned. How did they get enough of the new, devalued cash? Their wages didn't adjust day by day, did they? Did people just give up and resort to barter?

Do you think the Brazilian example is actually like an extreme version of the inflation we had in the UK and USA in the late 1970s?

That seems likely.  From what my friends said, it just kind of happened in Brazil and it was really hard to point to a "start" of when it became really bad.

As for wages, for people that had regular jobs, yes, the wages adjusted.  Some folks (tradespeople or service providers were what I heard of) the wages could adjust even during the day, and anecdotally I was told of people taking a new job at lunch that paid better than the job they were working in the morning, but going back to the first job with a better offer the next day.

Lines at the banks were incredible.  Families with external resources to supply money to them would basically have someone camping out in line all the time and getting back in line.  Plus when they devalued the money, if you had any of the old stuff you had a limited time to exchange it if you were to get anything at all for it.  (something in common with Zimbabwe, don't recall if Wiemar had bank problems like that.)

Barter did become more important, especially outside the city core (where people could grow some vegetables, have chickens and rabbits, etc).  But barter was already well established before inflation got bad.  I'm not sure how long it would take to get a barter economy going where it is not a normal part of society.

[AgAuMoney]

John Mauldin on Brazil's hyperinflation...

"
Honestly, recommending hyperinflation is tongue in cheek. But now even serious economists are recommending inflation as a solution."
Source: John Mauldin: Inflation and Hyperinflation

And that's the least of what they are recommending...  It starts with inflation (21may2009):

*I'm advocating 6 percent inflation for at least a couple of years. It would ameliorate the debt bomb and help us work through the deleveraging process.  --Prof Kenneth Rogoff, former IMF chief economist, Harvard professor

*The central bank should pledge to produce "significant" inflation, like the U.S. decision to abandon the gold standard in 1933 which freed policy makers to fight the depression.  --Prof Gregory Mankiw, former White House adviser, Harvard professor

And continues with:

With unemployment rising and the financial system in shambles, it's hard not to feel negative about the economy right now... Why not lower the target interest rate to, say, negative 3%? At that interest rate, you could borrow and spend $100 and repay $97 next year... The problem with negative interest rates, however, is quickly apparent: nobody would lend on those terms. Rather than giving your money to a borrower who promises a negative return, it would be better to stick the cash in your mattress. Because holding money promises a return of exactly zero, lenders cannot offer less. Unless, that is, we figure out a way to make holding money less attractive. At one of my recent Harvard seminars, a graduate student proposed a clever scheme to do exactly that. Imagine that the Fed were to announce that, a year from today, it would pick a digit from zero to 9 out of a hat. All currency with a serial number ending in that digit would no longer be legal tender. Suddenly, the expected return to holding currency would become negative 10%. That move would free the Fed to cut interest rates below zero. People would be delighted to lend money at negative 3%, since losing 3% is better than losing 10%.    --Prof Gregory Mankiw, Harvard


This is the same "respected economist" who said, 01Feb2000: When you look at the mistakes of the 1920s and 1930s, they were clearly amateurish. It is hard to imagine that happening again - we understand the business cycle much better.

[stone]

John Mauldin on Brazil's hyperinflation...

"
Honestly, recommending hyperinflation is tongue in cheek. But now even serious economists are recommending inflation as a solution."
Source: John Mauldin: Inflation and Hyperinflation

And that's the least of what they are recommending...  It starts with inflation (21may2009):

*I'm advocating 6 percent inflation for at least a couple of years. It would ameliorate the debt bomb and help us work through the deleveraging process.  --Prof Kenneth Rogoff, former IMF chief economist, Harvard professor

*The central bank should pledge to produce "significant" inflation, like the U.S. decision to abandon the gold standard in 1933 which freed policy makers to fight the depression.  --Prof Gregory Mankiw, former White House adviser, Harvard professor

And continues with:

With unemployment rising and the financial system in shambles, it's hard not to feel negative about the economy right now... Why not lower the target interest rate to, say, negative 3%? At that interest rate, you could borrow and spend $100 and repay $97 next year... The problem with negative interest rates, however, is quickly apparent: nobody would lend on those terms. Rather than giving your money to a borrower who promises a negative return, it would be better to stick the cash in your mattress. Because holding money promises a return of exactly zero, lenders cannot offer less. Unless, that is, we figure out a way to make holding money less attractive. At one of my recent Harvard seminars, a graduate student proposed a clever scheme to do exactly that. Imagine that the Fed were to announce that, a year from today, it would pick a digit from zero to 9 out of a hat. All currency with a serial number ending in that digit would no longer be legal tender. Suddenly, the expected return to holding currency would become negative 10%. That move would free the Fed to cut interest rates below zero. People would be delighted to lend money at negative 3%, since losing 3% is better than losing 10%.    --Prof Gregory Mankiw, Harvard


This is the same "respected economist" who said, 01Feb2000: When you look at the mistakes of the 1920s and 1930s, they were clearly amateurish. It is hard to imagine that happening again - we understand the business cycle much better.

It is all the more astonishing that all the "respected economists" were saying that it was imperative that the vast amounts of bank corporate bonds, CDOs etc could not be allowed to find their market clearing price/default in 2008. Basically it was them that forced that immense debt load off the banks and onto the tax payer rather than simply letting the debt vaporise in a cascade of bank bankcrupcies. They basically seem to have only one agenda- to expand the size of the banking sector as a proportion of GDP. All banking functions required for the real economy could be done with a finance sector <5% of GDP and yet they want expansion beyond 25%. How is that any different from wishing for wanton state bureaucratic waste