The Downfall of Money. Risks of Hyperinflation.

#The risks of hyperinflation in the U.S. today.

Today’s problems in the U.S. economy, too much debt and too little growth, are identical to the problems confronting Germany in 1921. 

• Then, as now, the solutions were mainly structural. 
• Then, as now, the politicians refused to compromise on solutions and looked to the central bank to paper over the problems. 
• Then, as now, the central bank accommodated the politicians.

Central bank independence is largely a myth and only appears to be a reality during stable economic times.

• But when the legislative and executive branches become dysfunctional, as they are today, and when debts and deficits spin out of control, as they appear to be, then central banks must bow to the politicians and monetize the debt by money printing. 
• This is what happened in Germany in 1921–23.

Something similar may be starting to happen in the U.S. today.

• The U.S. is not yet at the point of no return that Germany reached in 1921. But it is moving in the same direction. 
• It has a dysfunctional political class and accommodating central bankers. 

You want to know about the warning signs of hyperinflation before its most virulent stage wipes out your savings and pensions.

Mark Twain once wrote, 
“No occurrence is sole and solitary, but is merely a repetition of a thing which has happened before.” 






#Weimar hyperinflation

Weimar hyperinflation offers a historic guide to something that has happened before and that may repeat in the U.S. under remarkably similar conditions.

Despite the widespread identification of “Weimar” with hyperinflation, few investors know the detailed history and political dynamics that led to Germany’s catastrophic outcome.

• The facts that Germany had recently been defeated in the first World War and bore a heavy debt burden in the form of reparations to France, the U.K. and other victorious powers are necessary background.
• You may also know that communists and proto-Nazis fought street battles, led regional rebellions and engaged in assassinations of high-profile political figures.

 But even this backdrop does not tell the whole story.


#Rudolf Havenstein, the director of the Reichsbank, the central bank of Germany. 

Most accounts of the Weimar hyperinflation focus on Rudolf Havenstein, the director of the Reichsbank, the central bank of Germany.

• Havenstein had control of the printing presses and was directly responsible for the physical production of the banknotes, eventually denominated in the trillions of marks.
• At one point, the Reichsbank printed such huge volumes of currency that they were physically constrained by paper shortages. 
• They even resorted to printing on one side of the banknote in order to save ink, which was also in short supply. 
• Havenstein is routinely portrayed as the villain in the story the man whose money printing ruined the German currency and its economy.

#The culprit was the political leadership

• Yet the culprit was the political leadership that refused to compromise on the structural reforms needed to restore growth to the German economy so it could begin to deal with its debt burden.
• Politicians looked to the central bank to paper over their problems rather than fix the problem themselves.  
• Havenstein is not an autonomous actor out to destroy the currency. 
• He is simply the handmaiden of a weak, dysfunctional political class who refuse to make hard choices themselves.

This insight, is of the utmost importance as you try to assess the risks of hyperinflation in the U.S. today. Investors like to point fingers at the Fed for “printing” (actually digitally creating) trillions of U.S. dollars out of thin air; they maybe not totally correct.







Read:

The Downfall of Money: Germany’s Hyperinflation and the Destruction of the Middle Class, by Frederick Taylor. This is the best and most thorough account of the Weimar hyperinflation yet and is likely to remain the definitive history.  Read this to understand exactly what happened, and why a repetition in the U.S. is a real possibility today..