Weimar Republic Parallels
Hyperinflation: it’s a term that few people understand, but every financial officer dreads with all the nerves in his body. Once more the banking pundits are using this word all too frequently. Hyperinflation is simply inflation that is completely out of control with no apparent end in sight. The hallmark evidence for hyperinflation is currency losing its value. There is a startling parallel in history that can, perhaps, keep the United States from declaring the ultimate result of hyperinflation: government bankruptcy.
The year was 1920: Germany was struggling mightily to recover from their self-inflicted war and the huge debts she incurred for reparations decreed in the Treaty of Versailles. Afraid that Germany was going to default on all their loans across the board from the Treaty, demands for repayment came in the form of ‘gold only.’ Claiming they could no longer pay this, Germany stopped most of the reparations payments. France and Belgium troops invaded soon later in 1923, and took control of key mining and labor union activities. This caused massive labor strikes, severely limited production exports and furthered hollowed out the huge chasm that was occurring between goods and services.
Germany tried to fix this by buying foreign currencies, paid for by the German monetary printing press and newly minted government treasury bills, that only exacerbated the situation and further devalued the German Mark. German bankers speculated heavily on the falling market, similar to the ‘derivatives’ speculation that has crept into our personal 401K plans (see: Hedge Funds.) The bankers pulled their money from German marks, converted wherever possible to other foreign investments, and refused to grant a German country loan because the mark was now practically worthless. There are stories of average German people with wheelbarrows of money buying a loaf of bread; or using stacks of money to light furnaces and ovens.
The only solution to this hyperinflation problem was to print more money. It had the effect of pouring fuel on a fire. Hyperinflation wiped out the value of everyone’s savings with two short years. Generally, the largest groups of people affected by this are the middle and lower class people. It is said they are paying aa ‘regressive inflation tax.’ While this sounds impressive, it simply means this: the rich will be taxed higher to pass the wealth down to the middle/lower class in a much faster method than previous income-grab methods. In other words, the top 2008 income bracket currently at 35% for the ultra-ultra-rich, would probably double back to the pre-Reagan era rate of 70%. Production stagnation is often a result of an overly high inflation tax.
In a perfect banking world, all currency denominations would be equal in value and would rise and fall in value proportionately. But that doesn’t happen. People trade on the ‘margin’ between the value today, and the value yesterday. This speculation drives the market into a ‘futures’ strategy, meaning that the value of today’s transaction is based on what it will be like in the FUTURE, but not the Present. The Weimar Republic bankruptcy is the chief reason, historians state, that explained the Nazi’s rise to power. It offered an authoritarian totalitarian state that seemed to shut up critics by sheer physical force and labor-based will incentives.
I’ve been personally ticking off the hallmarks one by one, here in the United States. I'm saying that Nazi Germany will never occur here in the United States - Americans value freedom too much. The worst-case scenario IS a bankrupt country that redistributes wealth willy-nilly, rewards those who don’t work with pay-ups to get them closer to the middle class, and a banking institution that can’t overcome an overly inflated dollar.
How important is this topic? The Weimar hyperinflation story has been a case-study for college Econ majors for years. It's been taught in college but we aren't learning anything.
10/13/08 Jeff Feezle / ThreadBear
[This message has been edited by threadbear (10-14-2008 01:13 PM).]