Why Weimar Style Inflation is NOT in Our Future
Although the U.S. printing press is now rolling out new Dollar Dollar bills by the day, what the scary hawks out there do not talk about is the fact that as quickly as we are printing money, so too are we destroying it (deflation).
When a household, corporation or bank either defaults on their debt or pays down debt with cash that is the DESTRUCTION of dollars. In our economy right now, the persistent credit crunch in the private sector is destroying dollars at a far more rapid pace than the printing press is creating them. At some point this can change; however, anyone who analogizes the U.S. predicament to Weimar Germany should instantly lose credibility, as they hinder our ability to have a rational, coherent and forward looking debate as to the necessary steps to fix the future of our economy. Here is why:
More and more these days, I hear people trumpeting that the United States is on the path to Weimar-style inflation, where people will line up with wheelbarrows of cash on food lines in order to purchase a single loaf of bread. What these people fail to tell you is that the world was either in, or on the brink of an economic depression following World War I. Germany was far from immune to the spreading global contagion, as the majority of their industrial capacity was destroyed during the Great War and their fiscal budget had been in shambles from bearing the monetary cost of the war.
These colossal economic headwinds were evident BEFORE Germany was resigned to signing the Versailles Treaty that officially ended the First World War. Germany was forced to pay huge reparations in the form of currency, a basket of commodities including about $2 billion of gold a year and a large portion of the nation’s coal capacity, as well as physical transfers of property of the real, intellectual and productive varieties. The gold payments alone amounted to $2 billion a year, which at that time was a large sum (according to an inflation calculator, $2 billion in 1919 is equivalent to $25 billion in 2009 dollars).
In June of 1919, John Maynard Keynes resigned from the British Treasury in protest of the expressiveness of the reparations and wrote The End of Laissez-Faire: The Economic Consequences of the Peace.In many respects this was Keynes’ initial rise to prominence in economic theory. In The Consequences, Keynes asserted that the reparations would lead to a crippled German economy. With what had been growing European and global economic integration leading up to World War I, he correctly drew the connection between the imminent hyperinflation and depression in Germany and the global economy at large. Keynes was a visionary, a man well ahead of his time, and he knew that with the destruction of integrated trade amongst even warring partners, the contagion would spread quickly and violently to other parts of Europe and the world (including the United States).
Some of these ideas from Keynes about the economic interconnectedness amongst the European nations would later become a core component of the theory behind the European Union (you can read a little more about the history of the EU in my writeup on the euro). The EU resulted from a series of post-World War II treaties, in which the stated goal was to build economic cooperation and dependence to the point that war would become too much of an economic liability for any member nation to even consider attacking a trading partner. Realizing this connection between economic stability and geopolitical stability showed amazing foresight on the part of Keynes and in many respects, helped shape the next century of economics, global treaties and globalization even before “Keynesianism” became its own entity.
FYI Paragraph: I apologize for this digression in advance; however, it is simply too important to preempt an attack on Keynes in order to maintain the focus of this writeup on Weimar Germany. Keynes entitled his essay The End of Laissez-Faire,because he knew that after World War I, capitalism as an economic system would come under severe pressures from multiple directions. At the time, society was rife with class warfare and European colonies were increasingly bitter about their mercantile relationship with Europe. Keynes recognized that in order to PRESERVE capitalism, a new compromise between the ownership and working classes would be necessary. This is a lost aspect of Keynes’ thinking. People today, reflecting back on Keynes writings from nearly a century ago cannot grasp, and often ignore the role that social stability played in the formation of Keynes General Theory.
Again, sorry for the digression, now back to the original point. The economic plague in Germany did subsequently spread to Europe and the United States. Many assert that U.S. protectionism was a cause behind the depths of the Great Depression; however, what people often leave out is the fact that global trade was in collapse long before the passage of Smoot-Hawley in 1930. In fact, quite to the contrary of conventional wisdom, the fall off in global trade was a proximate cause FOR the passage of protectionist trade tariffs in the United States.
The German reparations following the Versailles Treaty were so destructive that they ultimately led to the rise of Hitler and the Second World War. Estimates about the impact of reparations on Germany establish that the nation would have been paying out 1/3rd of its annual fiscal budget until at least 1988 and in some cases, 2020 had it not been for intervening events. These are HUGE numbers we are talking about and this comes ON TOP of a massive collapse in the global economy. For anyone to assert that such a fate awaits the U.S. is completely and utterly absurd and shows a lack of understanding and knowledge about world history. Yes, inflation is the natural outgrowth of printing money; however, when most of the money in your system was not real in the first place (i.e. hyper-leveraged credit) then the destruction of money and the creation of money ultimately balance each other out. The key is recognizing at which point the printing of money in the public sector exceeds the destruction of money in the private.
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