Following my post on Weimar and the downfall of money – this was received this morning. It’s from a daily financial newsletter called The Daily Reckoning, dated November 18th, forwarded by my brother Michael in England.
Last week, Janet Yellen told the senate what everyone wanted to hear – the Fed will support the economy… which means, the Fed will support asset prices. With this option in their pockets, investors bid up the Dow to nearly 16,000 by the end of the week.
What to make of it?
We’re down at a conference sponsored by the Bonner Family Office. And we’re thinking. Thinking is the last resort. You only do it when you’re desperate. When your opinions, predictions and guesses don’t seem to be working out, you’re forced to consider alternatives.
While we have no doubt that current Fed policies will prove disastrous, we have nothing but doubts about what form the disaster will take. John Williams, who recalculates basic indicators – CPI, unemployment, GDP – based on what he believes are more honest data. What he discovers is that the CPI is higher, unemployment is higher, and the GDP is lower than the feds tell us.
He believes that there is only one outcome possible – hyperinflation. A year ago, he expected it in 2019. Now, he’s moved up the schedule. Expect hyperinflation to begin next year, he says – in 2014.
Why? Because the Fed is more aggressive than expected… and because the rest of the world is losing confidence in the dollar and its guardians. The overseas portion of the US money supply is huge – with dollars in every central banker’s vault as well as in the private accounts and hidey-holes of millions of people all over the globe. When these people lose faith, which he expects next year, the trickle of these dollars returning to the US will increase. Prices will begin to rise… slowly at first, then suddenly, in a flood.
Will John Williams be proven right? We’ll have to wait to find out!
The Daily Reckoning
Further . . . from the WSJ today
The uncertain future of U.S. fiscal and central bank policies poses a growing risk to the global economic recovery, the Organization for Economic Co-operation and Development said Tuesday.
In its twice-yearly Economic Outlook report, the Paris-based research body said the U.S. debt ceiling should be abolished, and replaced by “a credible long-term budgetary consolidation plan with solid political support.”
The report marks a significant shift in the OECD’s focus of concern, which in recent years has been centered on the euro zone’s attempts to tackle its fiscal and banking crises.
At the birth of the euro, The Economist magazine reminded readers that one of the great lessons of history is that paper money eventually always fails.
That doesn’t just go for the euro – it applies to dollars and pounds, too.
One way it fails is through hyperinflation.
We tend to think that hyperinflation only happens in banana republics like Zimbabwe, Ghana, and Argentina, forgetting that we also like bananas. It can happen here, too.
It happened in Germany.
After fighting and losing World War One, Germany entered a period known as the Weimar Republic. Its constitution was written in Weimar, a city 50 miles from Leipzig.
The victorious powers made the great mistake of forcing Germany to pay reparations after the war. The French, in particular, insisted on their neighbor paying for everything – even invading the German industrial heartland, with assistance from Belgium, in 1922. If the Germans wouldn’t hand over their wealth, they were simply going to take it!
All the main participants in the war suffered greatly. This does not include the United States, as America was only a factor in the closing months of the conflict. The established order in Russia, Germany and Austria-Hungary was overthrown, replaced by chaos and confusion. Serious financial problems also developed as somebody had to pay for the war.
In most countries it was the working class that had to foot the bill. In Germany, it was more the middle class. Successive Weimar administrations – and none of them lasted very long – gave in to the workers’ demands rather than try to enforce fiscal discipline. Additionally, Germany had the most generous welfare benefits in the world at the time, introduced by Otto von Bismarck in the 1880’s. Together with reparations, the result was a high rate of inflation.
Hyperinflation is when inflation gets out of control and prices are increasing at more than 50% a month. Very quickly, that becomes 50% per week, then 75% and 100%. Eventually, workers have to be paid hourly in wheelbarrows full of money, which then has to be spent quickly before prices go up even further.
The fixed-income middle class, professionals on salaries or pensions, soon suffers. Skilled workers can often barter their skills for food. In an attempt to control inflation, mistakes are made – freezing rents, for example, with resultant negative effects.
This was Germany in the early 1920’s. By 1923, the situation was out of control.
The Downfall of Money explains all this very well. The book is written by an Englishman named Frederick Taylor. It shows clearly how World War One led inevitably to World War Two, via hyperinflation and the rise of right-wing parties, culminating in the Nazis coming to power.
When economies collapse, people look for simple solutions – jobs and food are far more important than constitutional niceties and democracy.
The parallels in the United States and Great Britain today are disturbing.
Our governments are recklessly over-spending, borrowing to excess. The US is printing an extra $85 billion per month, “quantitative easing” as it’s called. This is enabling some to take advantage and make a lot of money, while the vast majority is finding it harder and harder to make ends meet.
Part of the justification involved in QE was the fear of deflation after the financial crash of 2008. The value of homes dropped dramatically in the crash; some commodities have been dropping as the global economy enters a slump. Deflation is the worst thing that can happen to an economy. It’s almost impossible to stop the downward spiral.
Hyperinflation is the second worst thing that can happen. One can lead to the other. As central banks print money to avoid the one, it can inadvertently get out of control and hyperinflation can take over.
The end result is that almost everybody loses everything! Those that gain by taking advantage of the situation also lose as the people will turn on them as they did in Germany.
“The Germany of the inflation was paradise for anyone who owed money.” (The Downfall of Money, by Frederick Taylor, page 206) A high rate of inflation reduces the amount of debt people owe. “By the same token, this was a very bad time for creditors of all kinds, for savers, and for investors depending on a fixed return. That meant large numbers of the old German middle and upper middle classes suffered a drastic, even catastrophic, fall in their standard of living.” Appropriately, chapter 21 of the book is titled: “The Starving Billionaires.”
Inflation is not something new. The prophet Haggai wrote about it 2,500 years ago.
“You have sown much, and bring in little; you eat, but you have not enough; you drink, but you are not filled with drink; you clothe yourselves, but no one is warm; and he that earns wages earns wages to put it into a bag with holes.” (Haggai 1:6)
We all hope that hyperinflation is not the consequence of over-spending by the US, UK and other governments. But it’s difficult to see how it can be avoided. It seems as if the only way we can create greater wealth today is by printing more money – a recipe for inflation. In turn, inflation can quickly get out of control, soon turning into hyperinflation.
It can all happen very quickly as it did in Zimbabwe a few years ago and in Germany in the 1920’s.
A spiritual lesson we should remember in these turbulent times is found in Matthew 6:19-21: “Lay not up for yourselves treasures upon earth, where moth and rust does corrupt, and where thieves break through and steal. But lay up for yourselves treasures in heaven, where neither moth nor rust does corrupt, and where thieves do not break through nor steal. For where your treasure is, there will your heart be also.”
The Economist was correct with its warning of all currencies eventually collapsing. It’s only a matter of time. The accumulation of wealth may seem important, but clearly we need to be prepared for losing it all as did millions in Germany. As Jesus Christ pointed out, treasures in heaven are more important and more reliable than treasures on earth!