Today, the entire global economy is deflating. Industrial demand and manufacturing are collapsing worldwide. Once economic deflation is underway, debt snowballs.
The Federal Reserve will turn the money spigots wide open to mitigate the paralyzing effects of deflation on the U.S. consumption-economy. For now, the dollar is strong because the yen and the Euro are weakening FASTER; but the true value of the dollar is declining.
Die Weimarer Republik
There are striking parallels between the U.S. economy (since 2008) and the economy of the German Weimar Republic in the 1920s. When recession hit the German economy, the central bank printed massive amounts of currency to stimulate business activity and pay debt. The cost of living was rising, the middle class was getting poorer, and debt was growing.
Although core fundamentals in the economy were deteriorating, industrial magnates benefited from money printing. Easy credit enabled business leaders to wipe out their debts with cheap money. They expanded plants, bought companies, and speculated in foreign exchange with borrowed money. Germany’s booming stock market was the envy of Europe.
All of a sudden, market psychology changed. One minute the rich were borrowing like crazy. Overnight, no one wanted to buy the debt.
There were no warning signals before credit collapsed. Just months before, Germany’s economics Ph.D.s had insisted money printing by the central bank was not a problem. They said inflation was low and manageable –even healthy– and proved it by documenting the country’s low inflation numbers.
In 1921 and 1922, politicians and eminent economists maintained there was no inflation in the Weimar Republic; but a sudden loss of confidence triggered the madness of hyperinflation. By 1923, 42 billion marks (ℳ) equaled one U.S. penny.
The following gold and silver charts demonstrate how quickly the paper mark (ℳ) lost value as the destruction of hyperinflation swept over the highly civilized society. The small minority who had the foresight to exchange their paper marks for gold early saved their capital. The government quickly imposed restrictive currency laws and rigid capital controls.
Weimarer Republik – Papiermark ℳ
Price of Gold in German Marks:
Price deflation after Feb. 1920:
prices on imported goods fell 50%;
mark strengthened against other currencies.
April rate of price inflation 6%;
price inflation after May.
Dec. mark regained ¼ of Nov. value
Price inflation in the autumn.
Jan 50,000 → 372,477
Oct 2 6,631,749,000
Oct 9 24,868,950,000
Oct 16 84,969,072,000
Oct 23 1,160,552,882,000
Oct 30 1,347,070,000,000
Nov 5 6,700,000,000,000
Nov 30 97,000,000,000,000
From 4.2 marks per 100% gold-backed US $1
To 4.2 trillion marks per gold-backed US $1.
Price of Silver in German Paper Marks:
May Deflation 60
Price deflation after Feb. 1920:
prices on imported goods fell by half;
mark strengthened against other currencies.
April rate of price inflation was 6%.
Price inflation after July.
Price stability in the spring.
June 5 80,953
July 3 207,239
Aug 7 4,273,874
Sept 4 16,839,937
Oct 2 414,484,000
Oct 9 1,554,309,000
Oct 16 5,319,567,000
Oct 23 7,253,460,000
Oct 30 8,419,200,000
Nov 5 54,375,000,000
Nov 13 108,750,000,000
Nov 30 543,750,000,000
1 U.S. Silver Dollar = 4.2 trillion paper marks ℳ
[About ¾ of an ounce of pure silver cost 4.2 trillion marks.]
After money velocity took off, Germans could no longer exchange marks for gold on the black market; no one would sell an ounce of gold for paper marks at any price.
Does any of the following sound familiar?
Germany ran huge deficits and lived far beyond its means. The country had little manufacturing for export, extremely high taxation, and staggering debt (war/social reforms). The purchasing power of the currency was decreasing steadily (gold-backing was removed in 1914); and the tax-base was shrinking. As revenues declined, spending accelerated on national healthcare, welfare and education.
The Weimar government financed the vast majority of its expenditures by borrowing. The government issued notes (promises to pay); the Reichsbank in Berlin issued money on the ‘security’ of the promissory notes. The central bank was the back-stop, keeping interest rates artificially low and ‘monetizing’ the debt.
Leaders said money-printing was necessary for jobs. During the inflationary boom, Germany had over-employment. The government was padded with bureaucrats; and industry was heavily subsidized by the state. Low-skilled workers were employed in make-work and short-time jobs, with excessive redundancy.
The Reichsbank frequently intervened in the foreign exchange market to defend the mark, squashing investors who were speculating against the currency.
• As credit expanded, a speculative bubble grew, and the stock market soared→ 1920, 1921, 1922.
• Stability existed as long as market participants believed it would last a little longer.
• Speculators did not realize the stock market was going up because the German mark (ℳ) was going down.
DETERIORATION OF FUNDAMENTALS
The economy looked good on paper. However, the falling value of the currency took its toll on everyone but the rich. Living standards for average people and those on fixed incomes declined. To protect against rising prices, people began to stock up on groceries and other necessities. Workers demanded higher wages to compensate for their loss of purchasing power.
RECESSION CAUSED DEBTS TO RISE. When the economy stalled, the government wildly expanded the money supply to pay debts, avoid civil unrest, and stave off bankruptcies. But once stagnation took hold, easy money could not stop fundamental economic deterioration.
Suddenly, lack of faith in the currency triggered ferocious money velocity (see charts above).
Price inflation out-paced the printing press: No matter how much money the bank printed, there was never enough! Businesses paid suppliers and employees with IOUs/ coupons; municipalities issued their own currencies; neither banks nor government could honor checks. Hungry people resorted to barter. By August, many villages had no food.
THE FARMER WAS KING. A loaf of bread cost 200 billion marks at the end of the collapse of the mark. But when Germans purchased bread with silver coins, the price was about the same in Weimar as it was in America [measured in ounces of silver]. Prices for commodities remained steady for those who paid in silver [or gold].
The Chancellor declared martial law at the end of September, 1923. After the collapse of the paper mark, a new currency was re-set at 1,000,000,000,000 papiermarks to 1 Rentenmark.
Pensioners and bond-holders were ruined utterly; a life’s savings could buy one stamp.
After 1924, societal destruction and mass-unemployment ushered in Hitler’s reign of NATIONAL SOCIALISM [NAZI]. Adolf Hitler got his 19% support from the disenfranchised workers and millions in the lower class who lost their jobs when the inflationary boom ended in depression.
Heinz Habedank, Die Reichsbank in der Weimarer Republik: Zur Rolle der Zentralbank in der Politik des deutschen Imperialismus 1919-1933; Steven B. Webb, The Supply of Money and Reichsbank Financing of Government and Corporate Debt in Germany, 1919-1923, “The Journal of Economic History,” Vol. 44, No. 2, The Tasks of Economic History (June, 1984), pp. 499-507, Cambridge Univ. Press.
Submitted by Denise Rhyne
STAGES OF CREDIT COLLAPSE
I. When an economy slows, people save money. They do not want to spend because the future is uncertain. The economy stagnates and welfare rolls increase. As public debts mount, the central bank prints more and more money. The purchasing power of the currency is drastically diluted.
II. Eventually, economic activity slows to a crawl. Consumption declines, business grinds down, and the central bank prints to buy government bonds and bail out insolvent financial institutions. People do not understand why everything costs so much money. One after another, businesses trim and then close their doors.
A short period of price deflation precedes collapse. Money changes hands SLOWLY. Prices temporarily fall, and then resume their climb.
III. Currency failure is similar to a run-on-the-bank. Total loss of confidence in a currency is the inexplicable trigger that unleashes ferocious money velocity. When people comprehend how rapidly the currency is losing value, they start purchasing tangible items as fast as they can; releasing the cash like a hot potato. They know the longer they hold on to it, the less it will buy.
Hyper-velocity of money is a symptom, rather than the cause of credit-collapse. Credit FREEZES and currencies fail because of massive debt financed by the printing press.
Save SILVER dollars, not PAPER dollars.
The U.S.A. does not resemble the America of the 1930s when our nation had trade surpluses and the dollar was gold-backed. This time, global deflation will lead to credit collapse and currency failures. The fuel for future inflation is accumulating now. During the coming economic upheaval, gold and silver will perform as “monetary metals” and the world’s only real money.