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Weimar 1920-21 : "It felt like deflation was underway"

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Essentially, what he says it that the sheeple can get fleeced for a very long time because they think that something has value which it hasn't. That is why some can profit in a (hyper-)inflation, and why most won't.

In a period of growth, the financial market dominates the real economy. Now, in a period of contraction [wealth destruction] the real economy dominates the financial market. And here human behavior trumps the so-called fundamentals of investors who too often have yet to catch up with what's going on. This could be due to an ideological lag where the old ideas of investment haven't been fully discredited yet.

 

In a real economy, subjected to a debt deflation, the behavior of the population leads to a higher valuation on money as relative to assets. They prefer to pay down debt and/ or save. This means the prices of assets will come down. Whether the prices of consumables come down, will depend on the strength of the local currency in the fx market. No hyper-inflation there... just less money, lowered velocity, and a reduced standard of living.

 

We should respect/ observe the behavior of the "sheeple" because they will determine the value of local money relative to local assets... all to the chagrin of the monetary authorities... whom we should disrespect. :)

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In a period of growth, the financial market dominates the real economy. In a period of contraction [wealth destruction] the real economy dominates the financial market. Human behavior trumps the so-called fundamentals of investors who too often have yet to catch up with what's going on. This is due to an ideological lag where the old ideas of investment haven't been fully discredited yet.

 

In a real economy, subjected to a debt deflation, the behavior of the population leads to a higher valuation on money as relative to assets/ consumables. They prefer to pay down debt and/ or save. The prices of assets will come down. The prices of consumables will come down depending on the strength of the local currency in the fx market. No hyper-inflation there... just less money, lowered velocity, and a reduced standard of living.

 

We should respect/ observe the behavior of the "sheeple" because they will determine the value of money relative to local assets... all to the chagrin of the monetary authorities... whom we should disrespect. :)

 

Not quite sure how that works in the UK where we are massively net importers of energy, food and just about everything else for that matter (although I did recently buy a Henry vacuum cleaner made in England) :lol:

 

I still think you are concentrating too much on what joe public thinks/does - it is not that important. Oligarchs, uber rich and other unmentionables own most of everything.

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Not quite sure how that works in the UK where we are massively net importers of energy, food and just about everything else for that matter (although I did recently buy a Henry vacuum cleaner made in England) :lol:

 

I still think you are concentrating too much on what joe public thinks/does - it is not that important. Oligarchs, uber rich and other unmentionables own most of everything.

Yes, which is why in the UK's case the currency could well depreciate against consumables, imports, commodities etc as capital flows out of the UK/ Sterling. But then consider demand destruction/ destruction of markets/ lowered standard of living could lead to downward pressure on prices canceling out some of the rises.

 

But hyper-inflation of the currency looks very unlikely, and UK property should still come down in terms of pounds.

 

Most likely will be continued volatility for the pound on the fx market.

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Here's a Key point:

+ Prices of Essentials can rise (thanks to cost pressures, and weak currencies), while

+ Prices of Assets fall

 

In fact, the pressures (mostly ZIRP) driving people to speculate, tend to generate BIG SWINGS in asset prices, over the long term, rather than steady appreciation.

 

Holding cash, during the inevitable downswings, can be a very good thing. And playing the swings well (if you can manage to do it), can get you ahead of the price rises in essential items, like food and energy.

 

But it is a tough game to win, and it is not good that some many of us have been driven to this !

imo my opinion, the solution to the problem you've posed here [in regards to weak currencies and rising essentials] is to maintain a core position in the strongest currencies. This way you will not be driven to speculate, which is a game most lose. By just sitting in the strongest currencies, your currency units should appreciate in value over the long term against assets/ commodities/ consumables [a Jesse Livermore quote is coming to mind].

 

In the strongest currencies, commodity/ consumable prices should be less volatile to the upside. If they do spike, it shouldn't take long for them to fall back due to eventual demand destruction.

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How many angels have space on the tip of a pin?

This is progress. :)

 

Modern economists, with their idea of a scientific currency, attempted to bring "value" into the domain of objectivity. It can't really be done. To ask how we can objectively and rationally measure value once and for all, you might as well ask how many angels can dance on the head of a pin. What's going on here is a confusion between the objective world of measurement, and the "metaphysical" [beyond the physical] world of valuation. Some things are the objects of mathematic measurement, somethings aren't.... but that doesn't make them any less real.

 

imo the whole sorry saga of boom and bust is due to the failure to recognise that human valuation, being idiosyncratic, is very precarious and can change quickly with changing circumstances. In the boom periods, populations think the "problem of valuation" has been normalized. This normalization usually takes form in some new progressive financial instrument that assumes "traditional" risk can be measured and managed. Hence there is no need for conservative fuddy duddy regulation. After the bust, high capital reserve ratios and regulations are once again restored [hopefully] along with the recognition of our inherent gullibility.

 

I think we agree that the monetary unit itself now is problematic as a measure of value. Yet, I think this is more likely to lead to increasing instability between currencies rather than the hyper-inflation of them.

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Modern economists, with their idea of a scientific currency, attempted to bring "value" into the domain of objectivity.

...

 

:rolleyes: another one of your vague groups to attack.

 

...

imo the whole sorry saga of boom and bust is due to the failure to recognise that human valuation, being idiosyncratic, is very precarious and can change quickly with changing circumstances.

...

 

IIRC, Hayek won the Nobel Prize for demonstrating that the boom-bust cycle is caused by state intervention, in particular the manipulation of interest rates.

 

Federal Reserve Act passed in 1913:

 

Untitled.jpg

 

...

After the bust, high capital reserve ratios and regulations are once again restored [hopefully] along with the recognition of our inherent gullibility.

...

 

I guess you're gullible enough to think the regulator will act in your interests.

 

...

I think we agree that the monetary unit itself now is problematic as a measure of value...

 

damn right the monetary unit itself now is problematic as a measure of value.

 

worthless bits of paper.

 

it takes lots and lots of violence to make people act as if the valueless has value.

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Untitled.jpg

No argument here on that chart. I fully expect to see the ratio of gold/ Dow back to around 1:1. I've always thought the nominal number involved would be relatively low..... say around 3000. the Dow could likely do a Nikkei.

 

 

another one of your vague groups to attack

 

Well, I consider the attempt to create a "scientific" currency also the attempt to manipulate/ control the population... science being primarily about power. Everyone, governments included. were/ are caught up in this web.

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Here's a regularly updated version:

 

Cheers. Though the nominal numbers can be argued, that ratio is always a good one. I think the Dow will follow the Nikkei down.

 

 

djia-nikkei-comparison.gif

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I think it is off track to focus so much on Weimar Germany, even though I have some family history on the maternal side who experienced it in its full glory.

 

I think general picture of a economy which has too much government/over-employment jobs, a financial sector is more akin to the situation in Italy around 1990. Its economy was made of small manufacturers and a plethura of government non-jobs, and to keep unemployment down, embarked on a multi year inflation. The Lira devalued by 90% against the USD within 8 or so years.

 

In the same way we can see pensions and benefits being tied to CPI rather than RPI, and, rather than a series of Thatcherist deflationist cuts and resultant unemployment a campaign of money printing and inflation is underway, which looks to be multi year, to the benefit of debtors. Maybe they will tax gold. Gold, like Houseprices looks to be eroded in real terms, as nominal wages rise, but it doesn't.

 

I think the plan is something along these lines.

 

Another major evil has been to utterly destroy savers or the concept of saving. I can only assume this comes from the simplistic Keynesian views of the Governer of the Bank of England and George Osbourne at the Treasury.

 

Why remove the NS&I limited form of inflation linked shelter for citizen savers, thus guaranteeing they will be robbed and devalued and placing them in a moral panic?

 

It makes little difference to the money printed to recapitalise the banks deposits, but a lot of difference to savers in the short term and future investment and jobs in the longer term.

 

(this is from a recent Prof. John Hussman Article)

 

It is a mathematical truth that GDP/Output = Consumption+Investment+GovernmentSpending (ignoring exports and imports)

and that Investment = Savings.

 

Keyne's believe was that savings (saving a part of consumable income) was terrible horror for the economy when Banks have suffered losses. Better to have no incentive to save!

As follows

 

Y = CIG, but C = cY (i.e. cY = savings - Part of Output - proportion to income) and I = I_fixed (the pool of real investment is fixed ; based on interest rates)

so rewrite this as Y = cY + I_fixed + G

or Y = (I_fixed + G)/(1-c) and, as savings, c, is a fraction of output Y, I and G are thus multiplied in relation to final Y (output).

 

Notice the pool of possible investment is assumed by Keynes to be FIXED - i.e. investment opportunities do not increase in this model based on lower interest rates, or expected productivity increases.

 

If Investment is fixed (cannot increase - i.e. opportunities to invest do not increase with lower interest rates and technology increases), then the act of people saving deflates output (Y) and the economy's final output contracts ; one persons income depends on anothers full spending - the act of saving is just holding back output and incomes ..the conclusion ...- savers should be trashed and burnt at the stake.

 

All complete nonsense, because the investment horizon is not fixed, the opposite is true - there are always new projects to fund which will meet a major human need, major new possibilties and frontiers opening up, and the only long term path to full employment is from projects funded by saving to fund investment, resulting in real growth, not a pile of non jobs. The very act and drive, to save produces efficencies, production increases which raise REAL output growth and jobs, not the nominal kind the keynseans are after.

 

Having said this is not like Weimar Germany, I must state that today we have a situation where if you don't spend and leave money sitting in a bank you will soon see it start to evaporate. People are trapped in exactly the same kind of moral horror my great grandmother felt in weimar Germany when she had to spend cash on whatever she could in order to save money for her kids future bread.

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I think it is off track to focus so much on Weimar Germany, even though I have some family history on the maternal side who experienced it in its full glory.

Hi DrNo, welcome to GEI. Yes, the idea of the thread was to see if there were some similarities to Weimar even though a Weimar-like hyper-inflation of the currency might not eventuate.

 

If Investment is fixed (cannot increase - i.e. opportunities to invest do not increase with lower interest rates and technology increases), then the act of people saving deflates output (Y) and the economy's final output contracts ; one persons income depends on anothers full spending - the act of saving is just holding back output and incomes ..the conclusion ...- savers should be trashed and burnt at the stake.

I see the currency subjected to the cross currents of both inflation and deflation; certain currencies can depreciate on the world stage as capital moves to stronger currencies, this could lead to inflation in the prices of consumables/ commodities etc, the currency may also appreciate against assets as populations look to pay down debt and/ or save in an ongoing credit contraction. Of course, central bankers do not want money sitting in banks but moving into the economy hence the QE. Whether inflation is here real or imagined is the point of contention. Personally, I think this is negated by a liquidity trap though QE remains a "credible threat" driving investors to speculate in a very risky market. On the other hand, the behavior of the wider population [which is not so easily contolled by cental banks] is not motivated by inflation expectation, and will just continue to save and/ or pay down debt, which is deflationary. If deflation is the primary force then savers need not speculate but should instead buy and sit in the strongest currencies.

 

All complete nonsense, because the investment horizon is not fixed, the opposite is true - there are always new projects to fund which will meet a major human need, major new possibilties and frontiers opening up, and the only long term path to full employment is from projects funded by saving to fund investment, resulting in real growth, not a pile of non jobs. The very act and drive, to save produces efficencies, production increases which raise REAL output growth and jobs, not the nominal kind the keynseans are after.

Real investment is needed in the economy [as opposed to speculation in the finacial market] yet this might not be seen until imbalances are worked out of the system one way or the other. The deleveraging of debt has to occur for the developed economies. Also, the currencies of debtor and creditor countires need to be re-balanced. This may yake time, and until then the economy could just continue in contraction mode.

 

I'd add that gold could do well as a currency when other national currencies are under the shadow of QE.

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Welcome, DrNO. How'd you find us?

 

You make some great points

 

Another major evil has been to utterly destroy savers or the concept of saving. I can only assume this comes from the simplistic Keynesian views of the Governer of the Bank of England and George Osbourne at the Treasury.

 

Why remove the NS&I limited form of inflation linked shelter for citizen savers, thus guaranteeing they will be robbed and devalued and placing them in a moral panic?

 

It makes little difference to the money printed to recapitalise the banks deposits, but a lot of difference to savers in the short term and future investment and jobs in the longer term.

People in the US and the UK have focused on bailout money - some of which has been repaid - but the real subsidy has been in the near zero funding provided to the banks - the proximate cause of the crisis. Savers are being robbed to reward villains. And the average guy is being forced into unwanted speculations to make any income at all, while the banks can just gear up on near zero cost money, and buy T-Bonds.

 

On top of that, the banks have been given license to hide losses, and pay themselves big bonuses. In effect, the average guy is being robbed so bankers can be over compensated. I think it would be better to let more banks go, give depositors a small haircut (5-10%) so they will be more cautious, and try to get new, and better focussed banks to start up. The OTC derivatives business is mostly nothing but selling expensive casino chips, and it should be downsized. Does a single politician have the courage to talk about this outrage?

 

If Investment is fixed (cannot increase - i.e. opportunities to invest do not increase with lower interest rates and technology increases), then the act of people saving deflates output (Y) and the economy's final output contracts ; one persons income depends on anothers full spending - the act of saving is just holding back output and incomes ..the conclusion ...- savers should be trashed and burnt at the stake.

 

All complete nonsense, because the investment horizon is not fixed, the opposite is true - there are always new projects to fund which will meet a major human need, major new possibilties and frontiers opening up, and the only long term path to full employment is from projects funded by saving to fund investment, resulting in real growth, not a pile of non jobs. The very act and drive, to save produces efficencies, production increases which raise REAL output growth and jobs, not the nominal kind the keynseans are after.

 

Having said this is not like Weimar Germany, I must state that today we have a situation where if you don't spend and leave money sitting in a bank you will soon see it start to evaporate. People are trapped in exactly the same kind of moral horror my great grandmother felt in weimar Germany when she had to spend cash on whatever she could in order to save money for her kids future bread.

A wise government would be making it easier to start new businesses, with less red tape, and lower taxes, rather than handing out money to unemployed people, many of whom would rather work.

 

Like you say, essentials are going up in price, and money in the bank earns nothing. So people are driven into speculations, and the most useful speculative investment is a start-up business, but they are weighed down now by higher medical costs, taxes, red tape, and uncertainties about future laws.

 

In the US, only the area around Washington is thriving.

 

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Some economies are enjoying a boom in exports. How can this be sustainable when many economies are ina continued slump. The idea of "decoupling" for boom economies in Asia seems to be in vogue at the moment, yet this may just be a case of wishful thinking as investors desperately look for yield. Booming economies in Germany and Asia or just feverish over-production and a crack up boom? Rick has an interesting take on it:

 

German Boom Recalls Titanic’s Last Hurrah

 

http://news.goldseek.com/RickAckerman/1283839200.php

If the global economy is the Titanic, then what is happening in Germany might be the stern rising as the USA “bow” begins to sink. When we read about the grim predictions of Austrian School economists in particular, a Titanic-style crack-up seems like the sort of thing anyone would notice. But the seemingly anomalous business boom in Germany that everyone seems so happy about (and the bankers say -- what else? – “Be merry!”), might just be that: a boom/bust cycle bearing down on us like a juggernaut.

 

Whatever the case, few are voicing concern over troubling signals in this German boom: German sovereign-debt interest rates are falling as if a Fed were causing it, but on free-market action; the Euro is much stronger than anyone had anticipated, considering the PIIGS dilemma and Eastern Europe’s deep economic wallow. German wages haven’t risen at all, even though booms usually translate quickly into higher wages. And the consumer boom, such as it is, is geared toward safe investments and matters around the house (such as installing those solar panels, etc.). The savings rate keeps climbing although there is hardly any interest being paid, and gold-buying is beginning to explode. Inflation is creeping through the holes via costs for utilities and government services. The employment situation is bright, but that has been going on for a while due to the emerging markets and the famous “Kurzarbeit,” a government-sponsored reduction of working hours to avoid layoffs in a crisis. Construction is also suddenly booming, although absolutely everyone knows the future is “unusually uncertain” at best. All these signals meet the predictions of the Austrian School in perfection.

 

Exporters ‘Astounded’

 

It is the investment-goods tier which is the happiest among exporters - and the most astonished. What might be happening is that, in anticipation of a crack-up boom, investors are thinking twice about ordering investment goods (which often necessitate complicated, long-term contracts) in the U.S. dollar realm and specifically in the U.S. realm. Are investment-goods investors and buyers beginning to walk to the other side? Given the steepness of the German-GDP ascent from rock bottom (especially in investment goods) in mind, one might also say they are…fleeing?

 

If we are indeed sinking bow (USA)-first, this explanation would make disturbing sense. The rise of the stern section, consisting of Germany and other nations with not so much debt and still-functioning economies, should perhaps become an indicator for the wary as the booms gain momentum as it ought, and grows scary at some point.

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Some economies are enjoying a boom in exports. How can this be sustainable when many economies are ina continued slump.

 

You talk about 'here'. I am in Finland and you are in Korea.

 

In Finland Korean products are selling well. Samsung cell phone adverts are everywhere and they look much better than Nokia, then there are those flat screen TV's which seem very cheap for what used to be a very large screen of 40". My previous TV back in NZ cost 1500 NZD for a 36? inch. An equivalent flat screen would be maybe a third of the price - everybody is converting now. Old CRT sets are more or less junk.

 

And Finnish exports and imports are up 40% since last year - but probably still down from before the crisis.

 

Then there very low interest rates. People must have loads of money if they are working.

 

Evidently you have your deflationary glasses on. But meanwhile deflationary fears are behind the stimulus and super low interest rates - how can there not be a boom for some economies??

 

And deflation in the USA will mean just more QE and stimulus. In the USA Retails sales and imports and exports have recovered almost to pre crisis levels - plenty of the profits from overseas manufacturing are American.

 

What actually do you expect to be happening when this is going on????????

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IMHO Wemier is a strong likelyhood in near future

 

I will be posting some proof to back it up in near future, as I've read the whole thread yet.

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IMHO Wemier is a strong likelyhood in near future

 

I will be posting some proof to back it up in near future, as I've read the whole thread yet.

I am planning to record a conversation with Gonzalo Lira today - he of the "Way Hyperinflation Happens" fame.

If it goes well, it will come out as a podcast on GER

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Evidently you have your deflationary glasses on. But meanwhile deflationary fears are behind the stimulus and super low interest rates - how can there not be a boom for some economies??

 

And deflation in the USA will mean just more QE and stimulus. In the USA Retails sales and imports and exports have recovered almost to pre crisis levels - plenty of the profits from overseas manufacturing are American.

 

What actually do you expect to be happening when this is going on????????

Hyper-deflation now..... and what is going on is expected and predictable because the currencies of some countries depreciate against other more central/ reserve currencies. Currency depreciation gives a boost to exports. You need to look at it from an international/ currency relative perspective.

 

Because we live in a global economy, some currencies will strengthen and others weaken relative to each other... and all depreciate against gold [this is the essence of of hyper-deflation]. The export boom should be relatively short-lived due to wider problems and imbalances in the global economy; when demand falls off in developed countries where will developing countries export to? And there may be first a bust in booming economies before they manage to "decouple" and develop their own internal [alternative] markets.

 

This is all predictable with hyper-deflation glasses on. The difference between deflation and hyper-deflation theory is the first tends to be overly abstract and US-centric, whereas the second is more country specific, empirical, and international.

 

Weimar also enjoyed a boom in exports [at the expense of other countries] as the mark depreciated. It was noted by many commentators at the time that during the boom period unemployment was not a problem, whereas it was plaguing other countries.

 

You talk about 'here'. I am in Finland and you are in Korea.

Sure, "here" is relative... though I don't think Weimar-like cash hyper-inflation will happen anywhere.

 

 

If a hyper-inflationary comparison must be made it should be made with China [not the US] where once again a modern hyper-inflation involves the massive expansion of credit:

 

http://www.latimes.com/business/la-fi-0907...8818,full.story

In this no-holds-barred environment, raising capital was easy if you knew how. In a scheme called "returning the flat," small groups of speculators would sell the same property to each other to drive up the listed value of a home. With each transaction, the next speculator could obtain a larger mortgage, using the excess cash from the lender to invest in other properties. The conspirators would then divide the profits once they unloaded the property outside their circle.

 

"A flat could be worth 10 times more by the time they were done," said Chen Zhencheng, director of the National Real Estate Management Alliance, who said that the practice broke no laws. "This was happening in 30% to 50% of some building projects. The places were full of speculators."

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Hyper-deflation now..... and what is going on is expected and predictable because the currencies of some countries depreciate against other more central/ reserve currencies. Currency depreciation gives a boost to exports. You need to look at it from an international/ currency relative perspective.

 

Because we live in a global economy, some currencies will strengthen and others weaken relative to each other... and all depreciate against gold [this is the essence of of hyper-deflation]. The export boom should be relatively short-lived due to wider problems and imbalances in the global economy; when demand falls off in developed countries where will developing countries export to? And there may be first a bust in booming economies before they manage to "decouple" and develop their own internal [alternative] markets.

 

This is all predictable with hyper-deflation glasses on. The difference between deflation and hyper-deflation theory is the first tends to be overly abstract and US-centric, whereas the second is more country specific, empirical, and international.

 

Weimar also enjoyed a boom in exports [at the expense of other countries] as the mark depreciated. It was noted by many commentators at the time that during the boom period unemployment was not a problem, whereas it was plaguing other countries.

 

 

Sure, "here" is relative... though I don't think Weimar-like cash hyper-inflation will happen anywhere.

 

 

If a hyper-inflationary comparison must be made it should be made with China not the US.... and once again the hyper-inflation is in credit:

 

http://www.latimes.com/business/la-fi-0907...8818,full.story

 

The economic bounce has generally almost nothing to do with exchange rates and generally everything to do with the absense of a collapse in credit.

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The economic bounce has generally almost nothing to do with exchange rates and generally everything to do with the absense of a collapse in credit.

I think it has to do with both. Germany's exports are helped by a depreciated Euro. Chinese exports are helped by a credit boom. Do you think these exporting booms are sustainable given that they are only furthering the current imbalances in the global economy?

 

 

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I think it has to do with both. Germany's exports are helped by a depreciated Euro. Chinese exports are helped by a credit boom. Do you think these exporting booms are sustainable given that they are only furthering the current imbalances in the global economy?

 

They are not booms. All they show is a recovery to conditions that are weaker than before the crisis as firms and people all around the world replace stuff they need to replace and get on with their lives in the expectation the world did not actually end in september 2008 while meanwhile exceptionally low interest rates are in place and only slightly higher rates will have a huge moderating impact.

 

The US also has had a reasonable recovery of imports and exports with a stronger currency.

 

To some degree it is just a recession and an inflationary one at present and it could go on for 10 years or longer.

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They are not booms. All they show is a recovery to conditions that are weaker than before the crisis as firms and people all around the world replace stuff they need to replace and get on with their lives in the expectation the world did not actually end in september 2008 while meanwhile exceptionally low interest rates are in place and only slightly higher rates will have a huge moderating impact.

 

The US also has had a reasonable recovery of imports and exports with a stronger currency.

 

To some degree it is just a recession and an inflationary one at present and it could go on for 10 years or longer.

The way I see it nothing has been resolved between surplus/ deficit economies... creditor/ debtor countries. All we see at present is a stimulus backed restoration of the old status quo. The imbalances will only build until we get an even worse crisis.

 

There needs to be a structural solution to the problem.... a rebalancing of trade by rebalancing currencies imo.

 

Thanks to the current currency system, the global economy can remain irrational longer than countries can remain solvent.

 

Definition of hyper-inflation: pg 42, when money dies.

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The way I see it nothing has been resolved between surplus/ deficit economies... creditor/ debtor countries. All we see at present is a stimulus backed restoration of the old status quo. The imbalances will only build until we get an even worse crisis.

 

There needs to be a structural solution to the problem.... a rebalancing of trade by rebalancing currencies imo.

 

Thanks to the current currency system, the global economy can remain irrational longer than countries can remain solvent.

 

Adjustments are already happening and there needs to be flexibility while that happens.

 

The world is not created by law. It just exists and happens and an allowance has to be made for that reality rather than imaginining it can be engineered via some rigid mechanical process.

 

Modern currencies are whatever they need to be whenever they need to be, in the context of whatever they can be tolerated to be.

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from Ellen Brown

 

maybe Bill Still is right

 

link

 

 

He indicates that the British government is already funding more of its budget by seigniorage than Weimar Germany did at the height of its massive hyperinflation; yet the pound is still holding its own, under circumstances said to have caused the complete destruction of the German mark. Something else must have been responsible for the mark's collapse besides mere money-printing to meet the government's budget, but what? And are we threatened by the same risk today? Let's take a closer look at the data.

 

History Repeats Itself - or Does It?

In his well-researched article, Hutchinson notes that Weimar Germany had been suffering from inflation ever since World War I; but it was in the two year period between 1921 and 1923 that the true "Weimar hyperinflation" occurred. By the time it had ended in November 1923, the mark was worth only one-trillionth of what it had been worth back in 1914. Hutchinson goes on:

"The current policy mix reflects those of Germany during the period between 1919 and 1923. The Weimar government was unwilling to raise taxes to fund post-war reconstruction and war-reparations payments, and so it ran large budget deficits. It kept interest rates far below inflation, expanding money supply rapidly and raising 50% of government spending through seigniorage (printing money and living off the profits from issuing it). . . .

"The really chilling parallel is that the United States, Britain and Japan have now taken to funding their budget deficits through seigniorage. In the United States, the Fed is buying $300 billion worth of U.S. Treasury bonds (T-bonds) over a six-month period, a rate of $600 billion per annum, 15% of federal spending of $4 trillion. In Britain, the Bank of England (BOE) is buying 75 billion pounds of gilts [the British equivalent of U.S. Treasury bonds] over three months. That's 300 billion pounds per annum, 65% of British government spending of 454 billion pounds. Thus, while the United States is approaching Weimar German policy (50% of spending) quite rapidly, Britain has already overtaken it!"

And that is where the data gets confusing. If Britain is already meeting a larger percentage of its budget deficit by seigniorage than Germany did at the height of its hyperinflation, why is the pound now worth about as much on foreign exchange markets as it was nine years ago, under circumstances said to have driven the mark to a trillionth of its former value in the same period, and most of this in only two years? Meanwhile, the U.S. dollar has actually gotten stronger relative to other currencies since the policy was begun last year of massive "quantitative easing" (today's euphemism for seigniorage).3 Central banks rather than governments are now doing the printing, but the effect on the money supply should be the same as in the government money-printing schemes of old. The government debt bought by the central banks is never actually paid off but is just rolled over from year to year; and once the new money is in the money supply, it stays there, diluting the value of the currency. So why haven't our currencies already collapsed to a trillionth of their former value, as happened in Weimar Germany? Indeed, if it were a simple question of supply and demand, a government would have to print a trillion times its earlier money supply to drop its currency by a factor of a trillion; and even the German government isn't charged with having done that. Something else must have been going on in the Weimar Republic, but what?

 

Schacht Lets the Cat Out of the Bag

Light is thrown on this mystery by the later writings of Hjalmar Schacht, the currency commissioner for the Weimar Republic. The facts are explored at length in The Lost Science of Money by Stephen Zarlenga, who writes that in Schacht's 1967 book The Magic of Money, he "let the cat out of the bag, writing in German, with some truly remarkable admissions that shatter the 'accepted wisdom' the financial community has promulgated on the German hyperinflation." What actually drove the wartime inflation into hyperinflation, said Schacht, was speculation by foreign investors, who would bet on the mark's decreasing value by selling it short.

Short selling is a technique used by investors to try to profit from an asset's falling price. It involves borrowing the asset and selling it, with the understanding that the asset must later be bought back and returned to the original owner. The speculator is gambling that the price will have dropped in the meantime and he can pocket the difference. Short selling of the German mark was made possible because private banks made massive amounts of currency available for borrowing, marks that were created on demand and lent to investors, returning a profitable interest to the banks.

At first, the speculation was fed by the Reichsbank (the German central bank), which had recently been privatized. But when the Reichsbank could no longer keep up with the voracious demand for marks, other private banks were allowed to create them out of nothing and lend them at interest as well.4

 

A Story with an Ironic Twist

If Schacht is to be believed, not only did the government not cause the hyperinflation but it was the government that got the situation under control. The Reichsbank was put under strict regulation, and prompt corrective measures were taken to eliminate foreign speculation by eliminating easy access to loans of bank-created money.

More interesting is a little-known sequel to this tale. What allowed Germany to get back on its feet in the 1930s was the very thing today's commentators are blaming for bringing it down in the 1920s - money issued by seigniorage by the government. Economist Henry C. K. Liu calls this form of financing "sovereign credit." He writes of Germany's remarkable transformation:

"The Nazis came to power in Germany in 1933, at a time when its economy was in total collapse, with ruinous war-reparation obligations and zero prospects for foreign investment or credit. Yet through an independent monetary policy of sovereign credit and a full-employment public-works program, the Third Reich was able to turn a bankrupt Germany, stripped of overseas colonies it could exploit, into the strongest economy in Europe within four years, even before armament spending began."5

While Hitler clearly deserves the opprobrium heaped on him for his later atrocities, he was enormously popular with his own people, at least for a time. This was evidently because he rescued Germany from the throes of a worldwide depression - and he did it through a plan of public works paid for with currency generated by the government itself. Projects were first earmarked for funding, including flood control, repair of public buildings and private residences, and construction of new buildings, roads, bridges, canals, and port facilities. The projected cost of the various programs was fixed at one billion units of the national currency. One billion non-inflationary bills of exchange called Labor Treasury Certificates were then issued against this cost. Millions of people were put to work on these projects, and the workers were paid with the Treasury Certificates. The workers then spent the certificates on goods and services, creating more jobs for more people. These certificates were not actually debt-free but were issued as bonds, and the government paid interest on them to the bearers. But the certificates circulated as money and were renewable indefinitely, making them a de facto currency; and they avoided the need to borrow from international lenders or to pay off international debts.6 The Treasury Certificates did not trade on foreign currency markets, so they were beyond the reach of the currency speculators. They could not be sold short because there was no one to sell them to, so they retained their value.

Within two years, Germany's unemployment problem had been solved and the country was back on its feet. It had a solid, stable currency, and no inflation, at a time when millions of people in the United States and other Western countries were still out of work and living on welfare. Germany even managed to restore foreign trade, although it was denied foreign credit and was faced with an economic boycott abroad. It did this by using a barter system: equipment and commodities were exchanged directly with other countries, circumventing the international banks. This system of direct exchange occurred without debt and without trade deficits. Although Germany's economic experiment was short-lived, it left some lasting monuments to its success, including the famous Autobahn, the world's first extensive superhighway.7

 

The Lessons of History: Not Always What They Seem

Germany's scheme for escaping its crippling debt and reinvigorating a moribund economy was clever, but it was not actually original with the Germans. The notion that a government could fund itself by printing and delivering paper receipts for goods and services received was first devised by the American colonists. Benjamin Franklin credited the remarkable growth and abundance in the colonies, at a time when English workers were suffering the impoverished conditions of the Industrial Revolution, to the colonists' unique system of government-issued money. In the nineteenth century, Senator Henry Clay called this the "American system," distinguishing it from the "British system" of privately-issued paper banknotes. After the American Revolution, the American system was replaced in the U.S. with banker-created money; but government-issued money was revived during the Civil War, when Abraham Lincoln funded his government with U.S. Notes or "Greenbacks" issued by the Treasury.

The dramatic difference in the results of Germany's two money-printing experiments was a direct result of the uses to which the money was put. Price inflation results when "demand" (money) increases more than "supply" (goods and services), driving prices up; and in the experiment of the 1930s, new money was created for the purpose of funding productivity, so supply and demand increased together and prices remained stable. Hitler said, "For every mark issued, we required the equivalent of a mark's worth of work done, or goods produced." In the hyperinflationary disaster of 1923, on the other hand, money was printed merely to pay off speculators, causing demand to shoot up while supply remained fixed. The result was not just inflation but hyperinflation, since the speculation went wild, triggering rampant tulip-bubble-style mania and panic.

This was also true in Zimbabwe, a dramatic contemporary example of runaway inflation. The crisis dated back to 2001, when Zimbabwe defaulted on its loans and the IMF refused to make the usual accommodations, including refinancing and loan forgiveness. Apparently, the IMF's intention was to punish the country for political policies of which it disapproved, including land reform measures that involved reclaiming the lands of wealthy landowners. Zimbabwe's credit was ruined and it could not get loans elsewhere, so the government resorted to issuing its own national currency and using the money to buy U.S. dollars on the foreign-exchange market. These dollars were then used to pay the IMF and regain the country's credit rating.8 According to a statement by the Zimbabwe central bank, the hyperinflation was caused by speculators who manipulated the foreign-exchange market, charging exorbitant rates for U.S. dollars, causing a drastic devaluation of the Zimbabwe currency.

The government's real mistake, however, may have been in playing the IMF's game at all. Rather than using its national currency to buy foreign fiat money to pay foreign lenders, it could have followed the lead of Abraham Lincoln and the American colonists and issued its own currency to pay for the production of goods and services for its own people. Inflation would then have been avoided, because supply would have kept up with demand; and the currency would have served the local economy rather than being siphoned off by speculators.

 

The Real Weimar Threat and How It Can Be Avoided

Is the United States, then, out of the hyperinflationary woods with its "quantitative easing" scheme? Maybe, maybe not. To the extent that the newly-created money will be used for real economic development and growth, funding by seigniorage is not likely to inflate prices, because supply and demand will rise together. Using quantitative easing to fund infrastructure and other productive projects, as in President Obama's stimulus package, could invigorate the economy as promised, producing the sort of abundance reported by Benjamin Franklin in America's flourishing early years.

There is, however, something else going on today that is disturbingly similar to what triggered the 1923 hyperinflation. As in Weimar Germany, money creation in the U.S. is now being undertaken by a privately-owned central bank, the Federal Reserve; and it is largely being done to settle speculative bets on the books of private banks, without producing anything of value to the economy. As gold investor James Sinclair warned nearly two years ago:

"[T]he real problem is a trembling $20 trillion mountain of over the counter credit and default derivatives. Think deeply about the Weimar Republic case study because every day it looks more and more like a repeat in cause and effect . . . ."9

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The Weimar Pattern - Is it repeating ?

=====================================

 

We have be given loads of reasons why it MIGHT repeat... are there any signs yet ?

 

BEFORE the hyperingflationary blowoff in Weimar Germany, there was a brief Deflationary dip

(falling inflation, and a brief improvement in the Mark's exchange rate)

 

akihito.jpg : raw chart

 

By February 1920 (an) inflationary episode had run its course. For the next fifteen months the price index held stable. The mark actually gained in value against foreign currencies, so that prices of imported goods fell by some 50%. Here was a golden opportunity to establish a stable currency. However, during these fifteen months the government kept issuing new money. The currency in circulation increased by 50% and the floating debt of the Reichsbank by 100%, providing fuel for a new outbreak.

 

In May 1921, price inflation started again and by July 1922 prices had risen 700%. The Reichsbank continued printing new currency, although more slowly than the rate at which prices were rising. In fact, all through this period the issue of currency proceeded at a fairly smooth steady rate, while the price index moved up in great surges, interspersed by periods of stability.

 

After July 1922 the phase of hyperinflation began...

 

/source: http://www.usagold.com/germannightmare.html

 

In the years 2010-12, we have seen some signs of inflation, and flight from the USD, but not in all indices. For instance, Agricultural prices (as represented by DBA) have remained relatively "tame" since 2008.

 

GLD and DBA ... update

 

dbavsgld.gif

 

I will be waiting and watching these measures, since many think that run-away Money Growth and a blowing up on the Fed's balance sheet will inevitably lead to high inflation, and hyperinflation.

 

Broad money growth is less than some think, with a slowing trend in the US in recent months

qemonetarybasevssupply.jpg

/source: http://ftalphaville.ft.com/blog/2012/03/07/912541/monetary-blanks-in-the-eurozone/

 

Also by some measures in Europe, Broad money-growth has slowed:

4070424742.gif

/source: http://www.efinancialnews.com/story/2012-05-02/chartoftheday-ltro-banks-lending-eurozone

 

The Gold bugs, who benefitted so handsomely from QE1 and QE2, and suffering a bit, as they await QE3. The LTRO plan in Europe helped bring down bond yields, and also helped stock prices, but now that the money has been invested, the positive impact on stock markets is fading.

 

image4.png

 

This thread will investigate other changes during Weimar times, and compare them with current price levels and policy decisions.

 

As I start this thread, I cannot help but think that the current period, charcterised by a rising dollar, and a pullback in Gold prices, bond yields, and inflation indices, provides an excellent "hedging window", for those concerned about rising inflation and a falling dollar in the future.

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SO WHAT ARE WE WORRIED ABOUT ?

 

In Weimar Germany:

"The mechanism of inflation was simple. The government issued paper promises to pay, and the Reichsbank issued money on the security of these promises. When a government spends more than its income, it must borrow. If it merely borrows money from its citizens by selling them bonds, there need be no inflation. Instead of that money being spent or invested by the citizen, it is borrowed and spent by the government, but the total amount of money is not increased."

(link, as above)

 

In the USA today:

The US government is spending far more than it takes in in tax revenues, and borrowing the shortfall. In fact, the borrowing has been "blowing up the Fed's balance sheet", since the Fed has been buying a great deal the the Bonds issued by the government to cover its shortfall in recenues.

 

 

Let's confront the Fears, and consider what happens in a period of Hyperinflation

 

What happens to various Asset Classes

 

EXCERPT (from the same link)

 

Cash: Lost value rapidly ... the most disastrous investment.

 

Bank Deposits: Nearly as worthless as cash. However, after the stabilization the government decreed partial reimbursement, and sums in the range of 15-30% of the original deposit value were repaid.

 

Bonds, Mortgages: As usual in an inflation, bonds and mortgages fell in value even faster than cash. After the stabilization, some restitution was provided by law. Holders of government bonds were reimbursed to the extent of 2.5% of the original bond values. Mortgage holders also received some repayment, while a 1925 law provided for 15-25% reimbursement of corporate bondholders, though the payment was delayed for some years.

 

Real Estate: Farmers and holders of urban property seemed to benefit if their property was mortgaged; the inflation soon wiped out the mortgage debt. However, they received no income, as noted above, since rents were frozen. After the stabilization, heavy new taxes and the urgent need for cash forced most holders to remortgage their property, often more heavily than originally, so that their gains were illusory. Still, those who held real estate throughout managed to save the capital thus invested. However, those who sold during the inflation (often through desperate need for cash) fared poorly. Because it brought no income, real estate sold at extremely low real price levels during inflation.

 

Foreign Exchange: Those who held funds in dollars, pounds or other stable currencies, or in gold, saved their capital. The government set up rigid exchange controls as the inflation proceeded. As usual under such conditions, a black market flourished.

 

The ones who fared best were the small minority who had the foresight to exchange marks into foreign money or gold very early, before new laws made this difficult and before the mark lost too much value.

 

Personal Property: Capital was preserved by those who early changed it into objects of lasting value--rare coins, stamps, jewelry, works of art... Of course, most people did not understand the advantage of accumulating such property until the inflation was well along. By that time the prices of all goods had risen so much that they seemed outrageously bad bargains. In the event, however, cash proved an even worse bargain.

 

Common Stocks: In an inflation, common stocks are generally considered a desirable hedge to protect against or even to profit from the rise in prices. In practice, it is not so simple. In this country stock prices have been known to fall violently just when inflation was most evident (1946, 1957, 1966, 1969). Market fluctuations--the rise of exciting new speculative stocks, waves of fear or greed--all make it much too easy to buy or to sell at the wrong time or to go into the wrong stocks.

 

Getting down to specifics, we can say that those who bought a well-diversified list of stocks in solid, well-established companies quite early in the inflation and who held on throughout the period and also through the stabilization crisis saved much or all of their capital. However, there were many pitfalls along the wayside for the greedy, the fearful and the over-clever. Those who did best were investors with a certain unemotional, stolid character, a basic confidence that strong, well-managed companies would come through, and an immunity to excitement, anxiety and speculative temptations.

 

/source: http://www.usagold.com/germannightmare.html

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