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

[drbubb]

See signature.

As posted elsewhere...

Answer: You ask the wrong question. No money needs to be in people's hand for prices to rise. When confidence wanes, money will lose value, no matter in whose hands it is.

 

EDIT: Keep in mind that in a hyperinflation no one ever has enough money. There is a general lack of money. That's why so much has to be created first place.

 

EDIT2: DrBubb comes into GF's corner store and ask how much the potatoes are. GF says: $X. Bubb says, oh, ok, but unfortunately I have no money. GF says, no problemo, come back tomorrow. Then, overnight, the Fed monetizes another trillion or two. DrBubb comes back next morning, and asks GF: how much are the potatoes. GF says: $3X. Bubb says, oh wow, that's suddenly very expensive, but unfortunately I still have no money at all. GF says, no problem, come back later. Meanwhile GF will sell the potatoes to the Fed's cantina and to Pimco's favourite restaurant, because the money is somewhere (for instance at Pimco, because they sold all their $h1te to the Fed), even if the 'people' don't have it.

That doesn't work...

Because SOMEBODY has to buy the potatoes, so the money arrives from someone somewhere.

Who? in your example?

Do you imagine that foreigners were all flying to Germany to buy potatoes?

 

Of course, spending by those with stronger currencies is part of the explanation, but not enough to explain the whole thing

 

(BTW, I should roll my eyes, I ask intelligent questions, and get half-arse partial answers.

Sorry for the insult, GF, but I am just retruning what I get here !)

 

My main point is this:

The Fed or the Treasury will have to do something MORE RECKLESS than we have seen so far, if we are going to see hyperinflation. The hyperinflationist here were predicting HYPERINFLATION BY NOW, and we are not seeing it now - instead we have mild inflation in essentials, and asset price deflation (in some areas). My question (How will the money get into people's hands?) gets more and more important as the predicted high inflation receeds further and further into the future - That's how I see it, anyway.

[G0ldfinger]

But the whole episode only took a few months, so those two stages were weeks apart

No, I think the x17 part took from 1914 to 1920, or so.

[G0ldfinger]

Who? in your example?

The Fed/Pimco has the money. The money then goes to those who have the commodities (farmers, miners, ...).

 

Someone always has the money. And that someone will get rid of it if too much of it is sloshing around.

[romans holiday]

See signature.

The idea of "causation" is a very interesting one in hyper-inflation. Some think hyper-inflation follows simplistically the amount of money/ notes in the economy. So you have notes printed and then an over-abundance of notes bidding up the price of real stuff.

 

But theses simple lines of causation were not followed in Weimar. What did happen is more like your signature states... demand-pull, but then you have to ask could this happen in today in major countries like the US.

 

From what I read, the mark first depreciated against major foreign currencies. This helped with full employment in Weimar at the expense of the exports of other countries.

+ First: prices went up in Weimar, and

+ Second: workers, with excellently organized unions, demanded more wages, then

+ Thirdly, the bank printed currency to meet the demands of both industrialists and workers.

 

Money didn't "bid up" prices.... inflating prices created the demand for increased money supply [the demand-pull of your sig.]. Your "17X inflation" is what enabled Germany to remain employed. It was only when the currency finally lost all purchasing power that mass unemployment finally set in. Of course, the middle classes/ rentiers were wiped out earlier as you say.

 

 

Is there a parallel with today? I can't see it for the following:

 

1] Demand destruction is the buzz word today... for both consumption and [debt] money.

 

2] Are more notes or credit coming into existence for consumption? No, the money being created is not going into the economy, but into restoring the balance sheets of banks.

 

3] And can the dollar or the pound depreciate against other major currencies when they are themselves the major currencies? I think at best all we will see is furthering instability between currencies.

 

4] The slow strengthening of gold is the due to this instability between currencies imo.

[drbubb]

The Fed/Pimco has the money. The money then goes to those who have the commodities (farmers, miners, ...).

Someone always has the money. And that someone will get rid of it if too much of it is sloshing around.

I can buy into that only if you are predicting a massive increase in money velocity.

Is that what you have in mind? And what do you see triggering that rise ?

[InternationalRockSuperstar]

...

Do you imagine that foreigners were all flying to Germany to buy potatoes?

...

 

do you imagine that federal gov't employees do not buy food with their wages?

 

do you imagine that the 40 million americans on food stamps don't buy food with their food stamp cards?

[G0ldfinger]

... It was only when the currency finally lost all purchasing power that mass unemployment finally set in. ...

The funny thing is that the currency was ALREADY worthless (i.e. it didn't finally lose it, although total money supply became worth less and less IIRC). So, it is not about the level of worthlessness, but about the acceleration of it that makes the ultimate economic catastrophe.

 

So, to shape this into a preciser thought, if HI is slow enough(?) such that at least the economically most active people can stay afloat (like in Weimar for a time since the unions were strong), there won't be a total economic collapse. However, a large part of the population (savers, pensioners, the insured) can be (were!) completely wiped out already. This is a major catastrophe and impoverishes many, but it is not yet total collapse. Total collapse comes when no one is able to keep up anymore and paper money simply makes no sense at all anymore.

[G0ldfinger]

I can buy into that only if you are predicting a massive increase in money velocity.

Is that what you have in mind? And what do you see triggering that rise ?

Watch those with the large savings: China, Japan, Pimco. A trigger might come from that corner, and then the other bond and money holders could panic too. But it might be slow process, it doesn't have to come overnight IMO. We're on the path, just look at gold.

[romans holiday]

Watch those with the large savings: China, Japan, Pimco. A trigger might come from that corner, and then the other bond and money holders could panic too. But it might be slow process, it doesn't have to come overnight IMO. We're on the path, just look at gold.

A steady increase in the gold price does not necessarily entail inflation. It may instead just be reflecting uncertainty and instability in the financial system.

[romans holiday]

The funny thing is that the currency was ALREADY worthless (i.e. it didn't finally lose it, although total money supply became worth less and less IIRC). So, it is not about the level of worthlessness, but about the acceleration of it that makes the ultimate economic catastrophe.

 

So, to shape this into a preciser thought, if HI is slow enough(?) such that at least the economically most active people can stay afloat (like in Weimar for a time since the unions were strong), there won't be a total economic collapse. However, a large part of the population (savers, pensioners, the insured) can be (were!) completely wiped out already. This is a major catastrophe and impoverishes many, but it is not yet total collapse. Total collapse comes when no one is able to keep up anymore and paper money simply makes no sense at all anymore.

The currency wasn't worthless until people refused to accept it for goods. Even while it was depreciating over the years and then halving in value over the months and weeks... it was still worth something. It only became worthless when people refused to accept it. Actually, it's amazing how long they continued to accept the money. There was always....up until the end, as you say, a perceived shortage of money notes. It took quite a while for the masses to see that their money was depreciating rather than stuff getting more expensive.

 

How does this relate to today's developed economies?

[romans holiday]

Now, the problem is balancing off the debt defaults against the injections by QE etc. to keep the banks' reserves adequate to stave off a collapse / run. Problem is, matching debt defaults against money velocity, reserve ratios, QE-created reserves to keep the bubble 'just so' is impossible IMO. That is why I believe (and always have) they will plump towards a higher inflation target than 2%: it gives them a safety margin, lets the old bad debts fade away.

 

Hyper- will follow IF the authorities lose the confidence of investors and they are forced to print to keep going.

Ok, shoot me down!

If only they could achieve this rosiest of outcomes, where a steady inflation could erode the real burden of debt, and everyone would get back to their merry consuming way.

 

My reading of it is that the authorities will be doing "well" to stave of a debt implosion and economic collapse by pumping money into the banks. A long slow deflation Japanese style would then be the best of all possible outcomes.

[enrieb]

As posted elsewhere...

 

That doesn't work...

Because SOMEBODY has to buy the potatoes, so the money arrives from someone somewhere.

Who? in your example?

Do you imagine that foreigners were all flying to Germany to buy potatoes?

 

Of course, spending by those with stronger currencies is part of the explanation, but not enough to explain the whole thing.

 

Foreigners did come to Germany in quite large numbers, and could live very comfortably on the appreciation of their own currency against the Mark. During the inflation, there were plenty of properties and rooms to rent and a foreigner with hard currency would get by far the best properties.

 

With the low cost of living Weimar Germany was an excellent place for foreigners to study at university due to the low rent, cheap meals and clothing. The train network was by all accounts excellent and low cost which made getting around one of the few pleasures left even for the domestic population. Servicing rich foreigners with prostitution was also common place, even amongst the more respectable middle classes. Such was the demand for hard currency, it was also quite common for young boys to dress as girls and perform sex acts to provide income for the family. Gambling was also popular, as the paper money would be worthless in a few days so people would spend it as fast as they could, to get maximum value. All in all, despite the destruction of real wealth, Weimar republic was a hedonistic, live-for-today place to visit. Their are many similarities the Weimar Republic and the general situation in Thai Land since their currency collapse.

 

Despite the popularity enjoyed by foreigners, or rather their currency, the luxurious lifestyle that foreigners enjoyed created a real resentment towards them and in-part help bring about the rise of the Nazi's and the horrendous policies that followed. Due to diaspora, for centuries Jewish people had an extensive network of family, friends and trading partners throughout europe, this was excellent for communication, credit, trading, merchant banking, foreign exchange and helped to make them very successful business people, being able to better take advantage of currency imbalances. Having family and friends in other countries allowed the Jewish people that lived in Germany to have a good source of hard currency with which to invest and buy up assets thus creating more resentment.

 

[Jake]

If only they could achieve this rosiest of outcomes, where a steady inflation could erode the real burden of debt, and everyone would get back to their merry consuming way.

 

My reading of it is that the authorities will be doing "well" to stave of a debt implosion and economic collapse by pumping money into the banks. A long slow deflation Japanese style would then be the best of all possible outcomes.

I should think that a slow deflation Japanese style would be best but Japanese people had a huge savings cushion PLUS they were exporting into a booming global economy. There is fat chance of that now for the late

comers to the deflation party.

I would say the Japanese deflation has been a walk in the park till 2008. Only these last two years does it feel like the general populace has been traumatized somewhat. And I don't think it is over yet. Maybe merely the end of the phony deflation/K winter and the beginning of the Ice Age winter. Japan will be stuffed without an export market. Domestically we are just about dead. We have had the Eco boom points crap. Japan has even turned exporter of gold. Personal debt is creeping up and societal breakdown is speeding up. Savings are running on the red light and we have simply loads of oaps to service. Maybe we are getting to the point where the uk is nearly. I expect infl ation here within 4/5 years. Perhaps less. Before that though I expect one more big drop to the bottom.

[Jake]

BTW, how long did the Weimar Hyperinflation last and what ended it?

[romans holiday]

BTW, how long did the Weimar Hyperinflation last and what ended it?

Though the mark steadily depreciated from the War years, the depreciation of the currency really picked up in '21, '22. The currency finally lost all purchasing power in'23 when the French moved in to occupy the industrial heartland. To support the workers and their movement of passive resistance against the French... the mark was printed into oblivion. When it was finally unacceptable for anything, German finances were stabilized on the new Retenmark with massive unemployment and bankruptcies ensuing.... as long as the currency could continue to be depreciated the economic machine could roll on.

 

I should think that a slow deflation Japanese style would be best but Japanese people had a huge savings cushion PLUS they were exporting into a booming global economy. There is fat chance of that now for the late

comers to the deflation party.

 

 

p 1

JUST BEFORE THE First World War in 1913, the German mark, the British shilling, the French franc, and the Italian lira were all worth about the same, and four or five of any were worth about a dollar. At the end of 1923, it would have been possible to exchange a shilling, a franc or a lira for up to 1,000,000,000,000 marks, although in practice by then no one was willing to take marks in return for anything. The mark was dead, one million-millionth of its former self. It had taken almost ten years to die.

The mark's fall began gradually. In the war years, 1914-1918, its foreign exchange value halved, and by August 1919 it had halved again. In early 1920, however, although the cost of living had risen less than nine times since 1914, the mark had only one-fortieth of its overseas purchasing power left. There followed twelve months of nervous fluctuation, but then the mark sped downwards with gathering momentum, dragging social misery and political disruption in its wake. Not until 1923 did Germany's currency at last go over the cliff-edge of sanity to which it had, as it were, clung for many months with slipping finger-tips. Pursuing the money of Austria and Hungary into the abyss, it crashed there more heavily than either.

[drbubb]

Wholesale Price Index : US$1.00 equals

July 1914 :........ 1.0 : ..... 4.2 Mark

Jan. 1919 :........ 2.6 : ..... 8.9 Mark

July 1919 :........ 3.4 : .... 14.0 Mark

Jan. 1920 :...... 12.6 : .... 64.8 Mark

July 1920 :......... .... : .... 39.5 Mark

Jan. 1921 :....... 14.4 : .... 64.9 Mark

July 1921 :....... 14.3 : .... 76.7 Mark

Jan. 1922 :....... 36.7 : ... 191.8 Mark

July 1922 :...... 100.6 : ... 493.2 Mark

Jan. 1923 :... 2,785.0 : .. 17,972 Mark

July 1923 : 194,000.0 : . 353,412 Mark

Aug. 1923 :.............. : 4.6million Mark

Sep. 1923 :.............. : 98.million Mark

Oct. 1923 :............... : 25.billion Mark

Nov. 1923 726 Billion... 4.2trillion Mark

Chart

/source:

/my old Weimar.co.uk site : http://www.goldstock.co.uk/weimar.htm

[romans holiday]

Wholesale Price Index : US$1.00 equals

July 1914 :........ 1.0 : ..... 4.2 Mark

Jan. 1919 :........ 2.6 : ..... 8.9 Mark

July 1919 :........ 3.4 : .... 14.0 Mark

Jan. 1920 :...... 12.6 : .... 64.8 Mark

July 1920 :......... .... : .... 39.5 Mark

Jan. 1921 :....... 14.4 : .... 64.9 Mark

July 1921 :....... 14.3 : .... 76.7 Mark

Jan. 1922 :....... 36.7 : ... 191.8 Mark

July 1922 :...... 100.6 : ... 493.2 Mark

Jan. 1923 :... 2,785.0 : .. 17,972 Mark

July 1923 : 194,000.0 : . 353,412 Mark

Aug. 1923 :.............. : 4.6million Mark

Sep. 1923 :.............. : 98.million Mark

Oct. 1923 :............... : 25.billion Mark

Nov. 1923 726 Billion... 4.2trillion Mark

 

/source:

/my old Weimar.co.uk site : http://www.goldstock.co.uk/weimar.htm

Weimar is a horror story, but rather than being spooked we need to ask how it is similiar and different to today.

 

The mark is measured above to the dollar. What can the dollar be measured against? The only thing I can think of is gold.

 

+ the similarity to Weimar... the massive depreciation of the dollar against another currency [gold].

+ the difference to Weimar... the dollar [or local currency] remains strong [and perhaps even strengthens] against assets.

 

against gold, this represents the utter collapse of the monetary value of assets [ok, slightly exaggerating].

 

 

 

 

 

 

 

Once the idea of gold being in a bubble is exorcised from the mind, it is quite easy to see gold as the currency of choice.

 

Edit. Another similarity- As we find it hard to part with our currency for a stronger one [gold], so too did many Germans find it hard to part with their marks for stronger currencies. They were "habituated" to the mark, just as we are to our own currency. They also thought their currency would "bounce back".

 

Of course, if local currencies remain relatively strong against assets this is not such a dire choice for the general population today as it was then. It is more a case here of someone with an investor's mindset looking to maximize their opportunities; gold will be much stronger against assets than the local currency will be. Personally, I also see something of a "just" price involved here.

[G0ldfinger]

The currency wasn't worthless until people refused to accept it for goods. ... it was still worth something. It only became worthless when people refused to accept it. ...

Even in the end it was not worthless, but worth 4.2 trillion Marks a US-Dollar. Apparently you did not get my point. The Mark was almost as worthless in 1920 as it was in 1923 - namely pretty much zero. The actual catastrophe lies in the speed of depreciation which very much accelerates towards the end. This hyper-acceleration is what really lets the economy not function anymore. The currency/bonds/insurance/fixed income holders had been wiped out years before.

 

That's why it is so dangerous to ignore the possibility of HI. You may get wiped out long before things go super-critical. Just look at real interest rates right now.

[Plastic Elastic]

A similarity: the corruption of public morals.

 

All civil society needs a public morality. In Weimar common decency broke down as people sought to physically survive. This is comparable to today, though to a much lesser extent, where the old idea of "honouring your debts" is vanishing as people seek to financially survive. The thing to note is the corruption of the monetary system leads to the corruption of morals.

 

http://www.nytimes.com/2010/08/12/business...tml?_r=1&hp

 

I noticed some of that when looking at the MSE Loan forum. It's full of threads like (slightly exagerrated) "I'm a 21 yo placement student. Where can I get a cheap loan to buy a £10K car?" or "I've taken out a loan with Loansharks plc on 2000% APR. Why are they hassling me for money?"

 

Ok, it's to a much lesser extent than Weimar Germany, but I conclude that the UK populace as a whole

1. has either not realised that debt isn't such a good idea, in particular when you can't pay it back, or
2. is subconsciously preparing for a collapse of the currency.

Either does not bode well.

[romans holiday]

Even in the end it was not worthless, but worth 4.2 trillion Marks a US-Dollar. Apparently you did not get my point. The Mark was almost as worthless in 1920 as it was in 1923 - namely pretty much zero. The actual catastrophe lies in the speed of depreciation which very much accelerates towards the end. This hyper-acceleration is what really lets the economy not function anymore. The currency/bonds/insurance/fixed income holders had been wiped out years before.

 

That's why it is so dangerous to ignore the possibility of HI. You may get wiped out long before things go super-critical. Just look at real interest rates right now.

 

In early 1920, however, although the cost of living had risen less than nine times since 1914, the mark had only one-fortieth of its overseas purchasing power left. There followed twelve months of nervous fluctuation, but then the mark sped downwards with gathering momentum, dragging social misery and political disruption in its wake. Not until 1923 did Germany's currency at last go over the cliff-edge of sanity to which it had, as it were, clung for many months with slipping finger-tips. Pursuing the money of Austria and Hungary into the abyss, it crashed there more heavily than either.

 

This gives some idea of price rises over the course of 1922. p 65

A litre of milk, which had cost 7 marks in April 1922 and 16 in August, by mid-September cost 26 marks. Beer had climbed from 5.60 marks a litre to 18, to 30. A single egg, 3.60 in April, now cost 9 marks. In only nine months, Mr Seeds's chauffeur's weekly bill for an identical food basket had risen from 370 marks to 2,615.

 

How was the Mark as worthless in 1920 as it was in 1923? Within Weimar, in 1920, there was massive demand for the mark [hence the printing]. There was a perceived shortage of marks in Germany. As long as you had enough marks, you could buy goods and services; ie, was worth something. It finally became practically worthless in 1923 when it could no longer operate as a medium of exchange. Within and without Weimar, currency speculation with the mark was going on. This only came to a complete stop when the mark became practically worthless.

 

Perhaps you are confusing two things; in 1920 the mark was not a good store of value, in 1923 it was no longer even a medium of exchange.

I think it's fair to say this is also the difference between inflation and hyper-inflation [where even the medium of exchange function is destroyed]. In the inflation period, a fevered demand for the currency lead also to a feverish hyper-active economy, when demand for the currency collapsed in hyper-inflation so too did the economy.

 

Here is a note Fergusson made on the definition of hyper-inflation:

(Phillip Cagan defined hyper-inflation as beginning in the month in which price rises first exceed 50 per cent (equivalent to an annual rate of 600 per cent): cf. his essay in Studies in the Quantity Theory of Money, edited by Milton Friedman, University of Chicago Press 1956.)

 

I think there has to be some psychological tipping point involved here where feverish demand for the currency turns to a rejection of it. This may involve a sudden dispersion of mass money illusion where the population suddenly realises that things aren't getting ridiculously more expensive, but that the value of their money is eroding before their eyes.

 

Investors, foreigners, and the internationally minded, saw the reality early on in Weimar, the population didn't. I think the same is true today, that investors, CBs, the internationally minded, have seen the debt problem and moved towards gold. But the general population may never see this for the currency may hold its value against local assets and consumables [ie, no inflation] due to the fact our money is created through debt and we are now in debt deflation mode. Think hyper-deflation of the monetary value of assets [against gold] not hyper-inflation of the currency. It's different this time.

[G0ldfinger]

How was the Mark as worthless in 1920 as it was in 1923? Within Weimar, in 1920, there was massive demand for the mark [hence the printing]. There was a perceived shortage of marks in Germany.

There was an even bigger shortage of Marks in 1923. And, they were just as worthless. In 1920 the value was less than 10% than that in 1914, and so in 1923. Someone who lost 90% or 99%, will he care so much about the difference? Will you care so much wether your Yens will have lost 90%, 95% or 99% of their value?

 

It finally became practically worthless in 1923 when it could no longer operate as a medium of exchange.

No, you are confused. It was already worthless. But there was still a difference, which is the one below.

 

Perhaps you are confusing two things; in 1920 the mark was not a good store of value, in 1923 it was no longer even a medium of exchange.

That is essentially what I said and I gave reasons for it (and except for the fact that "not a good store of value" is a gross understatement). But many were wiped out already in 1920 anyway. The acceleration of the decay was important.

[G0ldfinger]

Here is a note Fergusson made on the definition of hyper-inflation:

(Phillip Cagan defined hyper-inflation as beginning in the month in which price rises first exceed 50 per cent (equivalent to an annual rate of 600 per cent): cf. his essay in Studies in the Quantity Theory of Money, edited by Milton Friedman, University of Chicago Press 1956.)

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

[romans holiday]

There was an even bigger shortage of Marks in 1923. And, they were just as worthless. In 1920 the value was less than 10% than that in 1914, and so in 1923. Someone who lost 90% or 99%, will he care so much about the difference? Will you care so much wether your Yens will have lost 90%, 95% or 99% of their value?

There is a difference between worth less and worthless. For the middle classes/ rentiers who didn't swap marks for foreign currencies, their saved money/ fixed income became worth less the more it depreciated. Though there status was pretty much wiped out, their money wasn't worthless in 1920 when it was increasingly used to buy the necessities of life. The mark still functioned as a medium of exchange, even though it had lost the "store of value" function a while before.

 

But my focus was more on the real economy and the working classes from 1920. The working class fared a lot better than the middle classes. Their wages continued upwards thanks to the "demand-pull" inflation of organised unions and industrialists though in real terms the cost of living was always getting more expensive. The Mark certainly wasn't worthless to them in 1920. It was this feverish demand for money that kept the real economy going in fevered industry/exports .

 

No, you are confused. It was already worthless. But there was still a difference, which is the one below.

 

That is essentially what I said and I gave reasons for it (and except for the fact that "not a good store of value" is a gross understatement). But many were wiped out already in 1920 anyway. The acceleration of the decay was important.

 

I don't think there is much of a disagreement here if you keep in mind the distinct functions of money as both a "store of value" and a medium of exchange. What interests me is the point at which Weimar - long after the "store of value" function in its currency was lost - switched from inflation to hyper-inflation. Here we are focusing on the currency as merely a medium of exchange. As you say it would have accelerated quickly at the end as prices were starting to become astronomical. Still, during the inflationary period though, and up to the hyper-inflationary point, marks were not worthless.... they still managed to make their world go around.

 

Someone who lost 90% or 99%, will he care so much about the difference? Will you care so much wether your Yens will have lost 90%, 95% or 99% of their value

I can see we are focusing on different aspects here; I'm looking at money as a medium of exchange affecting the working class and real economy, whereas you seem focused on money as a store of value for the middle classes, which was long gone by the early 20's of Weimar.... no argument there.

 

As for Yen, dollar, pound I don't think they'll even lose 10% of their value against assets. Rather, assets will depreciate against them.

[Nigel Watson]

Can we agree on two points?

 

1. Hyperinflation is not caused by rising wages

 

2. Instead, hyperinflation is caused by a currency collapse, swiftly followed by currency repudiation

[InternationalRockSuperstar]

...

As for Yen, dollar, pound I don't think they'll even lose 10% of their value against assets. Rather, assets will depreciate against them.

 

?

 

what do you mean by assets?