Déjà vu all over again once more
By
Bill Bonner Jun 19, 2009
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Rarely has MoneyWeek been criticised for understating trouble. But trouble keeps getting ahead of us. We can barely keep up with it. Here on the back page, we have become alarmists with no bell or siren. We break the glass and pull the lever every week, but no sound is heard. Except the familiar words whispered in a hoarse, weary voice... watch out!
So today we turn to the dead for eyewitness accounts. Otto Freidrich described the period of German hyperinflation and its effects: "People carried wages home in huge crates; by the time they could spend even their trillion-mark notes they were practically worthless... There was not a single girl in the entire middle class who could get married without her father paying a dowry… They saved and saved so that they could get married, and so it destroyed the whole idea of remaining chaste until marriage… the girls learned that virginity didn't matter anymore."
"Against my will," wrote author Stefan Zweig, "I have witnessed the most terrible defeat of reason and wildest triumph of brutality in the chronicles of history." Zweig lived through the hyperinflation in Germany during the 1920s and sold stories to survive. Later, he moved to Brazil and blew his brains out.
Brutality triumphed because civilised life took a dive. The Treaty of Versailles condemned the Huns to pay more than 47,000 tonnes of gold in reparations. Taking that amount of real money out of the economy left the Germans with no choice. They had no money left. They had to create it. Result: hyperinflation. The size of the bank-notes rose with the crisis. In 1922, the highest denomination was 50,000 mark. By 1923, the highest denomination was 100,000,000,000,000 mark. By December 1923 the exchange rate was 4,200,000,000,000 marks to one US dollar.
The German middle class was wiped out. More importantly, the handrails and guideposts wobbled, so there was nothing to hold onto and no way to know where you were going. Businesses, banks, military, police, even the government itself, all wobbled and fell down. In the tumult, the war-hardened rabble rolled towards Herr Hitler like loose nuts.
"In economics," begins the Wikipedia description, "hyperinflation is inflation that is very high or out of control... Hyperinflation is often associated with wars (or their aftermath), economic depressions, and political or social upheavals. In both classical economics and monetarism, it is always the result of the monetary authority irresponsibly borrowing money to pay all its expenses."
Who is the biggest borrower today? The United States of America. It already owes Japan and China combined about the same amount – adjusted to today's money – as Germany owed their former enemies. But America's debts are far grander than those of Germany in 1923 – even adjusted to the relative size of the US economy. And America keeps borrowing more.
In a single year – 2009 – it will borrow $1.3trn, again, just shy of Germany's entire reparations bill. While the private sector during the bubble years brought US debts to a record 3.7 times the entire nation's output, now it's the public sector that does the borrowing. The Obama administration is adding to the accumulated US debt at a suicidal pace – four times faster than the record set just last year. And America's central bank hands the borrower a loaded pistol; it is adding bank reserves – which allow the money supply to expand geometrically – at a 4,500% rate.
That last number is not a typo. It's an SOS. If the Federal Reserve were a boat, it would be taking on water. If it were a normal bank, it would be closed down immediately. It is clearly another disaster waiting to happen.
But neither Karl Helferich, Germany's central bank chief in the 1920s, nor Ben Bernanke set out to ruin their economies; they do it not intentionally, but inevitably. Not because they want to, but because they have to. Like the Germans in the 1920s, America has no politically acceptable way to pay her growing debts – except by printing more money. And now, her leading intellectuals urge her on.
"The debate over economic policy has taken a predictable yet ominous turn," writes Nobel-winning economist Paul Krugman in The New York Times this week. "The crisis seems to be easing, and a chorus of critics is already demanding that the Federal Reserve and the Obama administration abandon their rescue efforts... those demands should be ignored. It's much too soon to give up on policies that have... pulled us a few inches back from the abyss."
"It's déjà vu all over again," he concludes. Cometh the hour when the feds begin to cut back their programme of inflation, cometh the experts to tell them why they shouldn't pay any attention.
"To follow the good counsel of stopping [the inflation machine] would mean... that in a very short time the entire public, factories, mines, railways and post office, national and local government, in short, all national and economic life would be stopped," said Helferich in 1923.
Déjà vu, all over again. Once more.
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