The Weimar Republic then and the US Now (revised)

The cause of the immense acceleration of prices that occurred during the German hyperinflation of 1922–23 seemed unclear and unpredictable to those who lived through it, but in retrospect was relatively simple. The Treaty of Versailles imposed a huge debt on Germany that to be paid only in gold or foreign currency.

Not by treaty but by willful deficit spending the US now has a huge national debt similar to Germany in the 1920s.

The German government attempted to buy foreign currency with German currency, but this caused the German Mark to fall rapidly in value, which greatly increased the number of Marks needed to buy more foreign currency. This caused German prices of goods to rise rapidly which increase the cost of operating the German government that could not be financed by raising taxes. The resulting budget deficits and national debt increased rapidly financed by the central bank creating more money (Quantitative Easing in today’s terms).

The dollar is suffering from the effects of the first two rounds of “Quantitative Easing” (QE1 and QE2) which is the same as printing money and diluting the value of the dollar. 

When the German people realized that their money was rapidly losing value, they tried to spend it quickly. This increase in monetary velocity caused still more rapid increase in prices that created a vicious cycle.  This placed the government and banks between two unacceptable alternatives: if they stopped the inflation, this would cause immediate bankruptcies, unemployment, strikes, hunger, violence, collapse of civil order, insurrection, and revolution.  If they continued the inflation, they would default on their foreign debt. The attempts to avoid both unemployment and insolvency ultimately failed when Germany had both. 

Does any of this sound familiar? 

Read up on Germany in the 1920s and 1930s. 

The Federal Reserve has launched a third round Quantitative Easing (QE3) monetary stimulus.   The Fed had the choice of either a fixed amount of dollars or open-ended.  A fixed amount would be bad enough but an open-ended unlimited program is the same thing that Germany did back in the 1920s. 

QE3 is 40 billion every month and it is open ended. 

The stock market, of course, reacted positively but not an awful lot.  However, what the stock market does, except for commodity prices, has little direct impact on the everyday consumer.  

Economists say this QE is powerful commitment to pump (read print) money into the economy until job growth picks up significantly.  That is not going to happen until the banks start lending again and they will not do that as long as the congress and the president present mixed signals that result in economic uncertainty.  Small businesses will not seek loans, expand, or hire for the same reason. 

Watch for commodity prices to increase.  It may not be a quick and rapid increase but it will begin as soon as the speculators become organized. 

Sometime in the probably not too distant future, the Weimar cycle will begin anew right here in America. 

Are you ready for anything?