Asia Times: Weimar model for Bernanke

[marmar]

Weimar model for Bernanke
By Martin Hutchinson


At the Federal Open Market Committee meeting last week, policy remained unchanged, and the accompanying statement made the extraordinary claim that "measures of underlying inflation continue to be somewhat low, relative to levels that the committee judges to be consistent, over the longer run, with its dual mandate".

The following day, the March Producer Price Index showed prices rising at 1.6% per month, equivalent to a rate of 21% per annum. Echoes of the German Weimar Republic inflation are getting louder, as do the chances for Federal Reserve chairman Ben Bernanke to turn into Reichsbank chairman Rudolf von Havenstein.

Von Havenstein took great pride in his work, bragging repeatedly about the Reichsbank's success in gearing up physical note production to meet soaring market demand. Rather than practice or urge monetary restraint, he regarded the explosion of physical banknote production as a triumph of German efficiency. Such was the need for speed, in the fall of 1923 when prices were doubling every three days, he was forced to resort to airplanes to get the currency to the more distant economic centers. All he lacked was Ben Bernanke's helicopter. ..........(more)

The complete piece is at: http://www.atimes.com/atimes/Global_Economy/MC23Dj02.html

[no_hypocrisy]

1. Does that mean I'll soon be using a wheelbarrow full of worthless dollars to buy a stick of butter?

Weimar Republic is best known for its hyperinflation in order to pay the debt of Reparations for World War I, imposed mostly by Wall Street which financed England and Frances' military.

[Hosnon]

2. 21% every year is not even close to 200% every three days. nt.

[dixiegrrrrl]

3. Verily. Well put.

Sadly, very few people actually follow this topic, marmar. This is a good article, tho.
( have you considered cross posting in Economy forum, where it will "stick" longer?)
:hi:

[marmar]

6. Will do.

[happyslug]

4. Hyper inflation only occurs in Country with huge amount of debt in foreign currency

Thus the problem with Germany in the 1920s was the huge funds Germany needed to pay to the Allies as war indemnities. Those war indemnities were valued in Gold, Pounds and Francs NOT German Marks, thus the traditional way to solve Government debt (inflate it away at about 10-20% per year) would NOT address those debts. The Germans did inflate away all of its internal debts but then Hyperinflation came into play and stayed until the US lead negotiations that reduced not only how much Germany had to pay, but at what rate (Germany finally paid off the last its WWI debts to foreign Nations in 2010, the payments were reduced in the 1920s to almost Zero, stayed at that level under Hitler in the 1930s and 1940s, put into abeyance after WWII until German unification and then paid dollar for dollar after that date i.e. One 2010 Dollar paid off one 1920 Dollar of debt, i.e. A dollar in 1920 was valued at $20 to an ounce of Gold, A Dollar in 1920 was valued at over $1418 an ounce of Gold).

See the Dawes's plan for more information on how the Hyperinflation was curtailed based on American Loans to Germany to pay off German War debts:
http://en.wikipedia.org/wiki/Dawes_Plan

Now, the some Articles mention "Gold Marks" i.e. German Currency based on a fixed value to Gold, but after WWII, that became a fixed value to the US Dollar and as the US dollar inflated so did the German Debt. On a Currency basis the "debt" was paid off, but in reality the debt was inflated away.

Argentina and its hyperinflation of the 1970s and 1980s was based on the fact its debt was measured in dollars not Argentinean Currency and thus followed the German 1920 experience, inflated away its internal debts then tried to do the same with its external debt, but Argentina had no control over the value of the Currency the Foreign debt was in, thus the attempt to inflate failed, but Argentina continue to have hyper inflation until its foreign creditors re-wrote its foreign debt to something Argentina could handle, then inflation went down (Argentina adopted the US dollar as its Currency of almost a decade until further economic collapse after 2000).

Zimbabwe is doing the same thing today, it has inflated away its internal debt and went to hyperinflation in an attempt to do the same with its foreign debt which is priced in foreign currency. Until someone deals with the Government of Zimbabwe i.e. work out a deal abolishing the foreign debt, hyperinflation will continue.

My point is the US Debt is in US Dollars and as long as that is the case Hyperinflation will NOT occur in the US. Hyperinflation only occurs as a country tries to eliminate its debt by inflation and finds it can NOT do that if the debt is in a Currency other then its own. A county can inflate away almost all of its debt, if the debt is in its own currency, in about 10 years at 10% inflation and given that situation why permit hyperinflation? Thus hyperinflation only occurs in country whose debt is in a currency that country does NOT control. That is NOT the case with the US so any fear of hyperinflation in the US is overblown.

[Possumpoint]

5. Not Sure I Agree With Your Conclusion

If we lose our reserve currency status we lose control of the dollars value. It will be set by speculators bidding it against the new reserve. Under that scenario, the cost of imported goods, especially oil will rise sharply.

[bossy22]

8. not necessarily

we still control the printing press and the underlying principles of the OP are correct. Yes it would be harder no doubt but we could still do it.

The thing is starting a new reserve currency is a very very expensive, very complicated job.

[bemildred]

7. Yeah, I agree, 70s style is more likely, unless we start foreign-denominated borrowing.

That will be more than enough trouble, as I remember.

[happyslug]

10. I doubt you have a 1970s situation, Unions are still to weak

In many ways the 1970s was the last Harrah of the Unions, in most contracts Unions insisted on "Cost of Living" clauses, that protected union members income during times of high inflation. This union protection was so great that most Factory workers almost reached the same income as Professionals (Middle management, lawyers, Doctors etc) in the 1970s (The Union members cost of living clause kept they income equal to the inflation rate, higher income professionals had no such protection and saw their income decline in real terms during the same time period). I had a Collage professor who joked in the mid 1970s that he was making the same money as his fellow high school buddies who went into the steel mills out of high school By that time non-union companies had to increase wages so to keep workers from defecting to unionized companies with cost of living contracts. Thus even among non-union workers, the fact unions had cost of living clauses kept their wage up with inflation.

In many ways, the inflation of the 1970s was wage driven, inflation went up, so did wages which drove inflation up more (The underlying cause was the huge debts do to the Vietnam War AND the rapid increase in oil prices in the 1970s, but wages kept up with inflation, so inflation was hard to stop). Most unions lost their cost of living clauses in the early 1980s and do to that lost inflation has NOT been driven by wages since the early 1980s. Thus inflation today is driven by the increase in the cost of oil and food (Which is off set by the drop in value of homes so the technical inflation rate is near zero while Oil and Food inflation are headed to double digits). It is hard for Union (and any other workers) to off set inflation with wage increases.

Thus we can not return to the 1970s. I suspect we will NOT see hyperinflation, but double digit inflation is possible (And may be the best way out of the decline in housing prices we are going through, remember deflation is worse then inflation and if you have to choose, take inflation every time).

[bemildred]

11. I did not suggest we were going back to the 70s, I suggested we will have 70s style inflation.

So we agree on that. We do not agree that unions caused the inflation back then, it was oil back then too, and the VietNam war.

[happyslug]

13. I agree the oil and the Debt from the Vietnam War was the cause of the Inflation

But unions permitted the working class to keep up with inflation during that time period with the almost universal demand for cost of living clauses in union contracts. That is all the union could have done, and that is the point I was trying to make. Today, we the unions are weak so they can NOT do what they did in the 1970s, i.e. keep the working class on step with inflation. That is all I was saying, and thus inflation will hit the working class today much more then it did in the 1970s. That, in itself, is a main difference between today and the 1970s.

[bemildred]

14. Well you are right about unions, I worked union 1969-1981.

We did not have COLAs, but we had contracts with yearly increases, which were based on expectations of inflation. I made about $25K the last year, I now get a $200/month pension from that, because I got vested before I quit.

And they started disemboweling unions when Raygun came in, on the theory that they cost jobs (boy is that a hoot), and that came right from the top.

You cannot protect American jobs unless the government does it, nobody else has the power, and the political suit-droids all drank the "free market" koolaid back around then, they hate unions because unions can challenge their power.

[dawg]

9. There is a disinformation campaign afoot.

Conservatives want Bernanke to raise rates, squashing whatever slight recovery we might have, just in time for the 2012 elections. They are also paranoid about the value of the dollar, 'cause they own all of the dollars.

Hyperinflation in the US right now is about as likely as the moon crashing to the earth in 2012. A long, grinding deflationary recession is much more probable. (Except for oil and food prices, which are driven by scarcity)

[BobbyBoring]

12. I dunno

Every time I go to the grocery store, stuff costs 15% more than it did last week.

OOPS Sorry I forgot food and fuel don't count~