1920’s Weimar Mark vs 2010’s Fiat Countries

[Feb 25, 2012]

We have all heard of the terrible hyperinflation that happened in the early 1920’s in the German Weimar Republic. And you often hear that we have come a long way since then and that such a thing couldn’t happen in a developed country today.

Well, we believe we need to check the premises behind that last statement.

Let’s start by making something entirely clear. We don’t believe we are any smarter than people say 90 years ago, or even thousands of years ago. Sure, the knowledge base has expanded but so has the follies of Mankind. People aren’t much more virtuous today and the sum of the vices indeed appears to be pretty constant. So the very idea that we won’t repeat the mistakes of the past is just wishful thinking.

But there are two important things that differ between Weimar and today, and it’s not in today’s favor.

First of all, we should note that when the value of the German mark started to deteriorate against other currencies, this was easy to detect. The reason for this was that many other nearby (like the Swiss) or major Western currencies still were based on gold. So when the German fiat paper mark inflated this quickly became visible through the exchange rate. It was even visible through the German gold mark that still existed.

Today, all national or supra-national currencies are fiat currencies. Hence, people have lost this tool for detecting the obvious. This has blinded even the smartest to the creeping price inflation of today and would certainly not help these people in times of hyperinflation. This is serious stuff.

Secondly, in order to meet the rising demand for cash, German central bank had to print money as fast as it could. They had huge problems finding new printing facilities and the necessary raw materials.

Please note that once the price inflation really took off, the money printing lagged behind the rising prices. This made people believe that printing money was the remedy, not the cause of the problem. Similarly, the exchange rate deterioration preceded the printing, with the false conclusion that the exchange rate deterioration created price inflation.

How about today? Well, today the money masters wouldn’t have the printing problem. In the 1920’s, they had to have trees and factories to do this. Today they would just have to push some buttons in order to create more money. And if the market wouldn’t accept the new money, they could just let another branch of government do it. In fact, they are doing just that already, as the Fed buys US Treasury bonds and the ECB are buying bonds of member states. Easy, no sweat at all.

Hence, in the modern context we’re far from safer than our German friends 90 years ago. In fact, it would be a lot easier to create a hyperinflation and it would be a lot harder to detect. So you better start thinking how to find other ways of detecting the signs of hyperinflation. We’d like to believe a Golden Markets Newsletter subscription will help you.

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