Posts Tagged ‘Weimar’

If you want deflation, you would love Germany

Sunday, July 11th, 2010

From our previous article, one of our readers was very indignant at the current state of affairs. As he wrote,

During inflationary times, those who speculated made more money than those who held cash. so you could argue that those who held cash felt the "inflationary pain" but why wasn’t the government pressured politically to do something as they were when they get spooked by deflation?

Then when deflationary times come its the turn of those who held cash to benefit while those who already made their money out of speculation and over leveraging to feel the "deflationary pain", after all they did take too much risk.

I don’t think its fair or right for governments to manipulate the economy to prop up the prices of the investments of the speculators (who helped create all these bubbles in the fist place). Basically that means that they got to make a lot of money out of speculating but they didn’t take any real risk as government will step in to do "something" about the pain.

If the don’t feel the pain they will continue recklessly speculating.

Meanwhile that very same "something" the governments will do to help the speculators avoid pain will probably mean devaluation of the currency one way or another so that once again those who did not speculate and over leverage will feel the pain.

The governments actions will tend to encourage more people to speculate! I would like to see deflation happen, does anybody else feel the same way???

On the first point, why are governments more spooked by deflation than by inflation? The simple reason is that in a democracy, the mob rules. Unfortunately, the mob is heavily indebted as a whole. All we have to do is to look around and see that the culture of debt is deeply ingrained in society. For young people, not only is it fashionable to get into debt, it is very difficult not to get into debt. For example, buying your first home is enough to put you in debt for decades.

The last time governments became spooked by inflation was in 2008 when oil and food prices shot through the roof (see Who is to blame for surging food and oil prices?). If governments continue its policy of doing ?something? about deflation for a sustained period of time, we believe it will be a matter of time before prices of necessities will resume its surge again. As usual, the blame will be put on ?shortages? and ?speculators.?

But not all governments in the world are biased towards inflation. Germany is the exception here. The trauma of the hyperinflation during the Weimar times is seared into the German consciousness. As a result, they will avoid anything that hints of inflation. Unlike the English-speaking countries, politicians in Germany who stick to discipline, austerity, balanced budgets and stand against moral hazards see their popularity go up.

Coincidentally, Germany is also the most important member of the Euro zone. As a result, their attitude towards inflation is being imposed on Europe. In the recent G-20 meeting, the G-20 endorsed a halving of budget deficits by 2013 as the target.

But as George Soros wrote in a recent article,

The situation is eerily reminiscent of the 1930s. Doubts about sovereign credit are forcing reductions in budget deficits at a time when the banking system and the economy may not be strong enough to do without fiscal and monetary stimulus.

The Great Depression of the 1930s is one of deflation. In Soros? opinion, the G-20?s endorsement of government de-leveraging has increased the risk of deflation today.

So, in the coming months, we can see why the deflation argument will be gaining the upper hand.

Unemployment in Weimar Germany

Thursday, October 15th, 2009

Since the powerfully rally several months ago, there are many economic indicators that seems to point to an economic recovery (there are also indicators that point to worsening economic conditions). In Australia, we have the ‘honour’ of being the first Western developed country to be on the road to recovery, with unemployment rate actually falling. The Reserve Bank of Australia (RBA), in the belief that emergency threat of deflation is over, decided to raise interest rates (and indicated that more rate rise will follow).

For the bears (particularly for those who are in the deflation camp), this is a very trying time. Some of them even seem to be throwing in the towel (e.g. Gerald Minack).

But is it really blue skies ahead?

Our view is that, when governments print copious amount of money, mirage of prosperity can appear. In fact, money printing, in addition to doing wonders for stock prices (see Should you be bullish on stocks?), can also do wonders for the unemployment rate. Let’s take a look at this book, The Economics Of Inflation- A Study Of Currency Depreciation In Post War Germany, written by Costantino Bresciani ? Turroni, an economist who lived through the German Hyperinflation of the 1920s,

In the summer of 1922 unemployment practically disappeared. It appears that?in spite of the gaps caused by the war in the ranks of the working population?the total number of individuals occupied in industry, agriculture, commerce, public services, etc., was greater in 1922 than before the war.

Next, we will show you the graph of the unemployment rate:

German unemployment rate 1913-1922

German unemployment rate 1913-1922

As we can see, in the midst of hyperinflation in Weimar Germany, as the standards of living of workers collapsed (as the German mark depreciate against the US dollar), the German economy had made great ‘strides’ in the area of unemployment!

So, don’t be surprised if the US economy’s unemployment numbers actually improved in the months to come. This need not necessarily be a sign of prosperity. Instead, it can be a sign of inflation.

A resemblance of the beginning of Weimar-style inflation

Monday, June 9th, 2008

As we can all learn from the news media, inflation seems to be infecting every nation in the world. Despite the destruction of credit (deflation) in the United States through asset write-downs, bad debts and wealth destruction through home price deflation, price inflation is still turning into a more and more serious problem not only in the United States, but also in the rest of the world. Most notably, with the prices of oil (which is an input for many stages of production, for example, see Can rising oil prices undermine the benefits of globalisation?) in an upward warpath, government ministers are murmuring of the threat to global growth, as this Bloomberg article, Soaring Oil Price `Dangerous’ for Growth, Steinbrueck Says, reported:

Soaring oil and food prices will spur inflation and could imperil economic growth, German Finance Minister Peer Steinbrueck said.

“We are facing a very dangerous situation caused by these tremendously increasing prices for commodities, food and oil,” Steinbrueck said today at the St. Petersburg International Economic Forum.

Here in Australia, our Prime Minister is putting the blame on oil producers, as this article reported,

As the bowser price of petrol climbs towards $1.80, the Prime Minister, Kevin Rudd, and the Treasurer, Wayne Swan, have blamed a lack of supply from oil-producing countries.

Can increasing production really solve the problem? Based on the simplistic supply-demand curve taught at first year economics courses, it is easy to conclude that rising prices is due to rising demand without the corresponding rise in supply. But there is far more than meets the eye in this problem.

Here we must make one point clear: There are indeed fundamental reasons why the prices of commodities, food and oil are rising (see The Problem that can throw us back into the age of horse-drawn carriages, Why are the poor suffering from food shortages? and Example of a secular trend- commodities and the upcoming rise of a potential superpower). But monetary inflation accentuates price inflation and distorts the price signals for demand and supply. As we explained in How is inflation sabotaging our ability to measure the value of things?,

If you want to measure the length of a box, you may use the ruler to do it. The reason why a ruler can do such a job is because its length is reasonably consistent for the foreseeable future. Now, imagine that ruler is as elastic as a rubber band. Do you think it is still a useful tool to measure the length of the box? An elastic ruler is useless because you can always make up the measurement of the box to whatever you please just by stretching the ruler such that the edge of the box is aligned to any intended measurement markings in the ruler.

Now, let come back to measuring the value of oil. Since oil is priced in US dollars and if the supply of US dollars [and other fiat money e.g. Australian dollars, Euros, etc] can be expanded [inflation] and contracted [deflation e.g. credit contraction] at will by the Federal Reserve, how useful do you think it is as a calibration for measuring the value of oil?

The presence of index speculators in the commodities futures market (see Who is to blame for surging food and oil prices?) is an example of how prices are distorted by monetary inflation. As we explained before in How to secretly rob the people with monetary inflation?, such price distortions ultimately harm societies (and by extensions, nations) in the end. Today, it is the poor nations that are bearing the brunt of commodities price inflation as the richer ones hoard them (see Price fluctuations and hoarding), which lead to even more price inflation, which further encourages even more hoarding. Ultimately, all these will result in further global mis-allocation of resources for production. As we said in The economics of inflation, that was what happened in Weimar Germany in the 1920s:

In the acutest phase of the inflation Germany offered the grotesque, and at the same time tragic, spectacle of a people which, rather than produce food, clothes, shoes, and milk for its own babies, was exhausting its energies in the manufacture of machines or the building of factories.

Our fear is that the world may be embarking on a similar path. Countries like China and Middle East are embarking on massive investment spending sprees as they spend their hoard of rapidly depreciating US dollars. This is probably the answer to the question we posed in What to do with US$ raised from dumped US Treasuries?. Soaring commodity prices may induce massive mal-investments into the commodity producing industries. For example, massive amount of capital could be further poured into the extraction and refining of lower quality oil in hostile terrains. Wars may even be fought for the sake of securing commodities (well, we wonder whether the root of Iran’s war rhetoric and US invasion of Iraq related to the fight for commodities?). Meanwhile, investments into alternative energy are languishing and dragged slowly by other seemingly more urgent agendas.

If this hyper-inflationary crack-up boom continues, all of us here know where the root of the problem begins: lack of honest monetary system (see Why should you invest in gold?).