Back in Nov 2011 I wrote a BlogPost called Zero Growth.

Charles Hugh Smith has just written a very interesting parallel to it.

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[Edited / redacted ~R ]

Habituating to Contraction       January 13, 2012 .

The Savior State has pulled out all the stops to prop up the Status Quo. Its gargantuan borrowing and spending have fixed nothing. Contraction is replacing expansion as the new normal.

For the past 67 years, Americans have been conditioned to expect expansion and more of everything: more income, more stuff, more opportunity, more benefits, more medical care, more government entitlements, and so on.

As a result, Americans have habituated to permanent expansion.

The concept that contraction–less of everything–is the new normal simply doesn’t register; it is rejected, denied, or decried as a great tragedy.

The notion that it is simply reality does not compute with a populace habituated to -permanent “growth”.

U.S. politicians have learned that Soaring Rhetoric about “morning in America,” “the New Frontier,” “hope” and other ritualistic appeals to permanent expansion win elections – while accurate descriptions of reality lose elections.

The voting public’s demand for “permanent good news” promising permanent expansion has spawned a feedback loop of officially sanctioned manipulated statistics and media spin (a.k.a. propaganda) that expands with every administration, even as the real economy visibly weakens.  The divergence of the real economy and the official “story” that “we’ve returned to permanent expansion” is widening.

Needless to say, humans prefer a future in which there will be more of everything – over one with less of everything.

Permanent expansion means there will be few if any troublesome cost-benefit analyses, hard choices or painful triage, and little need to adjust to new realities.

Americans have been conditioned for three generations to expect the Savior State to “do something” during downturns to “make it right.”   A people conditioned to this expectation will have great difficulty accepting that some problems are not fixable by more government intervention.  The idea that systemic problems are now beyond the reach of the government does not compute. 

2012 is looking like the year that the American public will have to face up to the fact that we will have to habituate to contraction.

All that has happened for four long years is systemic problems were papered over to benefit the Status Quo. Everything that is broken awaits real repair.

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~ Jens Parsson.           [edits/comments  ~R]

The Politics.

The Weimar Republic’s constitution was a masterpiece of democratic theory – and in the best democratic tradition the government was hopelessly responsive to its sources of support.  A government so plainly a weathervane to the prevailing winds was ill suited to override the shortsighted self-interest of its power groups and deal sternly with hard realities.      So, nothing has changed there then…

When the government tried to evolve adequate tax plans, labor blocked income or consumption taxes which would weigh upon workers, and business and property blocked taxes which would weigh upon capital. So, very simply, no one paid.  Ditto

Magnates like Hugo Stinnes and Fritz Thyssen and the entire voice of big business obstructed every effective effort to put a stop to the inflation, because very simply the inflation was good business for them.  Ditto

When Germany at last turned to the prominent industrialist Wilhelm Cuno in the hope of finding succor in a government of businesslike soundness,  [John Key?] his impotent administration from then presided inertly over the worst months of the inflation.

Even in November of 1923, political paralysis was so pervasive that chancellor Stresemann’s only way to shortcut the interminable parliamentary deliberation (and institute the miraculous Rentenmark) was to assume dictatorial power to rule by decree under the emergency provisions of the Weimar constitution.   (These same extraordinary powers were later accused of facilitating Hitler’s usurpation of absolute power)     [Apply enough heat: and it becomes a choice of the frying pan, or the fire – Great… ]

Throughout the inflation, the characteristic of the Reichsmark which was most vitally important, and at the same time most securely hidden, was the depreciation in its value as diminishing shares of the more or less constant total value of Germany.  But it was difficult to detect and practically impossible to measure.   [particularly if you choose to not even try]

Unrealized and unsuspected depreciation also accounted for the remarkable complacency of Germans, who were prone to think they were always more or less square with their past fiscal sins.  They were understandably bewildered when the inflation then burst over their heads in an unforeseen enormity and for no apparent reason. [particularly if you choose not to look or see]

It was always possible that if the growth in the real value of Germany had ever been allowed to make good the spurious value of the mark, some degree of unrealized depreciation could have been carried by the Mark indefinitely.  [kick the can]

The exact degree is so uncertain that, as Dr. Schacht said, a government finance minister must feel the danger line with his fingertips.  Its flash point was risky at best, especially when government ministers were totally unaware that anything like Schacht’s fingertip sensitivity was needed.   [yeah ...what could possibly go wrong?]

The government’s practical ability to make good on the Mark, as distinct from its theoretical ability, was undoubtedly limited.  [but lets use the numbers that look the best]

Once begun, the inflation required ever more inflationary expansion just to support the old debts. Germany had to run faster and faster to stay ahead of the engulfing wave, until it simply could not run any faster.  Stopping the inflation would have killed the boom, and that seemed excessively unpleasant.     [yeah ...what could possibly go wrong?]

Hugo Stinnes in a much-noted speech declared that it was madness to think that a defeated Germany with all its huge burdens could spend more, have more, work less, carry an ascending prosperity, and do it all with mirrors. But Germany seemed quite willing to try.   [well, you gotta try don't you ...what could possibly go wrong?]

It was theoretically possible for Germany to extricate itself at virtually any time it chose.  Lord Keynes and Dr. Schacht, two wizards of the black art of  economics, both happened to agree that the way to do it was with capital taxes designed to soak up some of the excess supplies of money.  Capital taxes made sense because the brimming coffers of capital were where the profits of the inflation gravitated; wage and salary earners were already laboring heavily under the inflation and had no more capacity to pay taxes.  An impartial tax on all capital would clearly have been less destructive than the totally confiscatory tax which eventually fell on one part of capital — the savers and lenders.

In any case, neither this nor any other means of dismounting from the inflationary wave was ever resolutely tried.  Though it was always possible to dismount, it was never possible to dismount painlessly.  [money for nothin' and your Chicks for free...]

Every day that passed, appeasing the inflationary dragon with more inflation, increased the assured severity of the inevitable medicine.    [how much severity do you imagine we here and now have saved up?]

So long as the Siren-like lure of the easy wealth continued, it was impossible to persuade enough of the nation that titanic measures of austerity and self-denial were necessary.    [hmmm... titanic....  so, you could either choose titanic, or have titanic thrust upon you...]

When the Siren’s song stopped the crash had already begun and it was too late.

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In final analysis, there is more difference of expert opinion than one might expect about whether the inflation was good or bad.  Its horrors, while it lasted and the permanent harm to millions of individuals which it left in its wake, might appear to speak for themselves.     [it might appear that way, yes... depends who's doing the measuring I guess]

From a transoceanic distance, detached economists like Professor Frank Graham were able to weigh up the pluses, minuses and the cold-blooded conclusion that the inflation may actually have been a good thing for Germany as a whole. Germany as a whole suffered no net loss in the inflation.

The great middle class and all the savers and lenders who lost all their wealth merely saw it transferred to debtors and to the government.  [oh, well that's alright then]

Production increased, employment increased. Conceivably the inflation may have helped Germany recover from the war and come out from under its load of liabilities. It may even have been a net gain to wipe out all the pensioners and herd them back into the labor force.

If so, the Germans who lost might be excused for finding no comfort in knowing all of this.

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In the end, Germany perhaps did not get off altogether so lightly from the inflation.

The later agony of Germany, and the world, personified in Hitler, was deeply rooted in the inflationary crash.  It was no mere coincidence that Hitler’s first Putsch occurred in the last and worst month of the inflation, and that he was in total eclipse later when economic conditions in Germany improved.

When still another economic crash struck Germany in the 1930′s, Hitler rode into power not by coup, but by election.

His most solid supports at that later date were an implacable middle class, the same who had paid the piper for all of Germany in 1923 – and who suffered grievously again when the 1930’s Depression came.

Barely two years before the onset of the Hitler nightmare, Professor Graham was able to make this marvel of miscalculation of the psychological scars of the inflation:    “With all these reservations taken into account however, the adverse effects on the national psychology were no doubt of import, but they cannot be measured, and these effects will perhaps more quickly disappear than is ordinarily supposed.”

Misgoverning the country perpetually at the expense of its quietest and steadiest class cannot be disregarded as possibly the best explanation why the plurality of Germans at last turned to Hitler.

The wages of economic charlatanry proved to be rather high – and not merely economic.   [but that's ok -  just so long as it can't be measured - somebody else's problem]

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Do you imagine that cocking it all up (again – globally) could conceivably lead to another World War?

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I will take a break for a week.

Both because I haven’t yet edited the next section of “Dying of Money”, and because I will be Pet/House sitting for a friend.  So away from home and the computer…

I will have to find something else to amuse me.

She doesn’t have a TV and is on Dial-up.  Good grief…  :-0

I will have to read a book or something, haha.

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However, I won’t leave you entirely bereft – here is an article that ties in nicely with my  thesis:

From Zero Hedge.    [extracts:  click the link for the whole article  ~R]

There Is No Deus Ex Machina Left

From Egon von Greyerz of Gold Switzerland.

With most of the world’s major economies as well as the financial system bankrupt, there is only one solution that can save the world economy. Like in the Greek tragedies, Deus ex Machina is now the only way that the world can avoid a total economic collapse.

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The main objective of governments is to stay in power and thus to buy votes. Therefore they are incapable of taking the right decisions. And the opposition, aspiring to power is even less suitable since they will lie through their teeth and promise the earth in order to be elected.

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So if there is no Deus ex Machina and if governments or bankers can’t rescue the world, who can and what is the solution. Let us return to the wise von Mises to look at the options available now:

“THERE IS NO MEANS OF AVOIDING THE FINAL COLLAPSE OF A BOOM BROUGHT ABOUT BY CREDIT EXPANSION. THE ALTERNATIVE IS ONLY WHETHER THE CRISIS SHOULD COME SOONER AS A RESULT OF A VOLUNTARY ABANDONMENT OF FURTHER CREDIT EXPANSION, OR LATER AS A FINAL OR TOTAL CATASTROPHE OF THE CURRENCY SYSTEM INVOLVED”   ~ Ludwig von Mises

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It has been clear to us for at least 20 years that the outcome was inevitable. It was never a question of “if” but only “when” it would happen. It is now clear to us that the false prosperity that the world has experienced by printing unlimited amounts of money will very soon come to an end. Thus the “if” and “when” conditions are now satisfied so the remaining question is HOW?

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Anyone who has followed my articles will know my view that governments worldwide are totally incapable of stopping the money printing. This is their only means of staying in power and buying votes. But not only that, this is the only method they know. This has been their patent solution to all economic problems in the last decades.

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And how will the currency system collapse? The answer to this question is very simple – through endless money printing. There will be no lasting austerity programmes in any country that can print money. Governments are incapable of sticking to austerity measures since in the end that is a guaranteed way of losing power. As power is the main purpose of all governments, they will use any method to retain it.

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So whilst world leaders are procrastinating and bickering in G8, G20 and all other “summit” meetings, it is absolutely guaranteed that the final outcome will be one QE package after the next. Governments and central banks know that without limitless money printing there would be a deflationary collapse of the banking system and world economy.

[actually, that would be a good thing - just not for Governments and Central Bankers, and Banksters]

The “final or total catastrophe of the currency system” will occur as a result of the QE or unlimited money printing that will very soon start in the EU, USA, UK, Japan and many more countries. And this currency destruction will lead to hyperinflation as I have stated for many years. Throughout history, substantial government deficits leading to money creation or printing have always been the cause of hyperinflation. Because hyperinflation is always the result of a collapsing currency and not of excess demand.

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I don’t think that even Mises envisaged at the time that this could involve a major part of the world rather than just one country. This is why this catastrophe will be unprecedented in world history and have consequences that will affect the world economically, socially and geopolitically for a very long time.

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See you in a week – have a good one.

~ Jens Parsson.       [edits/comments ~R]

The Roots

The expansion of Germany’s Reichsmark circulation, its money supply, always led the way in the inflation. When it abated temporarily, the inflation abated temporarily. When it stopped permanently, the inflation stopped permanently.

Nevertheless, the inflation was officially blamed on everything under the sun but the government’s spending, its deficits, and its money issues.    No shit

These, in turn were generally attributed to external factors such as war reparations, balance of   payments deficits, the constantly declining foreign-exchange value of the mark, the profiteers who were raising prices, foreign and domestic speculators who were supposedly attacking the mark, and the upward spiral of wages and prices.     Some of those sound very familiar

As for speculators, the most extraordinary feature of the Reichsmark’s joyride was not any attack against it  but quite the opposite, an incredible (“pathological,” it was later called) willingness on the part of investors at home and abroad to take and hold the torrents of Marks and give real value for them.      You mean – inspite of all the evidence to the contrary.  None so blind as those who will not see.

Until 1922 and the very brink of the collapse, Germans and especially foreign investors were absorbing Marks in huge quantities. Only the international reputation of the Reichsmark, the faith that an economic giant like Germany could not fail, made this possible.     Does that remind anybody of anything currently?

The precise moment when the inflation turned upward toward the vertical climb was timed by the dawning psychological awareness of investors that Germany was not going to back its money. With that, the rush to get out of the mark was on. Like a dam bursting, the seas of Marks flooded into the markets and drove prices beyond all bounds.     It couldn’t happen like that now though could it…?

In the collapsing stages, Germany ran a huge payments surplus as all her worthless Marks came home from abroad in search of something to buy. This reversal of the balance of payments toward surplus was therefore not an occasion for hope, but for deepest fear.

The government, confidently convinced of its claim that the inflation was being forced on it by external forces beyond its control, tried the usual array of palliatives to stanch the hemorrhages, such as import and export controls, exchange controls, and price controls. As always, these measures found no success, although they did achieve some rather strange distortions within the economy.

Rent control was a conspicuous example, the property of landlords was de facto confiscated for the benefit of tenants, and the housing shortage predictably became extreme.   We have a bit of a housing shortage here too don’t we?  That couldn’t be caused by government interference could it?

The government characterized as practically traitorous those little citizens who (long after the smart money and far too late to save much) finally repented of their faith in the government and joined the stampede to get out of the Mark.    They didn’t want to take one for the team…?

The government also tried one or two measures which did work but could not be continued. One was to stop the money and credit. This was done in late 1921, and the mark began to harden instantly. But the resulting credit squeeze began to strangle the boom equally fast, and business screamed.     Ohh, that team.

The plain fact was that the boom could not live without the inflation, and the fearful pains of withdrawal from the inflation did not then appear necessary or inevitable.          Ditto and… ditto

Easy money resumed and accelerated and never stopped again until the bitter end.     But we’re different, right?   By-the-way, is a Zero-Percent-Interest-Rate-Policy (ZIRP) considered ‘easy money’?

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The route to Germany’s inflationary destiny may be to Karl Helfferich.  He was minister of finance and vice-chancellor during the war, and he also had great personal influence in the later administrations that failed to deal with the inflation.

Helfferich was neither a fool nor a political hack.  To the contrary, he was a brilliant monetary theorist, Helfferich also made the principal theoretical contributions to the formation of the miraculous Rentenmark plan which ended the inflation.  Helfferich’s abysmal failure in the German inflation, represented more than anything else a tragedy of pure intellect, for he was constantly resorting to the most finely-reasoned theorization for answers – that ignored simple observation of the facts.          Bernanke…?

The fatal sin of Helfferich and all the Nationalists was that they would not bow to anything, certainly not to mere reality; if their intransigence spelled the destruction of the Reichsmark and all the little Germans, so be it.        It’s good to be King

The first postwar government of Gustav Bauer confronted the German war debt, which was considerably greater than Germany’s annual national product, and he resolved to try to make good on it.  From then until early in 1920, his finance minister  Erzberger introduced a program of tax reforms and tremendously increased taxes, especially taxes on capital.  Opposition from propertied interests was naturally enormous.       Taxes are for the little people.

1920, may be taken as Germany’s turning point, for from this day her crusader for financial probity was gone.  With Erzberger safely out of the way, taxes were reduced and deficits increased.       Reagan, Bush, Clinton, Bush, Obama….   (or closer to home:   National, Labour, National, Labour, Nat…)

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As a postscript, we might record that on August 26, 1921, Erzberger was assassinated.  The man who had been intrepid or incautious enough to point a    finger in the right direction was thus extinguished.

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Continued:  Politics.

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~ Jens Parsson.       [edited/comments ~R]

The Gains and Losses

When the inflation was over everyone who owed Marks, suddenly and magically owed nothing.

This came about because every contract or debt that called for payment in a fixed number of Marks was paid off with that many Marks, but they were worth next to nothing compared with what they had been worth when they had been borrowed or earned.   So some-ones hard work went up in smoke (sort of – re below)

Germany’s total prewar mortgage indebtedness alone, for example, equal to 40 billion Marks, or one-sixth of the total German wealth, was worth less than one American cent after the inflation.

On the other side of course, everyone who had owned Marks such as bank deposit accounts, savings, insurance, bonds, notes, or any sort of contractual right to money suddenly and magically owned nothing.      Ta-dah… Magic

The largest gainer by far, because it was the largest debtor, was the Reich government. The inflation relieved it of its entire crushing debt  from its deficit-financed boom.   How convenient – what an amazing co-incidence.

Others who were debtors, emerged like the government with large winnings.

Until the last moment of the inflation, borrowers continued to make huge profits simply by borrowing money and buying assets – because lenders never stopped underestimating the inflation. The good fortune of the debtors demonstrated the prudence of following the government’s lead: one must beware of being a creditor whenever the government is a huge debtor.

Farmers in particular were the classic case of invulnerability to inflation, because they always had food, their farms were constant values, and the many who had mortgages on their farms were forgiven their debts outright.  

The debtors’ gain was the creditors’ loss – foreign holders of Marks were huge losers.

The wealthy in Germany suffered heavily but unevenly – those who were not nimble lost everything.

Trustees were forbidden by law until the very end to invest in anything but fixed obligations and consequently lost all the value of their trusts. The endowments of great charitable institutions, similarly invested, were wiped out.  Mmmm… so, having your savings locked into institutional investments is a death sentence. (501k)

Financial institutions such as banks and insurance companies, which were both debtors and creditors in Marks, were generally weakened though not destroyed in the inflation.

Speculators tended to believe in their own game, until too late and emerged as net losers.   Interesting, so the Smart money wasn’t so smart afterall…?

Sound business escaped weaker but intact; their debts were relieved but their boom business was gone.  Inflation-born businesses disappeared.   What sort of business model does the company you work for operate under?

Industrial stocks, the darling of the inflationary speculation, had a peculiar history.   Investors were extremely slow to grasp that stocks were poles apart from fixed obligations like bonds, quite wrongly thinking that if bonds were worthless stocks must be too.         Hard to change a mindset huh?

When it was all over, stocks of sound businesses turned out to have kept all but   their peak boom values notably well.  Ahh… but, prior to… how do you tell which of them is a sound business?

The mass of the workers who lived mostly on their current wages, and who had no savings to lose, suffered only temporarily with privation and unemployment in the very last throes of the inflation.    Good thing it was over quickly then (wouldn’t want it to drag on for a decade or more).

At bottom, it was the unsuspecting middle class; those who were Germany’s savers, pensioners,  or purchasers of life insurance who not only suffered the worst of the agony while the inflation lasted, but also  after it was over were left with the most staggering permanent loss to their whole substance.  This class paid the piper for all of Germany.     Who do you imagine would pay for it all this time around?

Great numbers of pensioners were left totally impoverished and forced back into the work gang to end their days there.      Doesn’t that sound like fun…

The encouragement to thrift, an old German weakness, turned out to have been a complete swindle.       I’m shocked…

Instead of a levy on all the Germans to pay for Germany’s indulgences, a levy which might have been heavy but could have been fair, Germany left the levy to fall on those who were too innocent to evade it, and from them it took everything they owned.  The effect was a confiscatory tax on these victims.     What, you mean it was like a deliberate thing…?

John Maynard Keynes (who later rightly or wrongly was adopted as patron saint by inflationary governments) excoriated them on this occasion:   “… the best way to destroy the capitalist system was to debauch the currency.   By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”       Is that the same as stealing?

Adolf Hitler, whose economics were far more astute than those of the government’s economists, shared roughly the same view of the inflationary government confiscators with Lord Keynes:   ” once the printing presses stopped – and that is the prerequisite for the stabilization of the Mark – the   swindle would be at once brought to light … the State itself has become the biggest swindler and crook.”       Hmmm… the State as a player – that is not your friend…  Could it be???

Despite the obliteration of the wealth of millions of individual Germans, the inflation was merely a transfer of their wealth, like any. For every German’s total loss, there was an equivalent gain to some other German debtor or to Germany as a whole, through the discharge of their debts.    Like a shell game – a con.

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Continued:  The Roots.

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~ Jens Parsson.         [edited/comments ~R]

2: The Descent

That was how it was in the heyday of the boom (re last chapter), the government’s actual deficits were  relatively innocuous. In fact, the government’s budget was closer to balance at the brink of the crash in 1922 than at any time since 1914.  What…?  You mean exponentials, and the Lily Pond effect had come into play…?

But while the government’s new deficits diminished, the inflation had become self-sustaining, feeding on the old ones. The government was unable to refinance its existing debts except by printing new money. The government’s creation of paper wealth steadily fell behind the rising prices, and the inflation entered its catastrophic decaying stage.  Hmmm… so, it wouldn’t and couldn’t work, but that still didn’t stop them trying.

The final convulsion when it began was at first bizarre and at last became sheer nightmare.

Near the end in 1923, buyers were vying with one another to buy up any kind of goods at any price before their little money could evaporate. The seas of marks which had been stored up, especially by trusting foreigners, flooded forth and fought to buy into other investments, almost anything but marks.

Germany’s money printing industry could not turn out enough trillions to keep up.  translation: Government wheeled out the bazooka, and wanted the last say. (Can’t beat the Fed?)

Farmers, who were comfortable enough, would not sell their food to the townsmen for their worthless money.

Starvation and abject poverty reigned. The middle class virtually disappeared as professors, doctors, lawyers, scientists and artists pawned their earthly goods and turned to field or factory to try to earn a little food.  The dying of the middle class?  Why does that sound familiar…?

Production began to fall. As factories closed, the workers too became  unemployed and joined the starving. The whole system ground to a halt. Food riots and Marxist terror broke out throughout Germany.   Gosh, now there’s a future vision to aspire to…   Lets play that game shall we… (sarc)

Eighty-five persons died in a riot in Hamburg. The famous beer hall Putsch led by Adolf Hitler in Munich in November 1923, the last month of the inflation, was only one of many and not the worst.

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Once the old Reichsmark had been thoroughly obliterated, the return to a stable currency was so absurdly simple as to become known as the “miracle of the Rentenmark”.  No, really?  Do tell…

Gustav Stresemann, who was later foreign minister throughout the trying 1920′s has been described as by far the greatest German of the Weimar era.  In October, the Reichstag voted him dictatorial powers under the Weimar constitution.  He in turn called upon Dr. Hjalmar Schacht, who accomplished the introduction of the Rentenmark with no staff but his secretary and no establishment but his dark back office and a telephone.

The Rentenmark was placed in circulation beside the devalued Reichsmark   and carried no real value of its own but the naked avowal that there would be only so many Rentenmarks and no more. The Germans miraculously believed it and, still more miraculously, it turned out to be true.  The German finance ministry balanced its budget, and that was the end of the inflation.  Gosh.  Gosh… you mean… fiscal discipline?  It’s as simple as that???

Stabilization through the Rentenmark was by no means painless. To convince the skeptical required a series of severe bloodlettings to foreign-exchange speculators and businesses, all of whom depended on the continued depreciation of the official currency.  Ahh, so not so simple, there is actually a price to pay. It just all depends on who pays the price…

Schacht’s greatest achievement was not so much in the introduction of the Rentenmark but in making a new non-inflationary money policy stick. The grand-daddy of all credit squeezes ensued.  New inflation, was then abruptly and finally stopped.

The entrenched interests in Germany characteristically fought Schacht every inch of the way, although a few later acknowledged the rightness of his course.   So, the money men didn’t want a bar of it…  Gosh, that sounds familiar too…

Germany now took its stored-up dose of hard times.  What?  No free lunches?

Germans who had been caught in the inflation were relieved of their worldly goods. Businesses which were based on nothing but the inflationary boom were swept away. Credit for business was practically impossible to come by. Unemployment temporarily  skyrocketed. Government spending was slashed, government workers dismissed, taxes raised, working hours increased, and wages cut.  You say that like it is a bad thing…

However – lets be damn clear.  This is the price of fixing the crisis. THERE IS NO ALTERNATIVE.  So build a bridge and get over it – find a way to get your head around it. That was the solution then – and it is still the only solution today.

The shock to the German people of the final inflation, the stabilization, and the unemployment was so great that in the elections of May 1924, six months after the close of the inflation, millions of voters flocked from the moderate center parties to the extremes.

Germany very quickly began to feel better economically however, as the stabilization medicine did its work. Yes, yes actually, it CAN be done… imagine that.

Only by the greatest efforts did Germany get itself going again in this way.  Even so, because of the permanent shortage of credit Germany’s revival was unhealthily based (against Schacht’s warnings) on new foreign loans.   The world depression which followed after 1929 knocked debtor Germany flat again, and Hitler followed close behind.  There are no free rides…?

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Continued:  Gains and Losses (next chapter).

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~ Jens Parsson.          [edits/comments  ~R] 

PROLOGUE: The German Inflation of 1914-1923

1: The Ascent

In 1923 Germany’s money, the Reichsmark, finally was strained beyond the bursting point, and it burst.   Persistent inflation which had steadily eroded the mark since the beginning of World War I at last ran away. That was the spectacular part of the collapse, but most of the real loss in money wealth had been suffered much earlier. The first 90 percent of the Reichsmark’s real value had already been lost before the middle of 1922.   The tragicomic denouement of Germany’s inflation, the more sinister and permanent scars which the inflation left are less well known.

Still less clearly remembered are the years before the mark blew, with their breakneck boom,  spending, profits, speculation, riches, poverty, and all manner of excess.   Hmmm… does that sound like anything we know of?

Germany’s inflation cycle ran not for a year but for nine years, representing eight years of gestation and only one year of collapse.   The beginning was in the summer of 1914, a day or two before World War I opened, when Germany began to spend more than it had, run up debt, and expanding its money supply.     Otherwise known these days as Deficit-Spending and Quantitative-Easing.  If you use a new jargon, people might just miss that you are talking the same old shit…  

The end came on November 15, 1923, the day Germany shut off its money pump and balanced its budget.    So… apparently it can be stopped – if you Really want to…

Germany started by not paying adequately for its war out of the sacrifices of its people – taxes – but covered its deficits with war loans and issues of new paper Reichsmarks. Scarcely an eighth of Germany’s wartime expenses were covered by taxes. This was a failing common to all the combatants.   Sounds familiar…

For whatever reasons, Germany’s bad war financing did  not immediately demand its price.  And so long as the government could spend money it did not have, faster than its value could fall, Germany had both its war and life as usual, which was the same as having the war free of charge.  And we all Love free stuff…

After the war, Germany and all the other combatants underwent price inflations. The year 1919 was a year of violent inflation in every country, including the United States.  From this point, however, the paths of Germany and the other nations diverged.  The others stopped their deficit financing and began to take their accumulated economic medicine.   Well that sure as Hell is a difference to nowadays, no-one here interested in that idea…

Germany alone continued to inflate and to store up not only the price of the war but also the price of a new boom which it then commenced enjoying.   Party on Dudes… now that’s an idea we do know All about.

Germany was sublimely unconscious of the fiscal monsters in its closet, which was the turning of the tide toward the inflationary smash.  The catastrophe of 1923 was begotten not in 1923, but in the relatively good times of 1920 and 1921.  Willfully blind perchance…?  Ditto there for us too…

The life of the inflation in its ripening stage was a paradox which had its own unmistakable characteristics.   One was the great wealth, at least of those favored by the boom. These were the “profiteers” of whom everyone spoke. Industry and business were going at fever pitch.  Many great fortunes sprang up overnight.  Great mansions of the new rich grew like mushrooms.  The cities had an aimless and wanton life of an unprecedented splendor, dissolution, and unreality. Prodigality marked the affairs of both government and the private citizen.    Ditto…

When money was so easy to come by, one took less care to obtain real value for it, and frugality came to seem inconsequential.  like looking in a mirror isn’t it.

For this reason, Germans did not obtain so much real wealth as the growth of money alone would have indicated.   And side by side with the wealth were the pockets of poverty. Greater numbers of people remained on the outside of the easy money, looking in but not able to enter.   Check…

Although many workers were able to keep up with the inflation, other workers fell behind the rising cost of living, falling into real poverty. Salaried and white-collar workers lost ground in the same way. Even while total production rose, each individual’s own efforts faltered and showed a measurable decline. Accounts of the time tell of a progressive demoralization which crept over the common people,  compounded of their weariness with the breakneck pace, to no visible purpose, and their fears from watching their own precarious positions slip while others grew so conspicuously rich.  1921/2 = 2007/8…???

Along with the paradoxical wealth and poverty, other characteristics were masked by the boom and less easy to see until after it had destroyed itself. One was the difference between mere feverish activity, and real prosperity – which appeared to be the same thing.    Doesn’t help when the media hypes up the bullshit either…

There was vast spurious employment – activity in unproductive or useless pursuits. The ratio of office and administrative workers to production workers rose out of all control. Paperwork and  paperworkers proliferated. Government workers abounded, multitudes of redundant employees ostensibly employed.   So, nothing new under the sun then…

The boom suspended the normal processes of natural selection by which the nonessential and ineffective otherwise would have been culled out.   And not just by the Boom either, selective contrivance by the self interested – otherwise known as corruption.  When there is money to be made, the rules mysteriously fade away…

Speculation alone, while adding nothing to Germany’s wealth, became one of its largest activities. The fever to join in turning a quick mark infected nearly all classes, and the effort expended in simply buying and selling the paper titles to wealth was enormous. Ditto 1987 – and then the housing boom in the 2000′s – and everyones a real-estate trading genius… $billions poured in and churned.

Another busy though not directly productive sector of activity was in capital goods and industrial construction.  Much of this indiscriminate growth in plant capacity made sense only in the bloated inflationary expansion, but not otherwise.   Check – multiple high-flying, big name, property developers now bankrupt. (oh dear how sad – never mind)

Concentration of wealth and business was still another characteristic trend. The merger, the tender offer, the takeover bid, and the proxy fight were in vogue. Bank mergers were all the rage, while at the same time new and untried banks sprouted. Great ramshackle conglomerates of all manner of unconnected businesses were   collected together by merger and acquisition. Armies of lawyers, brokers, accountants, businessmen, and technicians who spent their time pasting together these paper empires bolstered the lists of the more or less employed.   Gosh, doesn’t that just sound so much like Investment Banking, and Merger & Acquisitions – clip that ticket.   Ditto again.

It was typically true that the Germans who grew the richest in the inflation were precisely those who were least essential to German industry. With the end of the inflation they disappeared like apparitions in the dawn.  Or… thieves in the night…?

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next:   The Descent.

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This Series is extracts, edits and comments on the Essay – Dying of Money – by Jens Parsson.

This is a Really long Essay, so I have redacted and edited it, and broken it into  chapters to make it a bit more easy to follow.  But it is still going to take some digesting.  (Or if you are feeling particularly masochistic, you can read the whole thing by following the link to the Mises Institute)

In any case, I have interspersed Jens’ Text with my own comments, highlighting the  parallels between Then and Now.  It is scary just how prescient history can be, and how it relates to our current economic situation.  If you are feeling disturbed and confused by what we facing, then read on – and be very afraid.

On a personal note: my thanks to Jens and the Mises Institute for making this information available on the Net.

Ludwig von Mises Institute - Tu Ne Cede Malis

Advancing the scholarship of liberty in the tradition of the Austrian School.

Dying of Money: Lessons of the Great German and American Inflations

by Jens O. Parsson

Hopefully my efforts here can make for a wider disemination and awareness of this information, the issues and dangers:  For those who forget history, are doomed to repeat it.

Unfortunately, some who do remember are just as likely to try and game the same sorry old tricks to their own advantage – and our detriment.

And now: enough blurb from me, on with the show.  Part One: Foreword.

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~ Jens O. Parsson       [edited ~R]

Foreword

Most of us have at least a general idea of what we think inflation is. Inflation is the state of affairs in which prices go up.

Inflation is an old, old story. Inflation is almost as ancient as money is, and money is almost as ancient as man himself.  Inflation was the very next magic after money. Inflation is a disease of money.  Before money, there could be no inflation. After money, there could be.

Thus inflation may be the oldest form of government finance, and governments have been perpetually rediscovering first the splendors and later the woes of inflation. Each new government discoverer of the splendors seems to believe that no one has ever beheld such splendors before. Each new discoverer of the woes professes not to understand any connection with the earlier splendors. In the thousands of years of the history of inflation, there has been nothing really new, and there is still not.

Emperor Diocletian became the author of one of the earliest recorded systems of price controls in an effort to remedy the woes without losing the joys of inflation, and he also became one of the earliest and most distinguished failures at that effort.  Like every later effort to have the joys without the woes of inflation Diocletian failed totally.

So it has gone throughout the millennia of man’s development. For at least  four thousand years man has known inflation. Babylon and Ancient. The Athenians. The Roman Empire. Henry the Eighth of England was a proficient inflationist, as were the kings of France. The entire world underwent a severe inflation in the sixteenth and seventeenth centuries as a result of the Spanish discoveries of huge quantities of gold in the New World. “Continentals” in the American   Revolution and the assignats in the French Revolution were precursors of the wild paper inflations of the twentieth century. Steadily rising prices have been the general rule and not the exception throughout man’s history.

The twentieth century brought the institution of inflation to its ultimate perfection. When economic systems are so highly organized as they became in the twentieth century, so that people are completely dependent on money trading for the necessaries of life, there is no place to take shelter from inflation.

Inflations in the twentieth century became like inflations in No other century. One of these was the German inflation that contributed to the rise of Adolf Hitler and World War II.

The other was the great American inflation that had its roots in World War II,

Inflation’s may be fast or slow, accelerating or decelerating, chronic or transitory. A merely annoying inflation, usually causes no one very much real harm. A volcanic inflation on the other hand, is the kind of catastrophe that confiscates wealth, withholds the means of life, breeds revolutions, and precipitates wars. Every volcanic inflation of history began as a mildly annoying inflation.

Scarcely a person is untouched by inflation’s handiwork. Every citizen, dancing to a tune he mostly can not hear, played for him by the government’s inflation. It’s up to every citizen to learn for himself what’s happening and to look out for himself, because no one else is. The government certainly is not.

The government is compelled by its other duties, not to protect him but the opposite, to continue to steal from him by inflation for as long as it can.

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Part Two: Prologue  - to follow

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“Think of how stupid the average person is, and realize half of them are stupider than that.”
~ George Carlin

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There is no solution to the European problem that is not, at its core, stopping the spending of more money than the government takes in via taxes.  Period.  Here, there, or anywhere — that’s the math.

~ Karl Denninger

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“Most fans go wild when they see a a goalie make what looks like a great save, but the chances are what they are seeing is a save that was made from being out of position.”

~Mike Richter

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[ Bernard Hickey and I are thinking in unison here.  ~R ]

All aboard the property rort

By Bernard Hickey    Sunday Dec 4, 2011  (NZ Herald)

There’s never been a better time to borrow up to the hilt and buy property.

It’s almost too good to be true – but it’s true.

Interest rates are at record lows and they’re about to go lower. Europe’s turmoil is brilliant because it will force central banks to cut interest rates. This means we can all afford to borrow more and pay higher prices. Banks are also desperate to lend again, even offering 95 per cent loans.

National has just won a second term and Prime Minister John Key will never do anything to hurt property-owners. During the past three years, he has argued against anything that would have a drastic effect on land or property prices. He is particularly reluctant to force the banks into fire sales of houses and farms in case it drives prices down.

He’s also doing very little to improve the supply of land. This has the effect of pushing up prices and creating tax-free capital gains.

National and the councils know what’s good for them and the property developers who support the National Party. There’s nothing better than sitting on a land bank and drip-feeding properties while making tax-free capital gains.

Did I mention the capital gains are tax-free?

Any government serious about improving housing supply would simply use government land and cheap government money to build a bunch of houses, but that’s never going to happen under National. Sweet.

Check out this combo: rents up 22.5 per cent in the past four years; house prices up 16 per cent in the past year; interest rates at record lows; housing supply constrained.

There’s no sign we’re going to lose our jobs because China will keep bailing everyone out.

And our government will never let the banks fail. Mate. You can’t lose with property. Ever.

~ D S A.

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In one short article, Bernard touched on 1/2 of the subjects I have been banging on about, or have wanted to expound on.

*   National won’t do anything to hurt its support base, regardless of the stupidity of the position.

*   Real Estate is a disaster waiting to explode – but we’ll all just use any lever or prop available to shore it on up.  Can’t let Property crash…

*  The whole sector is distorted beyond belief, but hey, don’t let that stop the musical chairs fiasco we have encouraged.

*   Prices for rents and purchase are completely out of hand.

*   Just because everyone else is jumping off the bridge, hey, lets us do it too.  Pump those low interest rates – woo hoo…

*   Introduce a tax regime that would slow down the property market?   Not in our lifetimes…

The situation is so farcical it has just stopped being a joke any more.

But here is my prescription – for what that is worth:

- Raise interest rates (dramatically).

- Tax capitol gains

- Discourage property investment – and effectively crash that whole market.

- Wipe out all the people and fortunes based on that business model.

- Build a new model based on government sponsorship of coordinated long range planning for housing and transport and infrastructure.

- Encourage things like KiwiSaver (and even the banks) into funding large scale residential developments. Long term investments that only pay a relatively small return – but which is perfect for Pension schemes/plans. (and any honest Banks)

- Kick the current clowns out of political office. They are corrupt – and corrupting.

- That which cannot be sustained, won’t be – and that would be our current Real Estate markets in case you didn’t get that…  They are doomed to crash, better we choose how we take them down, rather than have them crash down on us.

Because crash they will.

… and that would be where the Devils Advocate comes into it…

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