An Inflation History Lesson

As in many previous posts, I've shared that there are many lessons from history that we can learn from. This includes what happens when banks and other financial institutions fail like Bear Stearns and more recently like IndyMac. You can counter that no one in history have ever bundled mortgages into jumbo mortgages like IndyMac has done, but the same could be said for the wild speculation that occurred during the roaring 20's before the stock market crash of 1929. Never before the 20's could you buy securities for a fraction of the amount on deposit (leverage) without disastrous consequences down the road.

In both cases, money lessons can be learned. You can't continue to throw good money after bad. Sooner or later, someone has to take the fall. The same is true with fractional reserve banking. You cannot continue to create money from nothing but accounting ledger entries and spend wildly forever. Sooner or later, the devalued currency will crash.

To illustrate this point, I will share another James Turk article from Wednesday, May 2008. In this article, the founder of www.GoldMoney.com compares our inflationary times to that of the Weimar German government immediately after World War I. The hyper-inflationary times that resulted ultimately precipitated the rise of the Third Reich, Adolf Hitler, and the Nazi party.

Here is the first part of the article titled "Weimar Inflation in America" by James Turk.

Probably almost everyone is familiar with the hyperinflationary episode that engulfed Germany after the First World War. That nation’s economy was crippled by monetary problems that resulted in dreadful personal hardships, even though up to that time Germany had achieved one of the highest living standards in the world.

The newly formed German government, named for the city where their constitution was drafted after the Kaiser’s abdication in 1918, kept pumping up the money supply. The process started relatively slowly, but quickly the pace of money creation accelerated.

The Weimar government was paying its bills on credit – just like Zimbabwe is now doing. The Weimar government was issuing currency in exchange for valuable goods and services that it was receiving, and the vendors of those goods and services accepted the newly issued currency in the expectation that they would be able to exchange it for goods and services of like value. However, they soon realized that they were deluding themselves. Prices were rising rapidly, with the consequence that a flight from the currency into commodities and other tangibles began.

There was no discipline on the creation of new currency, with the result that it was being issued to excess. Within a few short years, the German government eventually destroyed the Reichsmark, the currency it had been issuing, making the words Weimar Germany synonymous with hyperinflation, economic collapse, deprivation and personal hardship. All the wealth saved in Reichsmarks was wiped out.

For example, in his classic book, “Paper Money”, penned three decades ago under the pen name of Adam Smith, George J.W. Goodman recounts the story of Walter Levy, an internationally known German-born oil consultant in New York. Levy told him: “My father was a lawyer, and he had taken out an insurance policy in 1903. Every month he had made the payments faithfully. It was a 20-year policy, and when it came due, he cashed it in and bought a single loaf of bread.”

As the inflation worsened, people sold whatever they could to survive. Widdig succinctly describes it in the caption to the above photo as follows: “The impoverished middle class has to sell its cherished possessions.” He should have correctly stated though that it was the “newly impoverished middle class”. They only became destitute after the inflation had destroyed their savings and ability to maintain their standard of living.

Sadly, the problems of Weimar Germany are now appearing in the US. To survive the impact of rising prices, Americans today – like Germans did eight decades ago – are selling cherished possessions, as explained in a recent story by Associated Press entitled “Americans unload prized belongings to make ends meet”. The full article is available at the following link: http://abcnews.go.com/Business/Economy/story?id=4750846&page=1

Tomorrow, we will continue with this article from James Turk and the pressures currently on Americans resulting from inflation, just like in Germany from nearly 90 years ago. Stay tuned ...

Will evildoers never learn—
those who devour my people as men eat bread
and who do not call on the LORD ?

There they are, overwhelmed with dread,
for God is present in the company of the righteous.

You evildoers frustrate the plans of the poor,
but the LORD is their refuge. Psalm 14:4-6 (NIV)

If you have comments or questions, please feel free to contact me at the address below.
Email: DeltaInspire@panama-vo.com