Why on earth are they crushing 1998 Ford Exploders! What, the new Ford comparable SUV gets 25% better fuel economy? This is a joke, those are good cars.
I don’t even begin to understand this whole scheme…

GDP does not create a red cent!

It does creates wealth in its wake, but debt can only be paid back with money. i.e. You can’t walk down to the bank with a brick or a wheel lug to pay off debt.

If all money were created at zero interest, GDP would be a zero-sum game.
But of course it is not, so we actually have a minus-sum game necessitating constant growth, the need to export, and / or foreign investment, and / or the need for a nice, steady flow of bankruptcies, (not to mention inflation!).

GDP (as we know it) is the great deceiver. If the stats given were % money supply, as they should be regards its payback, then we’d see the true story. That is, it would always be 100% ++ of the total money available and can never be paid back, (except with imported money).

All the rest is commentary!

This article also got me to reread Fekete’s article, like the earlier poster. It’s good to see you bring in Fekete’s point of view, as he has much to offer in this debate. Highly recommended reading.

a)
Not that long ago, it took about $1.4 in debt to produce $1 in GDP. Before negative GDP growth hit, that had gone to $6 in debt for $1 in GDP– some change.

b) Peter Montgomery writes
“…German inflation … Even during the war, Germany’s financial arrangements were such as to permit the grossest monetary excesses by her national banking system. … to render post-war inflation uncontrollable, while the nature and presentation of the Entente’s reparation demands — the indemnity for the war — encouraged the activities of the printing presses to the utter exclusion of other, more desirable policies.”

Dr. Fekete long ago pointed out, that one of the first ways gold was on its way to demontization, was when the German government started requiring all civil servants to take their salaries in paper Marks, not Goldmarks (around 1909 I believe). Others soon followed, and just about everyone had ditched it by 1914.
YET, at the end of 1918, the debasement of the currency in Germany was “only” about what it had been in the US from 1913-1918 (2x), whereas in England, it was almost twice that of either country (4x debasement).

The US, though, was able to take DELIBERATE (money supply) deflationary action,
which led to the severe, but short, depression/recession of 1920-1921, which Harding sensibly let the system clear by itself. This was a part of Republican policy, to return to the “5 cent cigar”, which had become a “10 cent cigar”.

Was Germany able to deflate back to 1914 levels? Perhaps, perhaps not. But one needs to put the Versailles treaty reparation demands in perspective.
Psychologically, the armistice agreements of 1918 had long been disregarded by Britain and France, so there was no great willingness to make reparations in anything real.

Financially speaking, Germany could never have repaid the sums demanded. Some have claimed, that it would “only (!)” have taken about 10% of German GDP for about 10-12 years to repay in full, as if that were doable (with the starvation blockade in effect long after 1918).

BUT, this is that sum in real money, gold:

The reparations were set at about 132 billion Goldmark.
(There are 7.16gr gold in 20M, or 0.358gr per 1 Goldmark (this is equal to the long term 4.2 exchange rate of Mark/Dollar [$20 = 30.05gr= 83.94 Mark].)

Thus 132 billion Goldmark=47.256 billion grams of gold, or 47,256 metric tons of Gold.
When one considers, that in the early 1920s, the total amount of gold theoretically extant (what had been mined over the last 5000 years) was only about 90-95,000 mtons, the reparations were about 50% of that.
At the same time, total monetary gold 90 years ago was probably no more than 20-30,000 mtons (or only 50-65% of the reparations)..

After WWII, when the US had ammassed the greatest EVER hoard of gold held in human history (about 30,000 mtons), this was only roughly 1/3 of theoretically extant gold (by then prob about 105 k mtons). With of course, the only remaining functioning economy of any of the large economies then.

If the US was never able to ammass 50% of theoretical world gold, even as the last man standing in 1945, how then could Germany have ever been able to accomplish this in 1920+ with a defeated economy?> .

Impossible in real money, possible in paper…

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Germany and its chancellor were initially sincere about making good on reparations — denominated in gold, no less — but that didn’t stop the French from continually pressing demands so harsh that Germany could not possibly have fulfilled them. (Being bullied by the French in this way has been cited as a significant reason for Germany’s great eagerness to re-arm.) Germany suspended gold convertibility in August 1914 to protect its bullion reserves, but by 1922 most of the reserves had been squandered in sporadic attempts to support the reichsmark, but mainly in helping Germans to buy the bare necessities. RA

I think the article shows a rather limited view of inflation. There’s another way to have inflation that has nothing to do with the supply of dollars. I’m talking about demand. If the entire country or world were to lose faith in the USD, then there would be a sudden move to exchange USD for assets. This is inflation of the Weimar and Zimbabwe kind.

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The Weimar and Zimbabwe hyperinflations were both fed by a deliberate hyperinflation of the supply of currencies, although the link between cause and effect was officially denied for some time (see below). I think it will happen here — think, that is, that the inflationists will eventually be right — but it may not come in time to save 50 million homeowners from bankruptcy. My theory is that we will have an extremely short period of hyperinflation — say, about ten about ruinous days’ worth — sandwiched between two lengthy periods of deflaton. The first period is occurring now and could take another 12-18 months to play out. But the second, which will follow the collapse of the hyperinflaton spike, will ast for at least a generation. RA

(The following is from a booked linked at Mises that is the best account of the Weimar hyperinflation that I’ve read: http://mises.org/resources/4016.)

“The Chancellor would accept no connection between printing money and its depreciation. Indeed, it remained largely unrecognised in Cabinet, bank, parliament or press. The Vossische Zeitung of August 16 declared that the opinion that the flood of paper is the real origin of the depreciation is not only wrong but dangerously wrong … Both private and public statistics have long shown that for the last two years the interior depreciation of the mark is due to the depreciation of the rate of exchange … It should be remembered today that our paper circulation, although it shows on paper a terrifying array of milliards, is really not excessively high … We have no ‘dangerous flood of paper’ but, on the contrary, our total circulation is at least three or four times as small as in peace time.

“Lord D’Abernon described these remarkable views as ‘far from exceptionally retrograde’, and in fact typical of enlightened Berlin opinion. The Berliner Borsen Courier a couple of days later showed greater concern for the social consequences but no more awareness about the reasons. It regretted that the German mark at one-three-hundredth of its par value was now in the same class as the Hungarian korona. The proletariate was becoming restless, said the newspaper, and the State whose taxation estimates were based on an average exchange rate of 500 to the dollar was helpless.

“But the real tragedy of the depreciation may be described as ‘the moral effect’. An apparently endless fall in the value of the mark predicted abroad will cause at home an unbearable increase of uncertainty. No economic discussions will pacify the masses, or hide from them the price of bread.

“It has long been realised that the printing of notes is the result and not the cause of depreciation, and that the amount of currency, as it increases in bulk, is really decreasing in value. A point has now been reached where the lack of money has a worse effect than the depreciation itself … Even should the quantity of paper money be three times its present size, it would constitute no real obstacle to stabilisation.”

http://www.usdebtclock.org

My view has been, and continues to be, that hyper-inflation is a monetary event, and not one triggered by the sort of admittedly weak stimulus created by programs like “Cash for Clunkers.”

What is going to occur in the wake of the next inevitable and unmistakable down turn in economic activity will involve an inability to fund that which needs to be funded and is, as Dick Cheney might say, non negotiable. A lack of tax revenue coupled with an out and out buyers strike by the usual cohort of Treasury bond investors will precede monetization of an even more epic scope than has heretofore occurred.

Put another and perhaps more academic way by scholars Amadou Dem, Gabriela Mihailovici, and Hui Gao of The Columbia School of International and Public Affairs:

“Hyperinflation can be experienced when the government face a greater need of seigniorage to finance its increasing fiscal deficit and after the seigniorage maximizing inflation rate is reached. Above that maximum inflation rate, the Laffer curve indicates that revenue decreases. However, this is true only when we consider the steady state inflation rate (when DM/M = DP/P), which is the one, used to describe the relationship between seigniorage revenue and inflation. Increasing the inflation rate beyond its steady state level, can allow an increase of seigniorage revenue even when the economy is on the wrong side of the Laffer curve. The reason is that there are lags in the adjustment of prices to new money creation or, in others terms, inflationary expectations tend to lag behind actual price increases. All the dynamic of hyperinflation relies on these lagged inflationary expectations. Indeed, as households realize that inflation rate is rising, they revise upward their expectations and therefore reduce their real money balances holding, reducing de facto the seigniorage revenue that was collected previously. In order to face the reduction of revenue, the government has to increase the rate of money creation. In other words, once the rate of inflation is beyond the peak of the Laffer curve, the government is forced to continue to increase the rate of monetary growth simply in order to maintain the same level of seigniorage revenue. The inflation rate rises without bound resulting eventually in hyperinflation.”

Going on from that, there exist, to the best of my knowledge, the following ten pre-conditions/antecedents for hyper-inflation:

1.) Foreign debt mostly denominated in foreign currencies
2.) History of currency and inflation instability
3.) History of political instability
4.) Fiscal deficit greater than 5% of GDP
5.) Weak government unable or unwilling to raise taxes or implement necessary budget reform.
6.) External debt in excess of 20% of GDP
7.) Gross public debt in excess of 50% of GDP
8.) Foreign debt mostly short term
9.) Major fiscal commitment to defense spending
10.) Major increases in money supply

In the last six of the above ten categories the U.S. well “qualifies” as a candidate for hyper-inflation. I maintain that, irrespective of the fact that our foreign debt is denominated in our own currency, and that the U.S. has a history of political stability, as well as monetary stability, if GDP declines at a 4% annual rate while receipts fall only 8% per year, all while government expenditures rise annually by as much as Congress has approved, we are not going to get very far into this deflationary depression before China’s concerns are on the mark. At that point we will be looking at a whole new ball game where what we presently have going for us that stands in the way of a hyper-inflation, namely political stability, vanishes.

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Thanks, Edward. This is how hyperinflation will come when it eventually does. The scenario you’ve outlined parallels that of Peter Schiff, who foresees a time when the U.S. Government is forced to support all bond markets as they begin to implode one dreadful day on realizations that only Treasury paper is being allowed into the lifeboats. My argument with the hyperinflationists concerns the timing of it — Will it happen in time to spare 50 million households from bankruptcy? — and the mechanism, not the theory. On that score, the inflationists cannot possibly be wrong, since the dollar is already fundamentally worthless. RA

I reread the Fekete essay about every 6 weeks. If true, [as he asserts], we are pouring gasoline on the fire.

Weimar inflation from Mises

The origins of the German inflation are in some ways fundamental, in some ways incidental, to this theme. They xvere both internal and external. Even during the war, Germany’s financial arrangements were such as to permit the grossest monetary excesses by her national banking system. They were eventually to render post-war inflation uncontrollable, while the nature and presentation of the Entente’s reparation demands — the indemnity for the war — encouraged the activities of the printing presses to the utter exclusion of other, more desirable policies. Nor may it be overlooked that Germany’s industrialists ruthlessly drove their Government down the road to monetary doom.

http://mises.org/resources/4016

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Note from RA: This excellent book has been linked in the Rick’s Picks forum as well, and I would encourage all who want to join in the discussion to read it, as I am now doing. I am attempting to discover whether the actual mechanism of Weimar hyperinflation could be duplicated here and now. The following passage holds a clue concerning how U.S. banks, acting greedily and completely in their own interest, could feed a “currency event” that at least initially might enjoy the blessings of The State. Here’s the excerpt:

“The question to be asked — the danger to be recognised — is how inflation, however caused, affects a nation: its government, its people, its officials, and its society. The more materialist that society, possibly, the more cruelly it hurts. If what happened to the defeated Central Powers in the early 19203 is anything to go by, then the process of collapse of the recognised, traditional, trusted medium of exchange, the currency by which all values are measured, by which social status is guaranteed, upon which security depends, and in which the fruits of labour are stored, unleashes such greed, violence, unhappiness, and hatred, largely bred from fear, as no society can survive uncrippled and unchanged.

“Certainly, 1922 and 1923 brought catastrophe to the German, Austrian and Hungarian bourgeoisie, as well as hunger, disease, destitution and sometimes death to an even wider public. Yet any people might have ridden out those years had they represented one frightful storm in an otherwise calm passage. What most severely damaged the morale of those nations was that they were merely the climax of unreality to years of unimagined strain of every kind. Financially, for nearly four years, the ultimate cataclysm was always just round the corner. It always arrived, and there was always an even worse one on its way — again, and again, and again. The speeches, the newspaper articles, the official records, the diplomatic telegrams, the letters and diaries of the period, all report month by month, year by year, that things could not go on like that any longer: and yet things always did, from bad to worse, to worse, to worse. It was unimaginable in 1921 that 1922 could hold any more terrors. They came, sure enough, and were in due course eclipsed, and more than eclipsed, with the turn of the following year.”