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Why Weimar-Style Inflation Is Nearly Impossible

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The global credit-blowout has stoked fears of a money-printing catastrophe like the one that wrecked Germany’s economy a hundred years ago, planting the seeds of World War II.  However, even a cursory look at the Weimar hyperinflation of 1921-23 reveals why it is extremely unlikely to happen again, especially on a global scale.  It was a local event involving physical paper currency that would be nearly impossible to replicate using a global reserve dollar, particularly at a time when digital transactions overwhelmingly dominate.

The German hyperinflation featured literal boxcars of D-marks delivered weekly to the biggest employers. The country was a ‘union shop’, so to speak, and the sums sent to workers ahead of each payday were continually renegotiated to include an adjustment for inflation. The system was put in place in order to hold down unemployment and worker unrest. It worked so well, at least initially, that the Germans enjoyed lower joblessness in 1920-22 than some of the Allied nations that had defeated them in The Great War.

Money by the Boxcar

The money-filled boxcars pushed the exchange rate to an extreme, in 1923, of 4.2 trillion marks per dollar. However, the periodic spikes in money creation that quickly ramped inflation to this level were caused not chiefly by official money-printing, but by employers who issued their own scrip. This was by agreement with the German government, which was fearful of riots if workers were not paid on time. In fact, Germany’s money presses, stressed to the limit, did break down a couple of times during the 1921-23 period. Employers reacted to this emergency with such patriotic vigor that it was immediately following each of their scrip-a-loozas that inflation took unfathomable leaps.

No similar mechanism or infrastructure exists to ramp up the physical supply of U.S. dollars. Although it is all too easy for the Fed to create asset inflation, even this is predicated on having the ginned-up dollars borrowed into existence. That’s why wage inflation could not be used to keep deflation at bay. Nor can helicopter money stave off yet another juggernaut of deflation bearing down on us, the collapse of the public-employee pension system. It is coming, and one need only imagine how it would play out to understand why “the Government” (i.e, taxpayers) will not be able to rescue “us”. Illinois is out front in the race to failure, but two dozen other states whose pension systems are nearly as bankrupt would line up quickly for their fair share of bailout money.  Although this scenario represents a theoretical path to hyperinflation, it would detumesce quickly when the generous checks sent out each month to pensioners in 25 states became nearly worthless over just a few short months.

Potato-Rich

For those who would value gold and silver above all in the event of a financial collapse, keep in mind that you cannot eat either. Arable land was the best asset to own during the German hyperinflation.  If you’d financed the purchase of farmland at 100% just before inflation began to take off in the spring of 1921, you could have paid back the entire loan with profits from your first harvest of potatoes.

All of the facts cited above are from Adam Fergusson’s extraordinary book, When Money Dies. The work is a must-read for anyone who thinks it would be easy for the Fed to hyperinflate a global-reserve currency so that the U.S. could effectively renege on debt that even now is unpayable. The book is available in paperback from Amazon for $15.

Please do not ask trading questions!

  • Richard Charles March 2, 2021, 11:07 am

    Hi Rick & Co

    Really liked your essay that reminded me of the recent debate between Harry Dent and Peter Schiff.

    Would we agree the key variable may be how long government can continue to function borrowing, creating, regulating, spending and taxing money out of the ether, what some refer to as Babylonian Money Magick ?

    Here are some current clues:

    USD down – 14 % the past year.

    EDV down – 34 %.

    SLVP + 61 %.

    To be continued…

  • cc chow March 2, 2021, 12:55 am

    So long as US economy is functioning, and the fact that US has a powerful military force, and also US is producing lots of stuff to export, not to mention it has a ton or resources under the ground, US dollar is not going to be worthless.


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