Tuesday, November 25, 2008

German Weimar Republic in the early 1920s and the U.S.Today

German Weimar Republic in the early 1920s and the U.S. - Troubling similarities


There's a possibility of something similar (but not as severe) happening in the U.S. - we'd rather at least mention it than not.

The parallel to the German war reparations is the derivatives area today.

Don't shoot the messenger, we didn't invent the facts below.



YearGerman Weimar RepublicUnited StatesYear
1914-1918
  1. German mark (Reichsmark) worth about 20-25 cents, about 4-5 marks per U.S. dollar.
  2. Bank interest rate - 5%
  3. Government deficit in 1914 was 1.5 billion, about -16% of the total budget.
  4. Government deficit in 1918 near war's end was over 15 billion, about -34% of the total budget.
  5. Coins made up 56% of the circulated money in 1913. In 1918 it was a mere 0.5% due to war inflation and metals shortage.
  6. German stock market at 126
  7. Money velocity - 1.5
  1. U.S. Dollar Index falls from $1.20 in 2001 to about $0.85 in 2004.
  2. Home mortgage rate varies between 5.5-7%
  3. Government (unaudited) surplus in 2001 was $128 billion, about +7% of the total budget.
  4. Government (unaudited) deficit in 2004 was $412 billion, about -21% of the total budget. (source)
  5. Steel, copper and other key industrial metals prices are up between 30-150%.
  6. Dow Jones stock average - about 10,500
  7. Money velocity - 1.5
2001-2004
1919-1921
  1. Bank interest rate - still 5%
  2. German stock market at 97 in January 1919, 166 in January 1920, 278 in January 1921 and 731 in December 1921.
  3. The general price level has doubled since 1914.
  4. Most of the rest of the world allows their money supplies to contract as a "war withdrawal" effect, and goes into recession or depression (general prices fell 16% in the U.S. in 1921). Germany keeps creating or printing money, and the government deficits continue to increase.
  5. Newspapers and many financial folk are very confused by the continual price increases. Its blamed somewhat on the Versailles Treaty and France but mostly on speculators and "foreigners" inside Germany (an ominous sign and similarity to what's ahead with Hitler and the Holocaust, etc.).
  6. In other countries, its blamed on the German government deficit. But the real problem is that too much money is being created by the German banks.
  7. Money velocity - 1.5
  8. Government has currency controls, one couldn't buy foreign currency to help protect one's assets.
  9. Many foreign companies have large foreign currency gains, due to the falling value of the mark.
  1. Home mortgage rate averages 5.5-6%
  2. Dow Jones stock average - about 10,000
  3. Home prices, health insurance, energy and many other costs have roughly doubled or more in the previous 4-6 years.
  4. As of mid/late 2005, there are strong indications that the world economy has topped and is slowing down.
  5. Newspapers and many financial folk are very confused by the continual price increases. It 'must be' greedy businessmen, housing speculators, mid eastern oil owners trying to stick it to the U.S., interest rates have been raised too much by the Fed, war spending is too high, terrorism, etc.
  6. In other countries and per the International Monetary Fundand others, its blamed on the U.S. government deficit. But the real problem is that too much money is being created by the Federal Reserve Central Bank and other banks or financial institutions.
  7. Money velocity - 1.5
  8. Some currency controls do exist as of mid 2005. All money transfers above $10,000 are required to be reported to the government and there are many other requirements in the Patriot Act.
  9. Many foreign companies have foreign currency gains, due to the falling value of the dollar and hedging operations.
2005
1922
  1. Bank interest rate still 5% as it was in 1914
  2. Bank interest rate rises to 7% in August, 12% in November.
  3. German stock market at 743 in January and rose to 8981 in December.
  4. From 1914-1922, the stock market rose about 89x (from about 100 to 8900), the dollar rose 1525x and coal rose 1250x.
  5. The general price level over doubles in the first five months.
  6. On June 24, 1922, right-wing fanatics assassinated Walter Rathenauer, the moderate and able foreign minister who was in favor of adhering to the Treaty of Versailles. From here on, inflation and social unrest, etc. really took off.
  7. Confidence in the mark is waning, the German people begin to demand foreign currency such as US dollars for trade and tend to not use marks.
  8. Money velocity - 3
  9. Speculation is rampant, whether a stock boy or housewife or weathly persons.
  10. Many foreign companies have large foreign currency gains, due to the falling value of the mark.
  1. October 2005 - Home mortgage rate averages 6% & slightly increasing as of early 2006.
  2. April 2006 - Prime rate has moved from 5.5% to 7.75% in the last year.
  3. April 2006 - The S&P 500 has moved from below 1200 to over 1300 in the last 6 months.
  4. From 1982-2006, the stock market rose about 15x.
  5. The general price level, once the lies are taken into account, has gone up 50% in about the last 6 years.
  6.  
  7. June 2007 - Issues with dollar confidence start to show with lessening purchase of US Treasuries by Foreign Central Banks, who have also been dropping their reserves in dollars since 2002. Possible derivatives dangeers showing with Bear Stearns, which could affect dollar confidence significantly.
  8. July 2006 - Money velocity - 1.94
  9. Speculation, especially on housing, is quite significant.
  10. Some foreign companies have significant foreign currency gains, due to the falling value of the dollar.
2006-2007
1923
  1. Bank interest rate rises to 19% in January, 30% in April, 90% in September.
  2. German stock market at 21,400 in January and rose to 26,890,000 in November at the peak.
  3. Crime, malnutrition, suicides etc. have reached unusually high levels.
  4. Money velocity - 5-12
  5. Many foreign companies have large foreign currency gains, due to the falling value of the mark.
  1. As of late 2007, bank & mortage interest rates are beginning to rise. As of mid 2008, Treasury rates are starting to rise.
  2.  
  3.  
  4. Many foreign companies have large foreign currency gains, due to the falling value of the mark.
?
November 14, 1923
  1. German mark worthless (4 Trillion marks per dollar)
  2. Bank interest rate over 900%
  3. German stock market at 26,890,000 at the peak
  4. The value of the Daimler company was about $980 million and a car cost $3 million - the whole company was only worth 327 of its cars.
  • We do not expect anything even closely resembling the Weimar experience in the US in magnitude. We do expect inflation of well over 25% though.
?
November 15, 1923 & beyond
  1. German Central Bank issues the Rentenmark, a new currency, backed by various property in Germany.
  2. Old marks are converted to Rentenmarks at a ratio of one billion marks = 1 Rentenmark.
  3. Many governments have enacted extremely stiff wage and price controls in the wake of hyperinflation, which is a form of forced savings: goods become unavailable, and hence people hoard cash.
  4. No episode of hyperinflation in history has been ended by the use of wage and price controls alone, though they have sometimes been part of the mix of policies used to halt hyperinflation.
  • We do not expect anything even closely resembling the Weimar experience in the US in magnitude.
?



Many charts from Weimar Germany here.




Note: Some of the statements above have been made in a general and somewhat imprecise way in order to make a cleaner and simpler comparison. 

The source of most of the data is: "The Economics of Inflation (Routledge Library Editions-Economics, 84)" by Constantino Bresciani-Turroni (427 pages, Routledge, reprint edition, October 1, 2003, first published 1937) Available at Amazon here

Here is another article covering the Wiemar period from 1924. 

Hypereinflation in China 1937-1949, a similar picture but from China 

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