The Weimar Economy

Any student of German history knows that the hyper-inflation of 1923 was a traumatic experience for the German people.  What started as a financial crisis ended as a tragedy that undermined the experiment in democracy of the Weimar Republic.  At the end of WWI the Reichsmark was trading at 9:1 against the US dollar.  By January of 1922 the ratio of marks to dollar was 192:1.  By the time the Rentenmark was introduced in November 1923 the exchange rate was 4 four trillion marks to the dollar and the German middle class had been wiped out. The Weimar inflation was a period when Germans became impoverished while foreigners lived in luxury hotels for next to nothing. Children were begging on the street while women were forced into prostitution to feed themselves and their families - under barter arrangements of sex for food. Those living on fixed incomes and pensions, including over a million war widows. suffered greatly, while speculators took advantage of easy credit to amass assets and created new industrial empires.  The social despair created by the hyper-inflation led  many Germans - especially the disenfranchised Bourgeoisie - to renounce democracy and embrace extremist ideologies.

In his blog Herdentrieb, Dieter Wermuth - drawing on Robert Shiller - sees parallels between the US economic crisis and post-WWI Germany:

Interessanterweise hat Robert Shiller in seinem neuen und sehr lesenswerten Buch mit dem Titel “The Subprime Solution” Parallelen zur Situation in Europa nach dem Ersten Weltkrieg gezogen. “Der Versailler Vertrag … forderte von Deutschland verschärfte Reparationszahlungen, die weit jenseits seiner Zahlungsfähigkeit lagen. … Die starken Ressentiments, die der Vertrag hervorrief, waren einer der Faktoren, die eine Generation später zum zweiten Weltkrieg führten. … Ein vergleichbares Desaster, wenn auch nicht ganz in diesem Ausmaß, braut sich gerade wieder zusammen … Erneut sind breite Bevölkerungsschichten nicht in der Lage, ihre Schulden zu bezahlen und die Gläubiger lassen ihnen keine Ruhe. Erneut haben viele Leute das Gefühl, dass nicht sie sondern andere Kräfte für die Lage verantwortlich sind. Erneut sehen sie um sich herum Institutionen der Wirtschaft zu Grunde gehen, denen sie einst vertraut haben. Und erneut fühlen sie sich durch zu optimistische Geschichten betrogen, die sie ermutigt hatten zu hohe Risiken einzugehen.” (S. 2f) Shiller sieht den sozialen Zusammenhalt durch die Krise gefährdet und sagt voraus, dass das amerikanische Wirtschaftswachstum auf Jahre hinaus sehr niedrig bleiben wird. (Robert Shiller has drawn some interesting parallels to the situation Europe  following WWI in his book "The Subprime Solution".  "The Versaille Treaty ... required reparation payments that far exceeded Germany's ability to pay.  The powerful resentment caused by the Treaty was one of the factors that led to next generation to war.  A similar, albeit not quite as extreme, situation is now unfolding.  Once again broad segments of the population are unable to repay their debts and are tormented by their creditors.  One again people feel that others are to blame to their terrible predicatment.  Once again people watch the insitutions they once trusted collapse.  And once again they feel they were deceived into entering into risky obligations by overly optimistic prognostications. "  Shiller sees the social cohesion (in the US) threatened by the financial crisis and believes that economic growth in Amerca will be stymied for years to come.)

Years of mismangement have hollowed out the American economy. The world watches in amazement as the US Treasury is forced to print tens of billions of new currency to fund a $$trillion (at a minimum) bailout of its financial institutions.  It is only a matter of time before America's main creditors, including China with its $500 billion of reserves, move their investments into safer currencies.  When that happens (not if) the US-Dollar will lose at least half its value.  Our bank accounts, CDs, money market investments and corporate bonds will be virtually worthless. The smart money is already moving to stronger currencies, gold and other hard assets, but we are competing against investors with strong currencies like the Euro to buy those assets.

Recently I was in New York City and took a walk down Fifth Avenue.  I was struck by all the European, Russian and Middle Eastern tourists strolling along with Gucci bags bulging with luxury items.  The few native New Yorkers I spotted looked a bit shabby around the edges.  The signs of the Weimar Economy are becoming very visible indeed.

Comments

[leftclick]

Why not raise to 5 trillion dollars for the colonisation of Pluto? Or for the invasion of (their-not your) China? Sell everything you have, David, borrow as much as you can and invest everything in tobacco and cigarettes...

[David]

Actually, I was thinking about buying a distillery. More and more Americans will want to drown their sorrows in booze...

[leftclick]

This, of course, is an investment that will excel everything: http://www.abnamrozertifikate.de/DE/Showpage.aspx?pageID=35&ISIN=NL0000210912

It's a direct investment into death.

[Chicago bankruptcy attorney]

The info that you have given in this blog is really impressive..

[moors710]

We are entering this scenario. The truth is that the Us Dollar the Euro and the Yuan are approaching a loss of confidence that gives the hyper-inflationary scenario a more than 50-50 chance of occurring.
I am invested in Canadian Dollars (backed by gold, oil and wheat), gold, silver, beans, Honey and Irish whiskey. The Wiemar experience is my guide as to store of value. I know on at least one aspect I will be wrong, but I will be liquid(whiskey) and not starve(honey and beans).
If I am wrong, I might waste my money, but if the hyperinflation occurs I will buy local land (the Red River Valley of Minnesota, North Dakota, and Manitoba) is very productive and my descendants and myself will prosper in the changing world.