The Death Of Paper Money

[LiveAndLetBuy]

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/7909432/The-Death-of-Paper-Money.html

Ebay is offering a well-thumbed volume of "Dying of Money: Lessons of the Great German and American Inflations" at a starting bid of $699 (shipping free.. thanks a lot).

The crucial passage comes in Chapter 17 entitled "Velocity". Each big inflation -- whether the early 1920s in Germany, or the Korean and Vietnam wars in the US -- starts with a passive expansion of the quantity money. This sits inert for a surprisingly long time. Asset prices may go up, but latent price inflation is disguised. The effect is much like lighter fuel on a camp fire before the match is struck.

People’s willingness to hold money can change suddenly for a "psychological and spontaneous reason" , causing a spike in the velocity of money. It can occur at lightning speed, over a few weeks. The shift invariably catches economists by surprise. They wait too long to drain the excess money.

"Velocity took an almost right-angle turn upward in the summer of 1922," said Mr O Parsson. Reichsbank officials were baffled. They could not fathom why the German people had started to behave differently almost two years after the bank had already boosted the money supply. He contends that public patience snapped abruptly once people lost trust and began to "smell a government rat".

Some might smile at the Bank of England "surprise" at the recent the jump in Brtiish inflation. Across the Atlantic, Fed critics say the rise in the US monetary base from $871bn to $2,024bn in just two years is an incendiary pyre that will ignite as soon as US money velocity returns to normal.

Morgan Stanley expects bond carnage as this catches up with the Fed, predicting that yields on US Treasuries will rocket to 5.5pc. This has not happened so far. 10-year yields have fallen below 3pc, and M2 velocity has remained at historic lows of 1.72.

As a signed-up member of the deflation camp, I think the Bank and the Fed are right to keep their nerve and delay the withdrawal of stimulus -- though that case is easier to make in the US where core inflation has dropped to the lowest since the mid 1960s. But fact that O Parsson’s book is suddenly in demand in elite banking circles is itself a sign of the sort of behavioral change that can become self-fulfilling.

As it happens, another book from the 1970s entitled "When Money Dies: the Nightmare of The Weimar Hyper-Inflation" has just been reprinted. Written by former Tory MEP Adam Fergusson -- endorsed by Warren Buffett as a must-read -- it is a vivid account drawn from the diaries of those who lived through the turmoil in Germany, Austria, and Hungary as the empires were broken up.

Near civil war between town and country was a pervasive feature of this break-down in social order. Large mobs of half-starved and vindictive townsmen descended on villages to seize food from farmers accused of hoarding. The diary of one young woman described the scene at her cousin’s farm.

"In the cart I saw three slaughtered pigs. The cowshed was drenched in blood. One cow had been slaughtered where it stood and the meat torn from its bones. The monsters had slit the udder of the finest milch cow, so that she had to be put out of her misery immediately. In the granary, a rag soaked with petrol was still smouldering to show what these beasts had intended," she wrote.

Grand pianos became a currency or sorts as pauperized members of the civil service elites traded the symbols of their old status for a sack of potatoes and a side of bacon. There is a harrowing moment when each middle-class families first starts to undertand that its gilt-edged securities and War Loan will never recover. Irreversible ruin lies ahead. Elderly couples gassed themselves in their apartments.

Foreigners with dollars, pounds, Swiss francs, or Czech crowns lived in opulence. They were hated. "Times made us cynical. Everybody saw an enemy in everybody else," said Erna von Pustau, daughter of a Hamburg fish merchant.

Great numbers of people failed to see it coming. "My relations and friends were stupid. They didn’t understand what inflation meant. Our solicitors were no better. My mother’s bank manager gave her appalling advice," said one well-connected woman.

"You used to see the appearance of their flats gradually changing. One remembered where there used to be a picture or a carpet, or a secretaire. Eventually their rooms would be almost empty. Some of them begged -- not in the streets -- but by making casual visits. One knew too well what they had come for."

Corruption became rampant. People were stripped of their coat and shoes at knife-point on the street. The winners were those who -- by luck or design -- had borrowed heavily from banks to buy hard assets, or industrial conglomerates that had issued debentures. There was a great transfer of wealth from saver to debtor, though the Reichstag later passed a law linking old contracts to the gold price. Creditors clawed back something.

A conspiracy theory took root that the inflation was a Jewish plot to ruin Germany. The currency became known as "Judefetzen" (Jew- confetti), hinting at the chain of events that wouild lead to Kristallnacht a decade later.

While the Weimar tale is a timeless study of social disintegration, it cannot shed much light on events today. The final trigger for the 1923 collapse was the French occupation of the Ruhr, which ripped a great chunk out of German industry and set off mass resistance.

Lloyd George suspected that the French were trying to precipitate the disintegration of Germany by sponsoring a break-away Rhineland state (as indeed they were). For a brief moment rebels set up a separatist government in Dusseldorf. With poetic justice, the crisis recoiled against Paris and destroyed the franc.

The Carthaginian peace of Versailles had by then poisoned everything. It was a patriotic duty not to pay taxes that would be sequestered for reparation payments to the enemy. Influenced by the Bolsheviks, Germany had become a Communist cauldron. partakists tried to take Berlin. Worker `soviets' proliferated. Dockers and shipworkers occupied police stations and set up barricades in Hamburg. Communist Red Centuries fought deadly street battles with right-wing militia.

Nostalgics plotted the restauration of Bavaria’s Wittelsbach monarchy and the old currency, the gold-backed thaler. The Bremen Senate issued its own notes tied to gold. Others issued currencies linked to the price of rye.

This is not a picture of America, or Britain, or Europe in 2010. But we should be careful of embracing the opposite and overly-reassuring assumption that this is a mild replay of Japan’s Lost Decade, that is to say a slow and largely benign slide into deflation as debt deleveraging exerts its discipline.

Japan was the world’s biggest external creditor when the Nikkei bubble burst twenty years ago. It had a private savings rate of 15pc of GDP. The Japanese people have gradually cut this rate to 2pc, cushioning the effects of the long slump. The Anglo-Saxons have no such cushion.

There is a clear temptation for the West to extricate itself from the errors of the Greenspan asset bubble, the Brown credit bubble, and the EMU sovereign bubble by stealth default through inflation. But that is a danger for later years. First we have the deflation shock of lives. Then -- and only then -- will central banks go to[sic] far and risk losing control over their printing experiment as velocity takes off. One problem at a time please.

So he's saying it's deflation, then hyperinflation, and the tipping point will come so suddenly that there'll be nothing we can do about it? Pretty much what a lot of people on here have been saying. Quite an interesting description of life under Weimar though

[Guest Noodle]

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/7909432/The-Death-of-Paper-Money.html

So he's saying it's deflation, then hyperinflation, and the tipping point will come so suddenly that there'll be nothing we can do about it? Pretty much what a lot of people on here have been saying. Quite an interesting description of life under Weimar though

I agree, deflation (may have already had that) then high inflation (not sure on hyper inflation).

Recently I did a personal re-stock for Blighty, tools, clothes, bike, full office, stuff needed for mobile living . . . everything I need for the next 5 years plus.

Reason is I don't think prices are going to stay down for long. All that printed money had zero effect so far because there was no money velocity, it never went further than the banks balance sheets. Now I see a thread on here about bankers being threatened with loss of bonuses if they don't start lending it out.

Price of oil has maintained in the $70-$80 bbl range throughout this mess, now consider the banks kick lending in again, the price of oil will just keep on ticking up.

[indirectapproach]

How about all the hyper-inflationary episodes of modern history have been much more closely linked to war and tyranny than we now are - Weimar, Hungary, Zimbabwe?

The current wars of the West are piddling by comparison with WWI and WWII.

The peaceful transition in democratic government in the UK and US says "no tyranny", in the narrowish sense of the word.

So I am with Ambrose on the deflation bit. Indeed we see it in US real estate prices.

And I think it was Ambrose that pointed out that Weimar hyperinflation of the 1920's preceded the Bruning deflation of the 1930's - no?

Sure - descriptions of Weimar may make interesting reading but I am not sure they are so relevant to now, a bit like banging on about the debauchery of the Roman Empire, or the Mayan calendar.

Edited July 26, 2010 by indirectapproach

[indirectapproach]

I think the classical definition of inflation also leads us to another very important distinguishing feature between now and Weimar,

"Too much money chasing too few goods."

Now we have more supply than ever before thanks to the emergence of Japan, Korea the Brics and others that were not much more than raw materials suppliers as long ago as the 1920's.

Now we have more "goods" than ever.

And most of the money seems to have disappeared into bad debt black holes. I still can't really figure that bit out.

But I don't see QE leading to hyper inflation because we need war or tyranny for it to get sufficiently out of control and instead of those two we have cuts "here" and in the US massive wealth/money destruction with real estate melt down.

Edited July 26, 2010 by indirectapproach

[Injin]

I think the classical definition of inflation also leads us to another very important distinguishing feature between now and Weimar,

"Too much money chasing too few goods."

Now we have more supply than ever before thanks to the emergence of Japan, Korea the Brics and others that were not much more than raw materials suppliers as long ago as the 1920's.

Now we have more "goods" than ever.

And most of the money seems to have disappeared into bad debt black holes. I still can't really figure that bit out.

But I don't see QE leading to hyper inflation because we need war or tyranny for it to get sufficiently out of control and instead of those two we have cuts "here" and in the US massive wealth/money destruction with real estate melt down.

It is indeed "different this time."

[scepticus]

How about all the hyper-inflationary episodes of modern history have been much more closely linked to war and tyranny than we now are - Weimar, Hungary, Zimbabwe?

correct. However I think ambrose's point is that an over-large stock of base money is vulnerable to shocks - like the french occupation of the ruhr. A similar major world shock (what might that be?) could have a similar effect on our stock of base money.

A large component of the weimar hyperinflation was IIRC, sustained short selling of the currency by foreigners. The way to prevent the latter happening is to impose reasonable capital controls on your own commercial banks so they are not tempted to engage in speculation against their own currency. This is how singapore and various other asian nations beat their crisis in 1997 and returned themselves to stability.

[Injin]

correct. However I think ambrose's point is that an over-large stock of base money is vulnerable to shocks - like the french occupation of the ruhr. A similar major world shock (what might that be?) could have a similar effect on our stock of base money.

A large component of the weimar hyperinflation was IIRC, sustained short selling of the currency by foreigners. The way to prevent the latter happening is to impose reasonable capital controls on your own commercial banks so they are not tempted to engage in speculation against their own currency. This is how singapore and various other asian nations beat their crisis in 1997 and returned themselves to stability.

The ruhr was invaded to move the money.

Someone made a fortune on it.

This will be no different.

[indirectapproach]

Another point worth making is that if the bankers are beginning to gen up on Weimar, is that a leading indicator that Weimar is not relevant?

[Injin]

Another point worth making is that if the bankers are beginning to gen up on Weimar, is that a leading indicator that Weimar is not relevant?

Just look at the money supply and stop wasting your time trying to outhink the ghosts of your imagination.

[Bloo Loo]

correct. However I think ambrose's point is that an over-large stock of base money is vulnerable to shocks - like the french occupation of the ruhr. A similar major world shock (what might that be?) could have a similar effect on our stock of base money.

A large component of the weimar hyperinflation was IIRC, sustained short selling of the currency by foreigners. The way to prevent the latter happening is to impose reasonable capital controls on your own commercial banks so they are not tempted to engage in speculation against their own currency. This is how singapore and various other asian nations beat their crisis in 1997 and returned themselves to stability.

how do you short sell a currency? I beleive NAKED short selling is banned.

[scepticus]

The ruhr was invaded to move the money.

the ruhr was invaded to provide 'collateral' against war reparation debts which germany could not possibly have paid.

however I don't think we should be too sorry for the weimar germans, these people had initiated an aggressive and unnecessary war in 1914, and they lost. If you do sh1t like that and lose, then expecting to live in an economically stable country afterwards is unreasonable.

ultimately the german hyperinflation stemmed from their really bad moves in the previous decade. I'm afraid a decade and a half of HPI do not fall into the same category as starting an losing a world war.

[Injin]

the ruhr was invaded to provide 'collateral' against war reparation debts which germany could not possibly have paid.

Who bought the munitions and uniforms and what was their expected return?

however I don't think we should be too sorry for the weimar germans, these people had initiated an aggressive and unnecessary war in 1914, and they lost. If you do sh1t like that and lose, then expecting to live in an economically stable country afterwards is unreasonable.

Who bought the munitions and uniforms and what was their expected return?

ultimately the german hyperinflation stemmed from their really bad moves in the previous decade. I'm afraid a decade and a half of HPI do not fall into the same category as starting an losing a world war.

I do declare that the moon will crash into the sun before you give up mad collectivism such as the above.

hey ho.

[R K]

Conveniently all money today is digital.

Computer says no.

Has no-one ever had their bank 'security dept' call 'em up 'cause of their 'abnormal spending pattern'?

Bonkers.

[scepticus]

how do you short sell a currency? I beleive NAKED short selling is banned.

In an investment newsletter called Money Morning on April 9, Martin Hutchinson pointed to disturbing parallels between current government monetary policy and Weimar Germany’s, when 50% of government spending was being funded by seigniorage – merely printing money.2 However, there is something puzzling in his data. He indicates that the British government is already funding more of its budget by seigniorage than Weimar Germany did at the height of its massive hyperinflation; yet the pound is still holding its own, under circumstances said to have caused the complete destruction of the German mark. Something else must have been responsible for the mark’s collapse besides mere money-printing to meet the government’s budget, but what? And are we threatened by the same risk today? Let’s take a closer look at the data.

History Repeats Itself – or Does It?

In his well-researched article, Hutchinson notes that Weimar Germany had been suffering from inflation ever since World War I; but it was in the two year period between 1921 and 1923 that the true “Weimar hyperinflation” occurred. By the time it had ended in November 1923, the mark was worth only one-trillionth of what it had been worth back in 1914. Hutchinson goes on:

“The current policy mix reflects those of Germany during the period between 1919 and 1923. The Weimar government was unwilling to raise taxes to fund post-war reconstruction and war-reparations payments, and so it ran large budget deficits. It kept interest rates far below inflation, expanding money supply rapidly and raising 50% of government spending through seigniorage (printing money and living off the profits from issuing it). . . .

“The really chilling parallel is that the United States, Britain and Japan have now taken to funding their budget deficits through seigniorage. In the United States, the Fed is buying $300 billion worth of U.S. Treasury bonds (T-bonds) over a six-month period, a rate of $600 billion per annum, 15% of federal spending of $4 trillion. In Britain, the Bank of England (BOE) is buying 75 billion pounds of gilts [the British equivalent of U.S. Treasury bonds] over three months. That’s 300 billion pounds per annum, 65% of British government spending of 454 billion pounds. Thus, while the United States is approaching Weimar German policy (50% of spending) quite rapidly, Britain has already overtaken it!”

And that is where the data gets confusing. If Britain is already meeting a larger percentage of its budget deficit by seigniorage than Germany did at the height of its hyperinflation, why is the pound now worth about as much on foreign exchange markets as it was nine years ago, under circumstances said to have driven the mark to a trillionth of its former value in the same period, and most of this in only two years? Meanwhile, the U.S. dollar has actually gotten stronger relative to other currencies since the policy was begun last year of massive “quantitative easing” (today’s euphemism for seigniorage).3 Central banks rather than governments are now doing the printing, but the effect on the money supply should be the same as in the government money-printing schemes of old. The government debt bought by the central banks is never actually paid off but is just rolled over from year to year; and once the new money is in the money supply, it stays there, diluting the value of the currency. So why haven’t our currencies already collapsed to a trillionth of their former value, as happened in Weimar Germany? Indeed, if it were a simple question of supply and demand, a government would have to print a trillion times its earlier money supply to drop its currency by a factor of a trillion; and even the German government isn’t charged with having done that. Something else must have been going on in the Weimar Republic, but what?

Schacht Lets the Cat Out of the Bag

Light is thrown on this mystery by the later writings of Hjalmar Schacht, the currency commissioner for the Weimar Republic. The facts are explored at length in The Lost Science of Money by Stephen Zarlenga, who writes that in Schacht’s 1967 book The Magic of Money, he “let the cat out of the bag, writing in German, with some truly remarkable admissions that shatter the ‘accepted wisdom’ the financial community has promulgated on the German hyperinflation.” What actually drove the wartime inflation into hyperinflation, said Schacht, was speculation by foreign investors, who would bet on the mark’s decreasing value by selling it short.

Short selling is a technique used by investors to try to profit from an asset’s falling price. It involves borrowing the asset and selling it, with the understanding that the asset must later be bought back and returned to the original owner. The speculator is gambling that the price will have dropped in the meantime and he can pocket the difference. Short selling of the German mark was made possible because private banks made massive amounts of currency available for borrowing, marks that were created on demand and lent to investors, returning a profitable interest to the banks.

At first, the speculation was fed by the Reichsbank (the German central bank), which had recently been privatized. But when the Reichsbank could no longer keep up with the voracious demand for marks, other private banks were allowed to create them out of nothing and lend them at interest as well.

with regard to currency short selling, you can only buy/sell in currency pair contracts.

also see:

http://forum.prisonplanet.com/index.php?topic=95970.0

[Bloo Loo]

snip

with regard to currency short selling, you can only buy/sell in currency pair contracts.

also see:

http://forum.prisonp...p?topic=95970.0

so, is that a no then? Im sure there is some very clever investment banker out there able to device a smokescreen "tool" to enable such a fraud.

[lowrentyieldmakessense(honest!)]

What actually drove the wartime inflation into hyperinflation, said Schacht, was speculation by foreign investors, who would bet on the mark’s decreasing value by selling it short.

hmmm

where did the currency come from

[blue skies]

Gold Dealer: The dollar is worthless. Gold is the only safe bet.

Me: But all I got are these worthless dollars.

Gold Dealer: We will take them.

Short selling is a the highest levels ever!

It is called the Derivities Market

[indirectapproach]

"Just look at the money supply and stop wasting your time trying to outhink the ghosts of your imagination."

Inflation is the product of the supply of goods as well as money.

Exhorting someone to just look at one side of a two side story in such a stentorian manner makes you look like a twit.

[indirectapproach]

As for Hjalmar Schacht, I suspect he was lying.

I suspect that what created hyper-inflation was a serious attempt by the German government to wriggle out of their war reparations and maybe that's why the French invaded the Rhineland. Frenchie could see it.

But try as I might I can't seem to find any German holding his hands up to this (quelle surprise) or much anyone else pointing the finger.

Anyone got any suggestions on where to look?

[blue skies]

Inflation refers to a rise in prices that causes the purchasing power of a nation to fall. Inflation is a normal economic development as long as the annual percentage remains low; once the percentage rises over a pre-determined level, it is considered an inflation crisis.

There are many causes for inflation, depending on a number of factors. For example, inflation can happen when governments print an excess of money to deal with a crisis. As a result, prices end up rising at an extremely high speed to keep up with the currency surplus. This is called the demand-pull, in which prices are forced upwards because of a high demand

Another common cause of inflation is a rise in production costs, which leads to an increase in the price of the final product. For example, if raw materials increase in price, this leads to the cost of production increasing, which in turn leads to the company increasing prices to maintain steady profits. Rising labor costs can also lead to inflation. As workers demand wage increases, companies usually chose to pass on those costs to their customers.

Inflation can also be caused by international lending and national debts. As nations borrow money, they have to deal with interests, which in the end cause prices to rise as a way of keeping up with their debts. A deep drop of the exchange rate can also result in inflation, as governments will have to deal with differences in the import/export level.

Finally, inflation can be caused by federal taxes put on consumer products such as cigarettes or fuel. As the taxes rise, suppliers often pass on the burden to the consumer; the catch, however, is that once prices have increased, they rarely go back, even if the taxes are later reduced. Wars are often cause for inflation, as governments must both recoup the money spent and repay the funds borrowed from the central bank. War often affects everything from international trading to labor costs to product demand, so in the end it always produces a rise in prices.

[Injin]

"Just look at the money supply and stop wasting your time trying to outhink the ghosts of your imagination."

Inflation is the product of the supply of goods as well as money.

Exhorting someone to just look at one side of a two side story in such a stentorian manner makes you look like a twit.

Nope, inflation is a measure of the money supply.

[Injin]

Inflation refers to a rise in prices that causes the purchasing power of a nation to fall. Inflation is a normal economic development as long as the annual percentage remains low; once the percentage rises over a pre-determined level, it is considered an inflation crisis.

There are many causes for inflation, depending on a number of factors. For example, inflation can happen when governments print an excess of money to deal with a crisis. As a result, prices end up rising at an extremely high speed to keep up with the currency surplus. This is called the demand-pull, in which prices are forced upwards because of a high demand

Another common cause of inflation is a rise in production costs, which leads to an increase in the price of the final product. For example, if raw materials increase in price, this leads to the cost of production increasing, which in turn leads to the company increasing prices to maintain steady profits. Rising labor costs can also lead to inflation. As workers demand wage increases, companies usually chose to pass on those costs to their customers.

Inflation can also be caused by international lending and national debts. As nations borrow money, they have to deal with interests, which in the end cause prices to rise as a way of keeping up with their debts. A deep drop of the exchange rate can also result in inflation, as governments will have to deal with differences in the import/export level.

Finally, inflation can be caused by federal taxes put on consumer products such as cigarettes or fuel. As the taxes rise, suppliers often pass on the burden to the consumer; the catch, however, is that once prices have increased, they rarely go back, even if the taxes are later reduced. Wars are often cause for inflation, as governments must both recoup the money spent and repay the funds borrowed from the central bank. War often affects everything from international trading to labor costs to product demand, so in the end it always produces a rise in prices.

Nope, inflation is an increase in the money supply.

[indirectapproach]

Well I'm using the dictionary definition of this technical term.

You use your own definition if you wish but that is a bit tiresome, something of a distraction and rudeness in the face of the courtesy of a reply.

The mistake of rising to I shall avoid in future.

[LiveAndLetBuy]

...

Light is thrown on this mystery by the later writings of Hjalmar Schacht, the currency commissioner for the Weimar Republic. The facts are explored at length in The Lost Science of Money by Stephen Zarlenga, who writes that in Schacht’s 1967 book The Magic of Money, he “let the cat out of the bag, writing in German, with some truly remarkable admissions that shatter the ‘accepted wisdom’ the financial community has promulgated on the German hyperinflation.” What actually drove the wartime inflation into hyperinflation, said Schacht, was speculation by foreign investors, who would bet on the mark’s decreasing value by selling it short.

Short selling is a technique used by investors to try to profit from an asset’s falling price. It involves borrowing the asset and selling it, with the understanding that the asset must later be bought back and returned to the original owner. The speculator is gambling that the price will have dropped in the meantime and he can pocket the difference. Short selling of the German mark was made possible because private banks made massive amounts of currency available for borrowing, marks that were created on demand and lent to investors, returning a profitable interest to the banks.

At first, the speculation was fed by the Reichsbank (the German central bank), which had recently been privatized. But when the Reichsbank could no longer keep up with the voracious demand for marks, other private banks were allowed to create them out of nothing and lend them at interest as well.

with regard to currency short selling, you can only buy/sell in currency pair contracts.

also see:

http://forum.prisonplanet.com/index.php?topic=95970.0

Sounds like the problem wasn't short selling per se, but rather the fact that the bank was willing to print and loan marks out to short sellers en masse on the assumption that interest payments would cover any currency devaluation. But in lending out more and more marks they were devaluing the currency further, ramping up demand, and ultimately causing a positive feedback loop. Everybody thought they were making money until suddenly they weren't. So it still seems to me that the main cause was an increase in the money supply, rather than short selling itself, which of course doesn't answer the question of why the pound and dollar have held their value better than the Reichsmark did.

[indirectapproach]

To which the answer is we are in a different supply of goods paradigm.

Edited July 26, 2010 by indirectapproach