In the award winning musical "Cabaret" ex-expatriates sang and danced their way through the collapsing landscape that was the German Wiemar Republic. In reality however, there was very little to sing and dance about in Germany at that time. Hyperinflation had devastated the mark to such an extent that it was far more beneficial to burn money in the stove because wood kindling had more value. The nation began to operate on a barter system and alternate currencies backed by certain commodities in agricultural areas began to take hold as an "official" currency. The image of a man pushing a wheelbarrow laden with marks to buy a loaf of bread was a peculiar sight to those seeing it in the magazines of the day but to Germans it was an everyday occurrence.
Two things brought about the destruction of the mark. Kaiser Wilhelm's financing of World War I through debt instead of taxation and the punitive reparations policy that was put into effect by the victors that stripped Germany of its colonies, its resources, its industrial output, and most of its army. It also saddled the country with gargantuan monetary restitution payments which over time would be increasingly difficult to pay given that much of its production capabilities were be taken by others. While American president Woodrow Wilson sought a far more just approach to punishment through his 14 Points, Europe and in particular France, sought to destroy what was left of its already vanquished enemy. So, in order to pay its debt, Germany was forced to fire up the printing presses.
An interesting phenomenon during this time was the German stock market's rally. Speculation was the order of the day and cash profits could be converted into much more favorable foreign currencies. Anyone who had access to the markets played them to the hilt. This became a necessity because bond yields were virtually non existent and no one trusted government paper anyway.
As inflation spiraled out of control, people found new ways to get by. As stated earlier; secondary currencies started to develop based on rye and other collateral. Barter became an important aspect of everyday life and it has been reported that one could rent an apartment for a half stick of butter. Labor sought wage increases to keep up with rising prices but this caused more marks to be printed which in turn further devalued the currency and caused the price of goods inflate. It became a no win situation for the average worker when it took a year's salary to pay for a month's living expenses.
Fast forward nearly a century later and let us consider the current U.S. economy. Now, obviously the economy of the United States today is nowhere near that of Germany in the 1920's. There are however, parallels that should be noted.
The U.S. has a tremendous amount of national debt; much of which was brought on by financing wars through the issuance of bonds and the great bank and business bailouts of 2008. Quantitative Easing has continuously pumped more money into the economy and the stock market has been moving higher because of this. Recently when the Federal Reserve pointed out that a tapering might be in order the market fell 300 points and only started to move higher when it was determined that QE would continue unabated for a few more months. Volume on the Dow Jones Industrials has dropped over 70% since 2008 and does not justify its performance otherwise.
Inflation, we are told is under control but a trip to the grocery store and the gas station however, might give one cause to ponder the veracity of such a claim. Inflation is gauged by how much money is in circulation. The more of it that is available the less it is worth. The M-1 money supply measures things like cash, checking accounts and immediately liquid instruments. The M-2 supply measures all of M-1 plus savings accounts and certificate of deposits under $100,000.00 and the M-3 money supply measures large accounts like CD's over $100,000.00, funds held by Americans in foreign banks and large institutional money funds. In 2006 the Federal Reserve stopped publishing M-3. So only M-1 and M-2 are used in the calculation. Therefore large deposits are no longer reported which may give a different appearance as to how much money is really out there and may distort the actual rate of inflation.
Bitcoin is making its rounds as an alternative currency and its future was even given a tacit endorsement from none other than Chairman of the Federal Reserve.
The demand for a $15.00 minimum wage to keep up with the cost of living is akin to the demands of German workers to double their earnings in the '20's. It is a futile effort to raise the minimum wage if high paying manufacturing jobs are not also available and plentiful. Inflation can only be curbed by taxation and only the government has the authority to remove money permanently from the economy. Larger paychecks for skilled labor coupled with corporations who domicile themselves in the U.S. and do not seek tax havens out of the country will create a larger tax benefit and ultimately ease inflation. In short the United States must reclaim its manufacturing base, widen its tax base and cut spending. A tapering of Quantitative Easing is also a necessary component in the reduction of inflation but there will be a serious side effect to the market and its investors if it is too much at once.
History is a teacher that repeats herself to varying degrees when a generation has forgotten the previous lessons.
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