Is Ben Bernanke The Second Coming Of Rudolf von Havenstein, The Central Banker Responsible For Germany's Hyperinflationary Collapse (And Ostensibly WWII)?

Tyler Durden's picture

SocGen’s Dylan Grice provides a gripping account of Germany’s hyperinflationary episode, in which he charts the extended parallels between not just the precursor economy that lead to a 16,579,999% inflation in 1923 Weimar Germany, and modern day developed (and highly leveraged) countries, but between Germany’s then central banker Rudolf von Havenstein, and the Greenspan-Bernanke duo. And while we know how “der Geld Marschall’s” Weimar experiment ended, the future before the U.S., as a result of the Maestro’s (both Senior and Junior) almost identical policy response is still open-ended. As the future of America is now exclusively in the hands of insidious economists, the following insight from Grice into the utility of economic models and decision-making should be sufficient to dash the hopes of any optimist for a favorable outcome.

“Is anything more dangerous than a nonsensical idea taken seriously? The esteem of economists has been dented by the financial crisis, though not so severely that the financial community treat economists? views with anything approaching the derision they deserve. The macroeconomic meme is resilient indeed! Sadly, the situation isn?t new. Macroeconomic theory has a long and distinguished history of seducing policymakers into thinking utopia is just around the corner, a trick brought about by untested hypotheses masquerading as empirical knowledge. Believe it or not, a school of economic thought that was prominent in Weimar Germany during the hyperinflation ? and particularly at the Reichsbank as it was aggressively monetising the government deficit ? held that the escalating money supply had nothing to do with the exploding rate of inflation! More on that later. For now, in this new world of policymaking experimentation, it?s worth recalling the British Ambassador to Germany?s observation on the hyperinflation that ?’no one could anticipate such an ingenious revelation of extreme folly to which ignorance and false theory could lead.’”

Hopefully, once the true span of the Great Depression v2 is grasped, once all extend and pretend measures are exhausted, modern society will do away with economists once and for all.

For those unfamiliar with the greatest failed experiment in developed world monetary policy, here is a brief primer.

For all the ink spilled analysing two of the 20th century’s greatest economic tragedies – the Great Depression and Japan’s lost decade(s) – little has been spent on arguably the greatest of them all: Germany’s hyperinflation. It may be because we’re confident we understand it. Everyone knows that unfettered money printing eventually leads to explosive inflation, don’t they? The thing is, economists knew that then! So what was going through the mind of the central bank head who presided over history’s most pathological currency debasement?

 

 

It is often said that the Great Depression so thoroughly destroyed the social fabric of the industrialised world in the 1930s that WW2 became inevitable. But this overlooks the role of Germany’?s hyperinflation, the horror of which seems underappreciated in the Anglo-Saxon world. At the height of the crisis in 1923, for example, industrial production fell by the staggering annual rate of 37%. In roughly the same single year, the unionised unemployment rate rose from under 1% in late 1922 to nearly 30%! (and according to Frank Graham, almost half of the total workforce became unemployed at this time). This, remember, is at a time when the rest of the world economy was booming.

 

 

As far as economic pain goes, this probably surpasses the Great Depression yet to come. But it only tells a part of the story: the nation?s wealth, held largely in German government bonds was completely wiped out. We can only imagine the nationwide psychological devastation of a proud Germany already feeling victimised and humiliated in the aftermath of WW1. In his ?’Ascent of Money’, Niall Ferguson quotes Elias Canetti?s recounting of his hyperinflation experience as a young man in Frankfurt, “It is a witches’ sabbath of devaluation, where men and the units of their money have the strongest effects on each other. The one stands for the other, men feeling themselves as ‘bad’ as their money; and this becomes worse and worse. Together they are all at its mercy and all feel equally worthless”. Such was the condition of Germany before the Great Depression had even begun.

 

Indeed, it is a tantalising counterfactual: would Germany have fallen under the Nazi spell which would ultimately lead the world to a second World War had she not borne the grave burdens of the Great Depression already exhausted, despairing and with ruptured social cohesion? We?ll never know, of course, and anyway such events are never so simplistically mono-causal. Nevertheless, it is possible that German hyperinflation played a decisive role in the build-up to WW2 and therefore logical to conjecture that the central banker who presided over that hyperinflation is the most influential figure in history you?’ve never heard of.

Next – presenting Ben Bernanke ideological father: Rudolf von Havenstein, after whom came the flood.

That central banker was a certain Rudolf von Havenstein. Born in 1857 into an aristocratic Prussian family, he trained as a lawyer and rose to become a county court judge before joining the Prussian Finance Ministry in 1890 and being appointed president of the Reichsbank in 1908. Steeped in the Wilhelmine tradition of devotion to his Kaiser and a passionate believer in the virtue of public duty, he seems to have been liked by all ? a true gentleman of the old school. Montagu Norman – then governor of the BoE – found him to be a “quiet, modest, convincing, and a very attractive man.?” [For more on the treasonous actions undertaken by Norman as head of the BOE in the 1930's click here]

 

Just how could such a decent, hard-working, intelligent and well-intentioned pubic servant have given birth to the uncontrollable monster of hyperinflation? How could such a paragon of public integrity preside over the largest currency debasement in financial history, quite possibly sowing the seeds for the most destructive war in the history of civilization?

 

He first seems to have developed the habit of monetizing government debt during WW1. With a complacency arguably similar to today?s policymakers in justifying their variously creative schemes for monetary and fiscal experimentation, the monetary expansion was justified as merely a stop-gap measure. The war was expected to be short and in any case the losers would be made to foot the bill. No one really anticipated the long and protracted conflict which occurred, or the financial burden it would impose. So by the end of the War – only 10% of which was financed by taxes – the money supply had ballooned and prices had quadrupled. Nevertheless, Von Havenstein was lauded as a public hero, decorated with honours and even nicknamed “der Geld Marschall“, which sounds a bit like the ?the Maestro? but in fact translates as the ?Money General?.

 

Once embarked upon this path though, it became difficult to stop, especially since the early stages of inflation didn?t seem too bad. Although inflation rose by 60% in 1921, real industrial production rose by 26% and unemployment stood at only 1% of the unionized workforce. The following chart shows that at one point during this period, real share prices rose by over 100%. But then the inflation intensified. In 1922 it reached 5,300% and on the eve of currency  reform in late 1923, the annual rate was 16,579,999%. How did this happen?

 

 

To call the political climate of the time merely difficult would be a gross understatement. The country was on the brink of civil war: on the far right was the vast and humiliated ex-military which, having been forcibly demobilized by the victorious Allies, had become a seething and vengeful nationalist militia; on the far left were the anti-war workers and communists, the latter inspired by the 1917 Bolshevik Revolution and aiming to achieve the same end in Germany. Meanwhile, with revolution in the air and violent street battles between these polar political opposites playing out nightly, deep-felt resentment towards the foreign powers was fermented by the issue of war time reparations, whereby Germany was required to hand over 4-7% of GDP each year until full compensation for the war-time devastation had been paid.

 

It?s worth noting that there has been much debate over the extent to which reparations were in fact a primary cause of the hyperinflation. Some have argued that the 4-7% budgetary burden was bearable and that the hyperinflation was actually a bluff gone wrong. The German authorities were actually trying to demonstrate just how desperate their situation was as a way to lower their reparation payments. I?m no expert, but I?m not completely convinced by this argument. In passing, it?s worth noting that we?re about to see how politically feasible such a budgetary burden is since the 4-7% of GDP range is roughly what Cecchetti et al at the BIS calculate is required to stabilise debt levels at 2007 levels (see chart below).

 

 

I personally think the 4-7% reparations was the last straw for the German authorities facing capital flight in response to the tax measures they?d introduced to shore up the government?s budget position (as we?re seeing in Greece today), with the monetization habit now very firmly entrenched and fearful of what might happen should painful deflationist policies be pursued. As Liaquat Ahamed writes in his masterful book on the Great Depression “Were he to refuse to print the money necessary to finance the deficit, he risked causing a sharp rise in interest rates as the government scrambled to borrow from every source. The mass unemployment that would ensue, he believed, would bring on a domestic economic and political crisis, which in Germany’s [then] fragile state might precipitate a real political convulsion.” Facing a dilemma orders of magnitude higher but nevertheless familiar to observers of today?s situation, faced with the terrifying prospect of even more economic pain should he slam on the brakes, he opted to press his foot further on the accelerator.

Another lesson: blaming speculators for economists’ endless blunders and flawed outlook on everything, is nothing new. Somehow, CDS traders did not exist the last time countries were going bankrupt: but how is that possible?

 
 

Less well known though is that, as always, economic theory was on hand to furnish Von Havenstein with a ?scientific? justification for his playing for time. The consensus in Germany was actually that the cause of inflation was external because both the Reichsmark and import prices had moved disproportionately more than the rise in the money supply. Since the external value was caused by the balance of payments, which was largely caused by the reparations, it was foreigners and not budget deficits which caused the inflation. Indeed, Von Havenstein was so enamoured with this theory that he blocked attempts at monetary reform arguing that any measures would be pointless without settlement of the reparations issue. According to Ludvig von Mises, “Herr Havenstein honestly believed that the continued issue of new notes had nothing to do with the rise of commodity prices, wages and foreign exchanges. This rise he attributed to the machinations of speculators …” Speculators always get the blame don?t they?

But 1922 is so long ago. There is no way out “advanced” economy can in any way compare, is there? Read on:

 
 

I don?t want to overplay the parallels. In fact, there is one very clear difference between the hand Von Havenstein had to play then and those today?s central bankers have to play now, namely the stability of today?s political climate. Clearly this can change, but the class warfare, nationalistic xenophobia and revolutionary spirit poisoning the political atmosphere of 1920s Germany is at the very least dormant today, and certainly not meaningfully visible across the political landscape. But let’s not ignore the parallels either: as is the case for today’s central bankers, Von Havenstein was faced with horrible fiscal problems; as is the case for today’s central bankers, the distinction between fiscal and monetary policy had blurred; as is the case for today’s central bankers, the political difficulty of deflating was daunting; and as is the case for today’s QE-enthralled central bankers, apparently respectable economic theory reassured him that he was doing the right thing.

Let’s not forget that without much fanfare, the Greeks and Germans are doing all they can to bring xenophobia back to the core.

 
 

One might think that the big difference is that today we have a greater expertise. Surely we understand what happens when deficits are financed with printed money, and that it is only backward and corrupt states that don?t know any better, like Bolivia and Zimbabwe? But just a few years ago didn?t we think that it was only backward and corrupt states that suffered banking crises too?

 

And anyway, how could Von Havenstein not have known that the continued and escalating printing of money to fund government deficits would cause inflation? The United States experience of unrestrained money printing during the Civil War had been well documented, as had the hyperinflation of revolutionary France in the late 18th century. Isn?t it possible that, like today, he was overconfident in his ability to control his creation and in the economic theory which told him such control was possible? Certainly, in an article in the New York Times on the eve of the First World War, again from Liaquat Ahamed?s book, there seems to have been evidence of the general optimism that there would be no “?unlimited issue of paper money and its steady depreciation … since monetary science is better understood at the present time than in those days.?”

 

The fact is we do understand the economics of inflation. Despite what economists everywhere say about being in ?uncharted territory? with QE, we know that if you keep monetizing deficits eventually you get inflation, and we know that once you’?re on that path it can be extremely difficult to get off it. But we knew that then. The real problem is that inflation is an inherently political variable and that concern over debt sustainability and unfunded welfare obligations leaves us more dependent on politicians than we have been in many decades. Frank Graham concluded his 1930 study of the Weimar hyperinflation with the following observation, which I think is as ominous as it is apt today:

 

“?The mills of international finance grind slowly but their capacity is great. It is also flexible. The one condition is that the hoppers be not unduly loaded in the effort to get the whole grist from a single grinding. So much for the economics of the question. What politics has in store is, however, an inscrutable mystery. It can only be said that such financial difficulties as may occur will almost certainly arise from political rather than from economic sources.?

How many more parallels do we need: escalating geopolitical tensions across the world, an Eastern European powder keg, Quantitave Easing masking as just economic doctrine, and, on top of it all, a deranged money printer. Just as von Havenstein set the foundations for the most destructive war in world history, is his modern reincarnation currently doing the same, as yet another, much more destructive military conflict possibly approaches?

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
truont's picture
Is Ben Bernanke The Second Coming Of Rudolf von Havenstein?

Da. Da. Da.

tpberg7's picture

Is Ben Bernanke The Second Coming Of Rudolf von Havenstein?

Indeed he is, Uncle Ben is Rudolf von Havenstein on steroids.  More money must be printed to feed the ravenous appetite of the vampire squid and his minions.  What will it take to keep this thing going?  What is the tipping point for the silent majority?

Noah Vail's picture

A major factor of the Weimar inflation was left out of this article. Half the nation as unionized and a quarter were govt employed. Workers were not paid with paychecks, they were paid in cash. It was a cash economy. Because of the rising prices, the general perception was that nobody had enough cash, particularly the corporations had trouble raising cash to make payrolls. Because of this, the perception arose that the problem was not too much money but rather too little. So, a huge part of the motivation to print resulted in the desire to avoid riots that would occur when there wasn't enough cash to pay them. Of course, by then they were caught in the classic wage/price spiral that motivated them to print evermore.

 

The literature of the time is full of references to "not enough money." People actually believed that a lack of money was the source of the problem. No doubt that was the result of propaganda, but it effectively initiated the call for ever more cash. I suspect that if checking accounts were in use at the time, that inflation would not have reached the levels it did.

walküre's picture

Good points.

I would add that seeing a total collapse of our entire financial system is unlikely given the fact that financial transactions are largely electronic and not in cash.

Some here seem to want to predict that.

 

Anonymous's picture

True. Yet if confidence is lost in the currency, many people will want to change their electronic currency into cold hard tanglible goods.

Then, what is the difference if the currency is paper or electronic. Too much currency chasing too few goods.

Anonymous's picture

Well then logically, just like when certain paper currencies were discounted, so will electronic bits and bytes. Why would/should they be any different? Pay bills on time, and your credit will be better. Electronic payment helps this at times.

Anonymous's picture

However Citi has claimed the right to hold funds for 7 days, without clear reason given.

Last I knew Citi cleared international transactions.

If Citi started refusing to clear checks or allow withdrawels is anybody really going to want to run an international transaction through them? International commerces ends at that moment.

Seems to me both cash and "electronic" can both be pinchpoints to commerce, it keeps comming down to perception.

Anonymous's picture

Don't see how the article can freeze-frame a point in time and say that's where the problem was. For starters, Americans look at when FDR nationalized the banks, but it was a couple years earlier that Britain that went off gold, in 1931. What happened, the punishing loans that Germany had to pay off as a result of World War I, were underwritten by the US, so when Germany couldn't pay back France and Great Britain, they couldn't pay back the US, or something like that, who could no longer make loans to Germany, etc etc. Hm.

Kayman's picture

I don't see how your position makes any sense. In the fall of 2008 Hank committed the daylight robbery of the American people, by demanding $700 billion (NOW, RIGHT NOW DAMMIT, OR I PLUG THAT KID YOU'RE HOLDING) from Congress (purportedly the representatives of the People).

That episode alone, is proof enough that electronic "money" cannot be considered de facto "more stable".

If the powers that be, wanted to, Mini-Greenspan could have electronically transferred $700 billion to his buddies (or as it later turned out, to anyplace and anyone that met his fancy).

Covering payrolls with electronic "magic" is no less inflationary, when the recipient uses their Visa/Debit card to buy goods before the goods double in price.

I wouldn't bet that the house of cards will collapse, but I also wouldn't bet against it, either. 

Anonymous's picture

Just to add fuel to your fire, when you add the additional 9 to 25% interest rate to the card holders monthly bill that they can no longer cover in one payment the Hyperinflation looks like a drop in the "exponential bucket". You also make make mention of the Electronic "magic" money. Which again I add how many people are not subject to the direct deposite controlled by the banks when it may or may not post?.

Anonymous's picture

WallSTOnion.blogspot.com is under new management.

ALl funny........Not Serious ...........Somewhat Truthful.

Nout Wellink's picture

Argentina did have bank accounts. So did many other countries. Didn't prevent them from defaulting, did it?

Anonymous's picture

Although, currently, the size of the workforce in the public sector in the US is small compared to the total size of the workforce, one has to account for the fact that many of the outsourced work that private industry is performing for the government can hardly count on their employees as being in "private sector".

http://www.washingtontimes.com/news/2010/feb/02/burgeoning-federal-payro...

Also, most of the workers belonging to unions are part of the public sector.

http://www.nytimes.com/2010/01/23/business/23labor.html

So at the moment the government is the economy! With the advent of Direct Deposit and PayCards, the people looking at their digital money being devalued on a computer screen wish they had chosen ( is that even possible in most cases now a days ) to be paid in cash, at least for a while ...

I guess HeliBen also thinks there is "not enough money today", so he is just adding his contribution to the solution of this "scarcity" problem.

Anonymous's picture

From my UK perspective the importance of this issue is understated, because Unions own the politicans at municipal level, just as Wall St. and big business owns the federal politicos.

The US has never cut Union power down to size as the UK did in the Thatcher revolution of the '80s. Can the US halt it's transition into financial and organised labour oligarchy?. Go long on pitchforks.

Eally Ucked's picture

Hey Ben, do you want to manage perceptions? We know that's the only goal you want to achieve. Submerged in shit and feeling like in the heaven?

Noah, Ben, Moshe, David, Aaron they all try to make you feel better!

Andrew_Miller's picture

By the way, why all those guys tend to be the same mordehai nationality?

delacroix's picture

I read somewhere, that currency speculators, had a significant impact, on the accelleration, of the decline, in value. and someone referring to the cash, as jew confetti

Anonymous's picture

In Noah Vail's first comment, replace the words "cash" and "money" with the words "credit" and "liquidity" and see how it reads.

What will happen when, after enough bailing out by creating new "liquidity", banks again feel confident in extending credit, and consumers again feel like borrowing? Won't the resulting spending spree ignite a "classic wage price spiral"?

During the 1970s we were no more of a "cash" economy than we are today, yet inflation raged as a result of the same monetary and fiscal policies we are pursuing today.

When confidence returns, so will inflation. Given the magnitude of the "quantitative easing" now in process and the amount of new "liquidity" required to restore that confidence, it is likely to be much worse than the 1970s.

As in 1920s Germany, the political struggles we are witnessing are fights over who gets to be first in line to receive the newly created money. So far the big banks and other well connected financial institutions are winning this fight.

Electronic or paper, the form of the currency does not matter, as long as it can be created at will and handed out to the politically well connected. Which is why the common man has only one way to protect himself: buy gold and silver.

hired goon's picture

http://en.wikipedia.org/wiki/Occupation_of_the_Ruhr

 

The Occupation of the Ruhr took place when Germany defaulted on reparations payments to France.

 

France occupied the Ruhr area in order to seize payments, but the German Government urged its citizens to adhere to its policy of "Passive Resistance", where economic activity slowed to a crawl because, for lack of a better description, people just stopped working. The Government, in their wisdom, encouraged adherence to passive resistence by continuing to pay every striking employee to sit at home and do squat.

 

So the real huge motivation to print was that the German government needed to pay a whole of people who were sitting down at home instead of working in factories, mines and timber mills.

Anonymous's picture

Despite obvious debasement parralells, I don't think we're living in an era where the US is having to pay war reparations and living under a foreign occupation.

Maybe the thought of paying what was thought to be the unjust debt led to the debasement (e.g. more of a nothing to lose mentality than the US today). The US is still the only world super power and the dollar the reserve currency, not quite a comparable situation.

Jesse's picture

 

The war reparations were an enormous, if not decisive, factor.  I was surprised that they received no mention.

 

Anonymous's picture

Reparations were mentioned, but only briefly in order to toss them out on the assertion that they simply weren't causal.

This article has some major flaws - I'm surprised, Tyler, that you buy into them. Do you know what the word "ostensible" means?

1921-1923 was not a time of global growth everywhere but Germany. Are you aware of the U.S. depression that started in 1921?

The reparations were a significant part of the outfow of capital from Germany starting in 1919. Equally significant were the debts incurred by both the government and private industry after the war, during the attempt at economic recovery. European, and especially American, bankers and speculators bought every bond issue the Germans brought forth to "re-capitalize" from war-induced bankruptcy. The result was a steady flow of mooney (in dollars, francs, and pounds) out of the country to meet interest payments on this debt. Any failure (as in a wave of defaults) on this debt would have produced financial crisis in Europe and America - which we made clear was unnacceptable. So, money was printed, payments were made (in dollars, francs, and pounds), the Reichsmark sank in value both at home and abroad. The German citizens were screwed, but the gov't and businesses with all the loans were happy (for a while), and the foreign "speculators" were happy, too, because they were getting paid in their own currency. After the hyperinflation went nuclear, the German gov't calmly issued new currency and went forth as if nothing bad had happened. With a stable currency, they soon found themselves again unable to make reparation payments, so the U.S. gov't started loaning Germany money (which was never repaid - a sort of prequel to the Marshall Plan) with which to make pay France et al (not directly, of course, but it ended up there). The whole story is much more complex than this article suggests.

We do not "know that if you keep monetizing deficits eventually you get inflation". That is one possible effect; another is that you don't get inflation (e.g., Japan). There are many factors in inflation, and an equal number of theories (Monetary, Wage-Push, Commodity Supply), that go into explanations of any specific historical episode of inflation, and there are many examples of predicted hyperinflation in the U.S between 1984 and the present - based on one or another theory - that never happened.

I could go on, but why bother?

pivot's picture

ahhh, all good points! but then you must have thought ZH still presents informational pieces and lets the community discuss.  this article is just another in a line of ridiculous, straw-man argument/ opinion pieces.  oh how i miss the old days, with informed commentary on market infrastructure, basis trades, and other things you couldn't find elsewhere in the financial press.

if it werent for the fact that coming to ZH is a bit of a habit if/when bored,  i would probably stop navigating here.

couple good posters still on this site, but few and far between.

WaterWings's picture

Typical.

Instead of actually adding your take ON THE ARTICLE we only have a long, empty waste of time. We'd love to hear your real thoughts except that it's pretty obvious we don't have real markets anymore. You never liked gold, so we already don't care about your views.

Anything else, or glorious one?

Noah Vail's picture

You have to understand the whole situation of Weimar. Way too many people take facts out of context. Germany became a dysfunctional nation right after the war with an incompetent government. The behavior of France, which essentially wanted to destroy Germany economically, was also a major factor. They seized the Ruhr valley and cut off a huge amount of their production. If anybody caused WWII it was France by destroying Germany. Neither does anybody ever mention that the inflation was worse in the other axis powers like Austria and Hungary. So what caused it in all three, mere coincidence? i'd say the proximate cause was loosing the war plus the treaty, not just reparations.

Kayman's picture

It is not war reparations, per se, but the quantum of war reparations.

We do indeed have a parallel, by spending more than we earn as a country in "good times" and doubling up on the bet in "bad times".

It is our children and grandchildren that will pay for our squandering and our debt.

We have been spending more than the net growth of our economy for more than a decade and (not so) Great Britain once held the world's reserve currency, so the USD is not "ordained by God herself"

Anonymous's picture

This is one of my most frequently visited sites... Me and the guys in the chat have been reading up on your blog before the market analyzing everything before the day begins in a small lil chat we made. http://stockson.blogspot.com/p/chat_22.html

thanks for keeping us informed.

Ripped Chunk's picture

Does history tend to repeat itself???

msorense's picture

No - as long as you just print secretly everything will be OK.  That's what the Fed is for.  What is good for the banker is good for the nation.

dumpster's picture

your one taco short of a complete mexican meal

 

just keep printing ,, we will be okay,,

 

the level of stupid is apparent \\

 

why not start your self a business ,, pay every one with electronic digits

Chopshop's picture

depends: if you know your history, yup; if you retro-fit history to fit what you think is occuring today, then, um, just wait n see how "inflation" 'works' out over the new few years (before it actually occurs).

Ripped Chunk's picture

What the fuck does that mean?

I should have qualified my question" Does history while central banks have existed repeat itself?

Yes it does.

The entity described as "inflation fighter" is in fact the biggest stimulus for inflation. Don't worry. No one will notice.

Who does inflation serve most?

Whe does inflation serve least? 

 

Howard_Beale's picture

What he means is that you can retrofit history to parallel today but that it doesn't necessarily mean it will happen. Deflation is still a huge possibility before inflation. And the truth is, we just don't know--and won't know until it happens. Deflation could become such a problem that Ben will go ahead and print us into hyperland in 2 or 3 years. It's all a wait and see situation.  

Unscarred's picture

(I THINK) what he means to say is:

 

BERNANKE = WWIII


...that is, after you've whittled down the equation, of course.

Anonymous's picture

I think you're wrong.

-unscarred

dogbreath's picture

or:

 

Bernanke = Destruction of Society

Anonymous's picture

by Inspector Asset

Tim Geithner announces the new and improved monetary policy for U.S. that was hammered out over the weekend with Lawerence Summers and received a two-thumbs up from the Obama administration. The new policy comes as a result of the new tough reforms coming out of DC against Wall Street due to the crisis in 2008. Tim Geithner, speaks excitedly about the new policy and states "unlike the past, this new reform package, and new monetary has plenty of transparency and oversight."

In fact the new policy is so simple that oversight may not be needed at all, as pointed out by Congress member Maxine Walters. It is better known on the hill as "The 3 rule system."

Rule # 1. If the investment is worthless (toxic) the Treasury shall buy it and pay full price. If a price is not known, then we shall make up a price.

Rule # 2. If the investment has any value at all, or has the potential to show value in the future than the Federal Reserve shall buy it.

Rule #3. If you not sure, call Goldman Sachs and let them decide. Give them a little time so they can make their investments, as needed, before the herds stampede in looking for a deal.

Geithner admits the plan may seem to simple, but argues "that sometimes complex problems require simple solutions, and oversight." "This plan being so simple, allows for that oversight that was lacking before."

When asked what happens when the FED balance sheet gets so big, would it pose a risk of being "To Big To Fail?" Geithner sniped back,

"Don't you worry about the FED, they will take care of themselves." "Long after America is bankrupted, just an example of course, the FED will still be here standing. Get it? They are a separate entity! "

Geithner closed out the interview saying "we should be more concerned about the actions of our own government, than snooping around the FEDS business."

When asked, by Congress Maxine Walters, "which government, do you work for?: Geithner lit up like an alien, seemed confused, and then left the room. He was unable to answer the question.

Ripped Chunk's picture

Please answer the 2 questions. Then think about the deflation argument.

Anonymous's picture

Inflation HELPS debtors, asset owners, equity owners and generally risk takers.

Inflation HURTS cash savers, fixed income investors, and generally the "risk averse".

IF you think there is going to be inflation... you should be looking to borrow as much money as possible at low fixed rates. This money will be very easy to pay back at the new inflated prices, especially if you've invested it in any cash-flow producing assets.

ZH -- Where is the bond auction failure? Ha!

Kayman's picture

To Anon 247329

There will never be a bond "failure" so long as Ben gets Indirects, Households, and can strongarm the New York Mafia, to buy Timmy's paper; and of course Ben can buy it himself through the many "conduits" available to someone that insists on stiffarming the public.

 After all, anyone that will lend you short term at zero and allow you to buy long at a profit, and will guarantee both sides of the transaction to boot, well, that person is a little hard to say no to.

But time is fleeting and the question is how many times can you twist the devil's tail.

And yes, you can have inflation and deflation at the same time.  Hyperinflation can ruin the value of assets that cannot keep up with pricing power.

Anonymous's picture

Where is the bond auction failure?

A better question is: How can we *ever* have a bond auction failure with the primary dealer system in place?

Nels's picture

Inflation HELPS debtors, asset owners, equity owners and generally risk takers.

Inflation helps debtors, and they are the only ones who get a clear pass.  equity owners and risk takers can get burnt by taxes on profits that really don't exist ex-inflation.

Inflation really helps the tax collector the most, especially with a graduated income tax

AnonymousMonetarist's picture

The deflationary episode in 1920 led to the initial money printing, which then fed upon itself as seen above.

More accurately a blast of inflation in 1919 didn't do the trick and led to a deflationary whiff which freaked 'em out causing 'the flood'..

Much like deflation freaks out today's Federales.

Deflation is the midwife of hyperinflation.

 

Gussiefink-nottle's picture

Absolutely spot on. Deflation makes debt more expensive, including sovereign debt, which therefore encourages debt monetization which in turn leads to inflation and ultimately hyperinflation. Because the initial stages of money printing seem benign, this encourages the authorities to believe that they have found the alchemist's stone - money without effort, which leads inevitably to disaster.

Because we are more sophisticated does not mean we are wiser. The bankers of the early twentieth century believed that they too were knowledgeable enough to understand the forces that they were playing with.

 

Howard_Beale's picture

Deflation is the midwife of hyperinflation.

Now that is spot on.

merehuman's picture

But the money has to flow. The dollar is sitting more than moving from hand to hand.

No job, no income no spending is my life.

To me that spells deflation , especially when i see more businesses closing .

My mainstreet is now a dead end, a cul de sac

of poverty .

I would like the government and states give a small piece of land to each citizen free and clear. That would restart a new boom.

In fact the fed ought to just give away all those properties .

This would equalize the discrepancy between rich and poor, make them look like saviors and allow the ponci to continiou with the same thieven assholes still in charge. Oh forget!

Am looking for a way out, wishing we all wont have to suffer so.

Anonymous's picture

"I would like the government and states give a small piece of land to each citizen free and clear. That would restart a new boom."

Let's not ruin more small pieces of land. I'd prefer a tax-free/Federal Gov't free Detroit. Call it an experiment in FREE ENTERPRISE.