Presenting Bridgewater's Weimar Hyperinflationary Case Study

Tyler Durden's picture




 

Last month, the world's biggest hedge fund, Bridgewater, issued a fascinating analysis of deleveraging case studies through the history of the world, grouped by final outcome (good, bad and ugly). As Dalio's analysts note: "the differences between deleveragings depend on the amounts and paces of 1) debt reduction, 2) austerity, 3) transferring wealth from the haves to the have-nots, and 4) debt  monetization. Each one of these four paths reduces debt/income ratios, but they have different effects on inflation and growth. Debt reduction (i.e., defaults and restructurings) and austerity are both deflationary and depressing while debt monetization is inflationary and stimulative. Ugly deleveragings get these out of balance while beautiful ones properly balance them. In other words, the key is in getting the mix right." Of these the most interesting one always has been that of the Weimar republic, as it certainly got the mix wrong.

The reason why Weimar will be critical, is that at the end of the day, Weimar, unlike some of the other successful case studies, is precisely what the global debt situation will require when all is said and done will be the model to imitate. Why? Because as BCG showed last year, the global debt overhang (on a net blended basis) to reduce global Debt to GDP to a "sustainable" 180%, would require the elimination of $21 trillion in debt, one way or another, with the excess debt concentrated primarily in the US ($8.2 trillion) and the Eurozone ($6.1 trillion).

This is in absolute terms, not relative, as permitted under Keynesian methodology, as relative devaluations simply destroy the "last defector" actor in serial fashion (with benefits accruing to the 'first to default'), in the process crucifying globalization and consolidated world trade. Which means that a coordinated inflation driven deleveraging is the only possible outcome.

Which is where Weimar comes in. And specifically the following chart from Bridgewater:

For those who may have avoided economic history books, here is the summary plot line:

The case of Weimar is one of the most extreme inflationary deleveragings ever. At the end of the war, the Reich government was forced to choose between a shortage of cash and economic contraction or printing to stimulate incomes. The government chose to print and devalue to stimulate the economy, beginning with a 50% devaluation at the end of 1919 that brought the economy out of recession. Eventually, a loss of confidence in the currency and an extreme amount of printing led to hyperinflation and left the currency basically worthless. As shown below, the currency fell essentially 100% against gold and printing was exponential. Starting debt of 913% fell to basically zero. Non-reparations government debt of 133% GDP in 1919 was wiped out by inflation. Gold-based reparation of 780% GDP effectively went into default in the summer of 1922 when reparation payments were halted. We summarize this in the table below and then go through the pieces.

Note the shaded red regions.

And this, make no mistake about it, is what is in store.

Continuing from Bridgewater: "The next chart shows the aggregate government obligations owed and its two pieces, the gold-based reparations and other government debt"

Then there is the question of what happens to gold. In Weimar's case, gold-denominated reparations were simply forgiven.

As discussed, the non-reparations government debt was eroded rapidly through inflation. While the reparations were not techincally imposed until 1921, they effectively existed shortly after the war and it was mostly a question of negotiating how big they would be (the official amount was settled at the start of 1921 and then reduced that spring by about 50%, still a huge sum). Because the reparations were denominated in gold, they held their value until Germany ceased payments in 1922. They were then restrutured several times over the next decade until they were effectively wiped out.

Well, as the Greek case study has shown, this time around the gold will first be confiscated. All of it. Only then will the debt be forgiven. In the form of a hyperinflating of trillions in claims, in a coordinated way across all currencies, and relative to a basket of hard assets. 

And going back to the current parallel in which the entire world is now one big Weimar Republic, we return to the BCG study in which the dire conclusion is as follows:

Let’s suppose that the politicians and central bankers acknowledge the hard facts. Agreeing on the starting situation would be a precondition for defining an effective remedy. They might begin by recognizing what many commentators have been pointing out for a long time:

  • Western economies, notably the U.S. and Europe, have to address the significant debt load accumulated in the course of 25 years of credit-financed economic expansion. (See Exhibit 1.) And some must address real estate bubbles as well.
  • The necessary deleveraging would lead to a period of low growth, which could, given historical precedent, last more than a decade and would be amplified by the aging of Western societies.
  • This would have consequences for the emerging markets, with their exportbased growth strategies. Any shift toward more consumption in these countries might not have a substantial stimulatory effect on the economies of the West.
  • Efforts by governments to deal with their debt problems would lead to even lower growth and would increase the risk of social unrest. A recent study shows that as soon as expenditure cuts exceed 3 percent of GDP, the frequency of protests increases significantly. The demonstrations that occurred in some European countries this September should therefore not have come as a surprise.
  • Banks do not have enough equity to weather further write-downs—and governments are running out of ammunition to stabilize banks should a new crisis hit.
  • Central banks may be seen as the last remaining institutions able to stabilize the financial markets and support economic growth. But their efforts are losing effectiveness. In spite of increasing balance sheets by up to 200 percent since the end of 2007, central banks have been unable to ignite sustainable economic growth.2 On the other hand, the monetary overhang could be the basis for significant inflation.
  • The longer governments postpone addressing the fundamental problems of the crisis, the deeper and more prolonged the crisis will become.

But even if all these facts were generally acknowledged, there would be no one size-fits-all solution.

Correct, which is why when push comes to shove, the nuclear option will be used.

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Tue, 03/13/2012 - 10:31 | 2250273 Everybodys All ...
Everybodys All American's picture

I'd love to see how the Fed plans to confiscate the gold in the hands of todays American public. I suppose MFGlobal is the model.

Tue, 03/13/2012 - 10:36 | 2250290 SheepDog-One
SheepDog-One's picture

We'll see. Gold is probably something youll have to bury under a boulder and forget about when this Shitalanche finaly lets loose.

Tue, 03/13/2012 - 10:40 | 2250309 FranSix
FranSix's picture

"Its already started, my good friend.  The shit blizzard."

http://youtu.be/Pvm-n6gwPCY

Tue, 03/13/2012 - 10:44 | 2250321 withnmeans
withnmeans's picture

Here is the latest thing they are watching in a Univerity near you, my son share this with me, not my thing but it sends a message. Maybe this newly educated generation may get it, However I doubt it.

http://www.youtube.com/watch?v=d0nERTFo-Sk

Tue, 03/13/2012 - 11:19 | 2250459 The Big Ching-aso
The Big Ching-aso's picture

 

 

The Fed has a handle on deflation.    Unfortunately their expectations are inflated.

Tue, 03/13/2012 - 11:25 | 2250482 trav7777
trav7777's picture

wtf are all these gobbledygook charts?
Look...you can't pay interest in excess of income (growth) in this creditmoney system. Period.

If your interest exceeds growth, you have to print the balance otherwise the system implodes.

Tue, 03/13/2012 - 11:35 | 2250518 NotApplicable
NotApplicable's picture

Eric Peters has a nice, scary article on the implosion dynamic known as the American Proletariat.

http://epautos.com/2012/03/12/one-of-two-outcomes/

Tue, 03/13/2012 - 12:18 | 2250633 Manthong
Manthong's picture

"Maybe this newly educated generation may get it"

You are right to be skeptical.. and all the more if that's what has to be done get the message across.

By the time the group that needs to see Hayek rapping gets it, they will already be accomplished and contented dumpster divers. 

Tue, 03/13/2012 - 12:34 | 2250683 kridkrid
kridkrid's picture

And they are easily distracted... give them a cause like Kony 2012... done and done.

Tue, 03/13/2012 - 13:52 | 2251011 stacking12321
stacking12321's picture

you wont see hayek rapping, but here's a youtube video about remy rapping about the debt ceiling:

http://tinyurl.com/7mxuchq

Tue, 03/13/2012 - 21:37 | 2252647 Hedgetard55
Hedgetard55's picture

+55

 

"I got a monetray plan and it involves a lot of toner".

Tue, 03/13/2012 - 11:49 | 2250566 kridkrid
kridkrid's picture

I assume the downvotes are based on the author, not the message?  Because I would like to hear someone explain why what he has written is wrong.  Hint: you'll fail.

This isn't at all complicated.  Any attempt to make it seem complicated is mental masterbation.

Tue, 03/13/2012 - 14:28 | 2251153 LowProfile
LowProfile's picture

 

I assume the downvotes are based on the author, not the message?

He goes out of his way to make it easy.

Tue, 03/13/2012 - 12:20 | 2250639 linrom
linrom's picture

US Debt/GDP is certaily NOT about 275%.

 

$54 trillion/15 trillion = 360%

Tue, 03/13/2012 - 12:43 | 2250722 IBelieveInMagic
IBelieveInMagic's picture

Shouldn't we combine the balance sheets of the US, Western Europe and Middle East in performing this analysis? I would think surpluses in our Middle Eastern assets would offset some of the deficits that we have run up.

Tue, 03/13/2012 - 12:54 | 2250779 Thamesford
Thamesford's picture

Where's Professor Mann when we need him. He knows how to "hide the decline"!

Tue, 03/13/2012 - 11:33 | 2250509 Triggernometry
Triggernometry's picture

I think he mis-spelled nucular.

Tue, 03/13/2012 - 14:12 | 2251085 EINSILVERGUY
EINSILVERGUY's picture

Fight of the Century Round 2 is even better

http://www.youtube.com/watch?v=GTQnarzmTOc

 

 

 

 

Tue, 03/13/2012 - 15:05 | 2251193 4horse
4horse's picture

40yrs later . . .

http://www.youtube.com/watch?v=d0nERTFo-Sk

 

eine kleine not music, the latest thing . . . from another vienna-like circlejerk, of young FrankenWittgensteins, who'll also yet soon enough serve

 

The BrainTrust

 

not torches'n'pitchforks

but, streetcorner bourgeois racemusic here again caught in their mimicry of the minstrelsy

gesunkeines kulturgut . . . ?

seemingly, without rhyme or reason, here's the outcome: the language: making fun, tongue-in-cheek, of what could be funnier. than nurseyrhymes. childish. monkey-see-monkey-do do. the bodylanguage. especially the gestures, in sync with the sunken

brothers.-in-harmony. of another tin pan alley. another brill bldg;geffin goffin ff-in king carolingMo'Money: My Maa ah a ah a ah aaaa me me me me

brilliant

brothers&sisters. sons&daughters, of a merkin revolt gen. of IV. aides-de-camp, of their father-home-land security. truly revolting

http://www.youtube.com/watch?v=vimZj8HW0Kg&feature=related

KO brought to you by virtue of mickeymousearison
WEIMA's favoritecafe society Life is a Car ne val, old chum. Come to The Car ne vale

 

the scum also rises

 

in the 20s. 2000s. cause history repeats. the alliteration. history rhymes. the resonance. the same old song'n'dance men so important that's entertainment while going through the motions, most especially the language

 

ANACREONTIC

 

tock. tic. tocsin
                     toxic
                             clock, in time for yet another american anthem

 

 

Who, finally, can stand for it  .  .  .

 

in allegiance. in extremis. but all in good fun

and in 4part harm

   IVorce

Tue, 03/13/2012 - 11:20 | 2250464 dmger14
dmger14's picture

That's funny!  Thanks for the laugh!

Tue, 03/13/2012 - 11:59 | 2250588 buckethead
buckethead's picture

'Nice Shit-analogy".

Tue, 03/13/2012 - 10:41 | 2250312 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Or use it to trade for a helicopter.  That's what I'm going to do.  Then I'm going to fly to the Fed and rain monopoly money from the sky. 

Tue, 03/13/2012 - 11:03 | 2250397 flacon
flacon's picture

I'm going to drop my 1,000oz bar right on top of Ben Bernanke's head. 

Tue, 03/13/2012 - 11:07 | 2250418 tmosley
tmosley's picture

I'll go halvsies with you on that, if you like.  You drop it, I'll film it.

Tue, 03/13/2012 - 10:36 | 2250291 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Don't keep your gold in a bank vault, because if you do, it may already be gone.

Tue, 03/13/2012 - 10:58 | 2250378 scatterbrains
scatterbrains's picture

That reminds me..  what is the metal detecting capabilities of these modern day fly-over drones ?

Tue, 03/13/2012 - 11:19 | 2250462 oddjob
oddjob's picture

VTEM

Tue, 03/13/2012 - 12:07 | 2250608 Doña K
Doña K's picture

VTEM can be easily defeated. I will not post that here. A college physics or chemistry major can do it. 

Tue, 03/13/2012 - 12:48 | 2250748 scatterbrains
scatterbrains's picture

oh come on give it up! We want to know.. is it  burying it in some Arm&Hammer baking soda or something ? Tell us before they ban what ever it is we need.

Tue, 03/13/2012 - 13:05 | 2250819 oddjob
oddjob's picture

Bury under a junk car.

Wed, 03/14/2012 - 05:24 | 2253249 Spontaneous Violence
Spontaneous Violence's picture

or Re Hypothecated ...

Tue, 03/13/2012 - 10:37 | 2250294 gdogus erectus
gdogus erectus's picture

Well, I think Charlton Heston said it best..  Oh wait - that was the other prescious metal.

Tue, 03/13/2012 - 10:58 | 2250377 semperfi
semperfi's picture

Charlton was wrong on one account:  the cold hands will not be mine, but instead those of the thieves

Tue, 03/13/2012 - 10:37 | 2250296 Comay Mierda
Comay Mierda's picture

citizen spies.  thats the whole point of the "see something say something" campaign.  throughout history its always been the ignorant class outing the enlightened ones when a dictatorship rises.  be careful who you call "friends"

Tue, 03/13/2012 - 10:43 | 2250316 SheepDog-One
SheepDog-One's picture

Yea the little brownshirt 'See something, say something' citizen spies all of them getting a welfare check from the gubment. These people are always your worst enemy, theyll defend their gubment masters at any cost. Thats why I have no mercy on the sheeple, everyone else wants to 'inform them' then go ahead theyll turn around and report you.

Tue, 03/13/2012 - 13:02 | 2250807 viahj
viahj's picture

maybe it's time for a name change then

Tue, 03/13/2012 - 13:03 | 2250812 Chicago bear
Chicago bear's picture

Community Health Workers is the next group. Saw a software that helps them take care of people door to door in every neighborhood. Soon to be the highest growth career of 2012. Watch. 

Tue, 03/13/2012 - 10:38 | 2250298 resurger
resurger's picture

my gun says "NO"

Tue, 03/13/2012 - 10:48 | 2250337 JPM Hater001
JPM Hater001's picture

Yes yes...configate the gold...make my precious silver worth gold...

Tue, 03/13/2012 - 10:50 | 2250342 francis_sawyer
francis_sawyer's picture

I'd love to see how the Fed plans to confiscate the gold in the hands of todays American public

I think it basically going on as we speak... Every time I walk into the coin shop, I'm the only one buying... There's usually around a 4-1 ratio of people in to SELL their scrap jewelry & junk silver for cash... People are strapped for cash...

As long as they manage to keep the economy bad on the margin, but ENTERTAIN the folks with TV shows & sports, while 'feeding' them with SNAP cards... Gold is coming in to get melted down into bricks...

 

Tue, 03/13/2012 - 11:19 | 2250461 Everybodys All ...
Everybodys All American's picture

That's normal trade which is to be expected with Obama's new normal. Confiscation is when they just come over and demand it and you may or may not get paid or have a choice.

Tue, 03/13/2012 - 12:10 | 2250619 BeerBrewer09
BeerBrewer09's picture

Bingo.

Tue, 03/13/2012 - 14:14 | 2251087 Slewburger
Slewburger's picture

As my least favorite vaginal wall would say, Its a bauble. People are selling away their own wealth protection. I saw 10 (not exaggerating) cash for gold stores on the outskirts of a small town in South Texas.

So when the plebes zig....zag.

Tue, 03/13/2012 - 16:13 | 2251647 akak
akak's picture

.

As my least favorite vaginal wall would say ...

I have to assume you are referring to Jon Nadler here.

Tue, 03/13/2012 - 11:18 | 2250458 true brain
true brain's picture

Never underestimate the treachery of those in power to save themselves.

Tue, 03/13/2012 - 11:38 | 2250525 Ruffcut
Ruffcut's picture

Lose the petrodollar peg and oil zooms, inflation will go accordingly. Oil is the trigger to big greecy gun. If stays level, then no hyperinflation unless all the crops are killed off.

Tue, 03/13/2012 - 11:39 | 2250532 Sophist Economicus
Sophist Economicus's picture

The FED doesn't have either the desire nor authority to confiscate gold.    Their gold was also confiscated by FDR.   The entity you should fear is the FEDERAL GOVERNMENT

Tue, 03/13/2012 - 11:54 | 2250581 SheepDog-One
SheepDog-One's picture

Their real problem isnt gold confiscation, its gun confiscation.

Tue, 03/13/2012 - 12:37 | 2250699 It was not me
It was not me's picture

So Kyle Bass was right after all in these videos: http://www.armadamarkets.com/market-info/videos/

Tue, 03/13/2012 - 13:13 | 2250852 TheFourthStooge-ing
TheFourthStooge-ing's picture

Stop spamming and get back to work at the lutefisk factory, Ingmar.

 

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