SocGen's Grice Joins Crowded ECB-Print-Demanders Citing 'He Who Devalues First, Wins'

Tyler Durden's picture

It is no surprise that everyone's attention, hopes and dreams, are now on the shoulders of a principled and sensible Bundesbank as they fight-the-good-fight against a torrent of seemingly-sensible print-baby-print commentators (and politicians). Of course, if they did the equity markets would rally (despite the circular EUR weakness, correlated equity weakness, equity strength on we-are-all-saved, EUR strength game theory response) and the trade would be equity to outperform credit (as we've seen before). The pragmatist might argue that this is not a solution, but interestingly Dylan Grice of SocGen, suggests that as opposed to prospectively common-knowledge (and Germany's anti-Weimar reputation), the notion to devalue first, does best and maybe it is time for the ECB to take that plunge. This is somewhat opposed to his previous views on the path to hyperinflation (as akin to being half-pregnant) and our perspective remains that once the ECB starts, how will they ever stop?

Angela Merkel recently told Greece to make its mind up. But Germany should do the same. What’s more important: its hard money principles, or the euro? My guess is we’ll see a compromise on principle. And if we don’t, I think we’ll see a coup inside the ECB. Depending on the magnitude of the market riot which causes either of these events, we might go maximum bullish. In the meantime, valuations are selectively attractive. So we’re still minimum bullish.


A widely accepted truth is that the horrors of the Third Reich were caused by the 1923 hyperinflation. Indeed, it is a part of modern Germany's founding myth. But while Hitler's first attempted power grab occurred in Bavaria at the peak of the hyperinflation ' the November 1923 “Beerhall Putsch” ' by the late 1920s the Nazis were little more than one of the larger fringe groups whose best days were judged to be behind it.


But as the world economy collapsed in the early 1930s the gold standard broke up. Successive countries chose to devalue their currencies and inflate their way out of painful deleveraging (chart below). Germany was the exception. Haunted by von Havenstein's ghost, it fatefully chose to bear instead the brunt of gold standard deflation, experiencing a depression arguably greater even than America's. It was then that something broke in Germany's collective psyche. With resurgent Nazi support, Hitler won power in 1933, his rise facilitated not only by the 1923 inflation, but by the subsequent fear of inflation.


The following charts tell the story. The first shows how the gold standard broke up during the Great Depression. The UK was first to devalue, quickly followed by Japan. FDR devalued the dollar in 1933.




These exchange rate devaluations and the domestic reflation they enabled were instrumental in Japan and Britain avoiding deep depressions. But the US and Germany, who hung on for longer, suffered depressions of catastrophic magnitude.

Grice concludes:

A couple of weeks ago Merkel and Sarkozy bluntly asked Papandreou whether or not Greece wanted to remain in the euro. “Make your mind up” she said. But it's now time for the Germans to conduct some introspection of their own. They should make their mind up. What's more important: the euro or their hard money principles?


My guess is it's the euro.

So commencing on the path to potentially out of control inflation is a good thing? We think not. And to demonstrate we will harken back to a post from May, in which we cited Thunderroad's Paul Mylchreest, which demonstrated beyond a reasonable doubt that no civilization has ever ended due to deflation. As for hyperinflation? Not so much.

From the Thunder Road Report:

Let’s consider the run-up to Rome’s hyperinflation. I think this comment from “Good Money, Bad Money, and Runaway Inflation” resonates with what’s happening in the US today:


“Severus Alexander (AD 222-235) tried to reform by going back to the denarius but, once started, this path of runaway inflation and financial irresponsibility on the part of the imperial government proved impossible to control.”


It also seems that the hyperinflation was preceded by some kind of banking crisis, which is an interesting parallel. From “Demise and Fall of the Augustan Monetary System” by Koenraad Verboven:


“Papyri show it was common for private individuals to deposit money at a bank and to make and accept payments through bankers.Bankers in the west disappear from view around the middle of the 3rd c… A famous papyrus from Oxyrhynchus from 260 CE shows exchange bankers closing in order to avoid having to change the ‘imperial money’. The strategos ordered the exchange bankers to reopen and accept all genuine coins and warned businessmen to do the same. In 266 CE we find for the first time transactions being expressed in ‘ptolemaeic’ or ‘old silver’ as opposed to ‘new silver’.”


The chart shows how inflation remained relatively subdued until a tipping point was reached in the late- 260s A.D Monetary systems can absorb substantial abuse before there is a dramatic impact on the price level. For example, the debasement of the coinage was already accelerating in the early part of the third century A.D., before plunging in the latter part. Indeed, the chart below (apologies for the quality) only shows the trend up to 253 AD. By around 290 AD, the coins were only dipped in silver to give them a coating (<0.5%):

It is amusing that just like the Imperial decline of the Roman empire in the Common Era was matched by unprecedented fiscal profligacy, we have precisely the same thing now. As to what happens next...

“With few exceptions the Emperors of the third century pursued a policy of wasteful expenditure. Personal extravagance, donatives to the populace at Rome, costly civil and foreign wars, in which a pandering to the greed of the soldiery was a condition of success, had drained the wealth of the provinces…The conception of a national debt was as foreign to the Emperors of the third century as it had been to the statesmen of the Republic. Instead, to give an air of SUPERFICIAL PROSPERITY, resort had been had to a POLICY OF INFLATION (my emphasis).”

“The gold coinage lost all stability and regularity, while the debasement of the silver proceeded till Gallienus flooded the market with a worthless billon. The State had virtually declared itself bankrupt…In consequence PRICES SOARED TO AN ENORMOUS HEIGHT, trade was undermined and speculation flourished. Individual fortunes were lost, and in town and country alike the honest citizen was faced with untold hardships without any prospects of better days to come.”


I wanted to explore the extent and timing of Rome’s hyperinflation in quantitative terms and compare what happened then with what’s happening to prices today.


Inflation data during the Roman Empire is not exactly easy to come by, but there is a remarkably good proxy in my opinion, which is the price of Egyptian wheat. The source I used was the research paper “Another View on an Old Inflation: Environment and Policies in the Roman Empire up to Diocletian’s Price Edict” by the Centre of Planning and Economic Research in Athens. Relying heavily on a multitude of other sources, this paper contains a time series for wheat prices stretching from 18 B.C. to 301 A.D.


It’s important to explain why Egyptian wheat prices serve as a good proxy for inflation across the Roman Empire. In very succinct terms, it was probably best expressed by Lionel Casson in “The Role of the State in Rome’s Grain Trade”:


“Grain was to antiquity what oil is to the world today”


It’s worth making three more detailed observations with regard to the role of wheat in the Roman economy. Firstly, agriculture was overwhelmingly the dominant sector in the economy. Here is Paul Erdkamp from “The Grain Market in the Roman Empire – A Social, Political and Economic Study”:


“agriculture was by far the predominant sector within the economy, and in both the Roman world and early modern Europe, agriculture was dominated by the cultivation of grain…It is a commonplace that in antiquity about 80 per cent of the population were engaged in agriculture, leaving only 20 per cent for all other sectors of the economy.”


Secondly, the importance of wheat to both the agricultural sector and the economy of the Roman Empire as a whole. In “Price behaviour in the Roman Empire”, Peter Temin argued:


Wheat is a good index of inflation because its quality does not vary much over time and it forms a large part of ordinary diets.”


And this from Wikipedia:


“The staple crop grown was wheat, and bread was the mainstay of every Roman table.”

Thirdly, Egypt was at times the largest supplier of wheat to Rome, although other important regions included North Africa and Sicily. 


According to Wikpedia:


“Egypt was also important in providing wheat to Rome. Normally, shipments of Egyptian wheat may have amounted to 20 million modii or more annually. This number can be found in the Epitome de Caesaribus. Twenty million modii of wheat was enough for half or two thirds of Rome.”


Having established Egyptian wheat as the best proxy we have for price levels in the Roman Empire, the chart below shows the price from 18 B.C. to 301 A.D.:

The largely predictable conclusion:

The point I’m trying to emphasize is that the relationship between the debasement of the coinage and price levels is non-linear. A monetary system can be abused for a long period, but not indefinitely. A tipping point is reached when CONFIDENCE in the value of the currency collapses, leading to a surge in inflation – hyperinflation in this case.


The corollary with today’s financial system is that the quantity theory of money is not linear either. However, the abuses are piling up in obscene fashion and we are approaching the tipping point. Today the “path of runaway inflation and fiscal irresponsibility” incorporates all manner of abuses like trillion dollar deficits, bank bailouts, near zero interest rates and Q1, QE2…!


In the next chart, I overlaid the price level for the last 223 years, i.e. 1814-2010, over the price level in the Roman Empire in a way that gave me the best fit. Please note – the price level for the last 223 years uses data for Britain from 1788-1843 and from the US from 1844-2010 – hence the term “Anglo-US 1788-2010” in the chart below.


Pretty much says it all.

Lastly, let's not forget that it was not deflation that brought about the advent of the Nazi party. It was Weimar hyperinflation.

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redpill's picture

OT: Can't believe this made it on Yahoo Finance

How to steal like Wall Street

Ralph Spoilsport's picture

I saw that. The comments left were pretty interesting. People are angry, even on brain-dead Yahoo forums.

redpill's picture

Max out all credit cards, buy physical, go BK.  War, bitches.

Biggvs's picture

...and it's gone! The Yahoo link, I mean. "Page not found"

GeneMarchbanks's picture

If by 'angry' you mean impotent then yes. You realize 'floating' articles like that can be a great barometer of public opinion? Then you simply manipulate from there. Old trick. See Bernays.

GeneMarchbanks's picture

From the article:

'Everyone now knows the rules down on America’s Street of Shame. These are almost the exact opposite of the rules in the real, normal, moral economy the rest of us inhabit.'

Not too sure how true that is. A vague, general statement. Moralism is something that exists mostly in the American psyche and much less in actuality.

HelluvaEngineer's picture

Agreed.  The core is rotten.  The only way to be successful (accumulate wealth) is to take advantage of others.  You can make a living by working hard, but the American dream has been dead for a long time.

GeneMarchbanks's picture

'The core is rotten'

I'm not sure that's what I wanted to say. America is in need of a major gut-check. The so-called American individualism has clearly deteriorated into something unrecognizable and now it appears that the theory of 'looking out for your own good', doesn't translate into the so-called collective good.

The American Dream is still alive, you just have to be asleep to believe it.

Corn1945's picture

Please tell me this clown doesn't actually get paid to write this stuff.

Fortunes Favor's picture

The MF Global story of fraud and corruption has disturbed the delicate confidence of professional money managers and traders.  The bastardization of the haloed ’segregated’ account has rocked market professionals to the core.  The COMMON SENSE reaction to this disturbance in the force is to withdraw liquidity.

Steroid's picture

He hasn't changed just now he pisses from the jumping board into the pool on everyone's head.

SheepDog-One's picture

Everyone sitting around on the edge of their seats waiting for more fiat currency to be printed. Totaly pathetic.


Better to be the fukker than the fukkee is the moral of this story. 

gatorengineer's picture

How can the ECB expand its balance sheet without the consent of all of the EU members?  I dont think it can.....  I think the Germans would have Merkels head on a spike if she tried too......  

The only way out is for the PIIGS to become provinces of Germany....... on German terms..........

20 Billion a week will kick the can for a long time though (months), and maybe the space aliens will be here by then or world war 3.......


PulauHantu29's picture

"Where there's a will, there's a way."


Print they shall!

it's deflationary Chaos...or inflationary stability.


kito's picture

keep dreaming hyperinflationistas, its not happening. your pms will be crushed like every other commodity when europe deleverages and the carnage spreads to the u.s. qe3 is not happening. ecb will not print as long as germany is in the eu.  GET OVER IT!!!!!!!!!!!!!!!!

SheepDog-One's picture

Yep, I think that sums it up. Meanwhile everyone sits all-in on hoping there will be news out any minute about printing more money and handing it out. Theyre not going to print, but theyre just fine letting everyone believe its right around the corner, to keep stocks riding along on unicorn farts. Just sad and pathetic.

kito's picture

yep sheepie, if stocks start to tank, big ben will pull a promise out of his ass that should be good for another 6 months. no chance ben lets the fed get villainized further before elections. NO WAY NO HOW!!! 

redpill's picture

I don't think you understand.  The half-life of every rumor is getting shorter and shorter.  Time is getting compressed.  There is a fork in the road ahead: Default or Inflate.  Those are the only two choices, eventually they will have to go down one road or another.


kito's picture

well, lets see, qe2 ended in may/june? its now nearing december and the dow-a-thon has ran to 12000. 


And so who exactly is buying those 100 billion dollars of bonds every month? I sure as hell am not. You're right, that 10 yr at 2% is just staying there magically. There has been no QE going on at all since June.  If there was Ben would tell us so. ;)


Good sir Mr. Kito- It's not that many of us are hoping for printing press-a-pa-looza, it's just we are hedged for it.  If you are not, then GL2U my friend. On a side note, exactly how is that debt going to go away again? 

Black Forest's picture

I guess they will finally decide to deleverage and inflate in order to suit demands of all EU "styles". So a stagflation is on the horizon. Not too bad for PMs.

dereksatkinson's picture

Why is no one talking about the Euro Bond announcement?

Headlines crossing that Official saying EU Commission will propose three options for joint euro bond issuance in the future but officials notes it will be accompanied by tight controls on budgets and debt levels -

Read more:
Tyler Durden's picture

Because Germany has said no, says no, and will say no.

SheepDog-One's picture

Hey I know...lets float the Eurobond rumor again! Sure, its never going to happen without Germany who has said 'Go to hell with all that' but hey we got to have rumors, its all the markets got!

slaughterer's picture

Na ja, Deutschland hat ein "Jein" gesagt.  

lineskis's picture

Not so sure though, they will say YES when they have the right to tax other countries, which the European Stability Mechanism will bring.

The presentation from the European asylum, errr, consilium:

The full text here:

Best summed up by the following video:

Snakeeyes's picture

Printing is probably the only political solution since Eurozone, like our our Super Committee, are scared to cut spending/entitlements.

European Debt Crisis – Status Update (ECB Interventions Seems As Ineffective as Super Committee)

SheepDog-One's picture

OK say they printed today...$3 trillion Euro's...big deal whats that going to do??

sabra1's picture

demand 3T in real money to be repaid!

PulauHantu29's picture

$220 oil;

$250 silver; and

$2,500 gold.

Damn....too bad you can't eat (or drink) that stuff.

css1971's picture

$220 oil means ~ $70 silver and $3000 gold.


SheepDog-One's picture

'Maybe someone will print'...the last hope of western civilization...LOL.

THE DORK OF CORK's picture

"It is no surprise that everyone's attention, hopes and dreams, are now on the shoulders of a principled and sensible Bundesbank as they fight-the-good-fight against a torrent of seemingly-sensible print-baby-print commentators (and politicians)."


What a load of aul bollox

The Bundesbank is not some altruistic or disinterested Greek like God sitting on Brocken mountain.

It destroyed the currency when it refused to turn the massive Euro bank bond market ( it dwarfed the sov market) into equity back in 2008.


Chuck Walla's picture

If Germany can hold the line, we can get this world wide depression over a little sooner rather than continuing to delay the inevitable reckoning.

slewie the pi-rat's picture


well. maybe, but it seems far-fetched to me, because:

  1. news travels more slowly today;
  2. people were smarter back then; and
  3. we don't have real money
blu's picture

The ECB most certainly will print.

This is an end-game. End-game rules apply. And the first rule of the end-game is; there is no future.

Once you understand that part, you'll wonder why there is all this hand-wringing about who is going to do what.

Stockmonger's picture

Print now or it's Hitler time, bitches.  That's how Krugman interpreted this article today.

besnook's picture

some group of quants are burning up a super computer gathering empirical data to show those ill humored krauts that if money can be printed at just above the rate it will be destroyed there is a sweet spot that will enrich all those who deserve to kept wealthy with only incidental collateral carnage to an insignificant number of eaters who can be easily sated with adequate supplies of bread distributed by a benevolent looking .gov. you know, the usa model.

redpill's picture

Probably both.  Nothing exceeds like excess!

rambler6421's picture

HOw do you win by devaluing the dollar?  Silly liberal theory.

DosZap's picture



How do you win by devaluing the dollar? Silly liberal theory.

Easy, makes your goods and services less expensive.Where does everyone go when looking to buy?.

slaughterer's picture

They need the Bazooka rumor rally before ES breaks its 50DMA.     Otherwise retail will see no holiday season from the high-beta rich.  

deepsouthdoug's picture

Calling BlackHawk Ben!  Calling BlackHawk Ben!  Crank those choppers up!

Zero Govt's picture

Dylan Grice of SocGen, suggests... the notion to devalue first, does best and maybe it is time for the ECB to take that plunge.

Dylan Grice is a white collar anarchist. He supports printing the crap out of the currency, defrauding millions of their hard earned and value of their savings and causing absolute chaos for businesses to deal with in the real economy

1 percent screwing the 99 precent to save the 1 percents bankrupt over-leveraged worthless arses ...the easy way out (for them) ...GFU