Posted on 04/15/2009 5:45:14 AM PDT by SeekAndFind
I am an amateur economist. But, one doesn't need years of schooling to be a better "economist" than Ben Bernanke. One merely needs to take the blinders off and release common sense. A broad background in law, economics and history helps, but it is not absolutely necessary. Economics is the study of human nature as it applies to money. So, it is precisely those who are narrowly educated, like some professional economists who don't study enough history, take an intensely academic viewpoint on things, and who don't understand fundamental human nature, who get things wrong. A narrowness of outlook and training may be blinding people like Ben Bernanke from reality, but, if they are operating knowingly and intentionally, as some claim, the situation is even more frightening.
Unfortunately, Ben Bernanke has been wrong on almost all his predictions concerning the course of this crisis. That has been true since the beginning. Where, then, can we obtain the confidence that he knows what he is doing, or, frankly, that he knows more than we do, as he should? Many wrong-headed people seem to believe that we must throw away common sense and listen to him, and the others who think like him, even though we have been consistently correct, over the past 4 years, and he has been consistently wrong. The American people understandably have little confidence in the Washington crowd. Is this surprising in light of the events? What assurance is there that they know how to address this situation, when they first failed to regulate the financial madness, and, then, afterward, were completely wrong on almost all economic projections, one after another?
One must reach the inevitable conclusion that neither Bernanke, nor his comrades, such as Timothy Geithner, actually "know" what they are doing. Instead, that crowd in Washington DC, think that if they throw money around, it will land somewhere, and help things. They are wrong. But, to partly achieve this goal, they have forced changes in accounting standards, legalizing misrepresentation of bank bookkeeping, and removed "mark to market" standards, replacing those standards with a system of "mark to fantasy" that is remarkably similar to that which previously existed and caused this crisis. "Mark to fantasy" accounting, now the order of the day once again, will allow insolvent banks to present the false appearance of big profits this quarter, even as they are really on the brink of failing. The end result will be more economic imbalances, as investors unknowingly misallocate their investment dollars to buy into the fraud.
In truth, there is only one way to save the zombie banks, and it is not through faked-up accounting books. The only way is to inflate their obligations away, while increasing the value of their assets at the expense of the rest of us. That appears to be the plan, if there is any plan. But, if Ben Bernanke and that crowd do know what they are doing, the most nefarious heist against the American people, as well as other innocent folks all over the world, is being planned. The upcoming massive inflation is going to be a stealth tax upon millions of innocent people, all for the benefit of a few still wealthy bank executives, who made huge mistakes, and should be forced to pay for those mistakes themselves. I will give Ben Bernanke and Timothy Geithner the benefit of the doubt and conclude, until presented with more evidence, that they simply don't know what they are doing.
The mass "throwing of money" has already resulted in a stealthy transfer of wealth, from those who earned it, to those who have political clout. This process is inherently destructive to the long term health of the economy, and it will get worse. This is the same insidious series of events that occured in post World War I Germany. Hyperinflation is a greater evil than economic depression. It is evil in nature, insidiously immoral in that it rewards misbehavior and is fundamentally destructive of our economy and the fabric of our society. It will eventually wipe out the American middle class.
So far, due to various external events, the U.S. Treasury has been able to borrow the money used. The final bill has not arrived. But, when it does, it will be left at the doorstep of the American people, and every other person, around the world, who once believed in America and the American dollar. The deep and sudden devaluation of the U.S. dollar, which is coming, will steal money from innocent pensioners, savers, and good people of all types and kinds, both here and abroad. Unfortunately, after having spent and wasted trillions of dollars for the benefit of those closely connected to the U.S. Treasury and Federal Reserve, there will be a massive dollar devaluation. Indeed, were that not to happen, there would be an overt legal default.
The intent to transfer wealth is the key to understanding all economic catastrophes. It is also the key to understanding why this particular crisis more closely mirrors that of the German hyperinflation 1919-23, rather than the early years of the Great Depression in 1930s America. To fixate on the Great Depression, as Ben Bernanke is doing, ignores the true problem, and sets us off into wrong directions. Let me point out some comparisons:
1) Post WW I Germany was the biggest debtor nation in the world, at that time. Debtor nations are dependent upon foreign cash flows. In contrast, in the 1930s, like Japan in 1990, the U.S. was the biggest creditor nation in the world. That is why Germany had hyperinflation when it printed money, while 1990s Japan and 1930s America had deflation as they did the same thing. Because we are the biggest debtor nation in the world, the current money printing will result in hyperinflation, NOT deflation.
2) Post WW I Germany had just finished fighting a major war on borrowed money, without properly budgeting or taxing. The USA has just fought, and continues to fight, multiple wars on multiple fronts that, while not quite as "big" as WW I, have been extraordinarily costly. We use a professional army, and its pay and equipment add huge costs. We have failed to budget these wars, and have borrowed money instead in order to fight them. By contrast, from an economic point of view, late 1920s and early 1930s America was a net "beneficiary" of WW I, which resulted in huge debts being owed to the USA, and the first stage of the rise of the U.S. dollar to replace the British pound as an international medium of exchange.
3) Post WW I Germany was heavily dependent upon the import of foreign raw materials. Indeed, the USA was one of its biggest creditors. The USA is no longer a creditor. It is now very dependent upon the import of foreign raw materials and finished goods. The temporary improvement in trade figures will disappear as the fake recovery gets under way. By contrast, in the 1930s, the U.S.A. was one of the biggest exporters of raw materials.
4) Post WW I Germany was heavily dependent upon foreign cash flows to plug holes in its budget after the War. Sales of bundesbonds to foreign buyers, including the American financier, J.P. Morgan, were critical. The USA is now even more dependent than post-war Germany once was, upon foreign cash flows. Sales of huge numbers of Treasury bills, notes and bonds are critical, and a lot of those sales are to China, who, unlike America to Germany in 1918, is currently our strategic competitor, and that makes our situation somewhat worse.
5) It is important to point out that Germany was not the only nation affected by the post-War depression and the so-called 1918 "credit crunch." All of Europe experienced it. Not all countries, however, followed the same path to ruin. Similarly, the whole world is now experiencing the so-called "credit crunch". Hopefully, not all nations will follow the path to ruin being forced by the United States, although the tendency to do so is greater, given the leadership position of this nation in the world compared to Germany then.
6) So, Germany led Europe in the effort to spend its way out of the post-war depression, while the rest of Europe, with the exception of the former Hapsburg possessions (the former Austro-Hungarian Empire) did NOT follow Germany's lead. The former Hapsburg possession did follow the German lead, although with less gusto, and ended up with hyperinflation, at a somewhat lower level. Similarly, the USA leads the world in an effort to spend its way out of this depression, and the U.K. is basically following in our footsteps. In 1919, many admired the Reichsbank. Employment rose, unemployment fell...economic output exploded -- or seemed to, at first. No doubt, that will be the case, again, this time as America leads the way into a fake recovery. Most of Germany's recovery amounted to irrational production. The industrial bailouts were improperly allocated and colored by the illicit transfer of wealth that is inherent when a nation chooses to print up new money. The same will be the case with America.
7) Like America, now, the post WW I German money flows, into that nation, continued for quite a while, in spite of the flawed policies of the Reichsbank. American trade interests, for example, supported German spending on U.S. raw material products, because Germany was one of their biggest markets. The USA played a similar role with respect to the Weimar Republic as China plays now to the USA. It was Germany's biggest creditor. It is quite likely that money flows to America may continue for an even longer time. However, eventually, they will be cut off. It is important, once again, to point out that China is our strategic competitor, whereas a large part of the U.S. population has German ancestry that made us a natural friend to Germany.
8) Like the foolish foreigners who now buy U.S. bonds, even otherwise savvy American financiers, like J.P. Morgan, were convinced by officials of the Reichsbank, that the problems were temporary, and that the mark would regain value, just as buyers of Treasury debt are now convinced that the dollar will retain value. The U.S. has a distinct advantage, because it is able to pump the exchange value of its currency with credit default events that must be settled in dollars. This results in a direct benefit to the dollar in terms of exchange value, and allowed the Fed to obtain foreign currency swap lines. The swap lines were obtained because foreign central banks temporarily needed to supply dollars to financial firms who needed to settle CDS events. In addition, most of the U.S. debt is denominated in dollars. So, the temporary party will go on longer in America, until the world's patience is finally exhausted, and the devaluation of the dollar will not be in the trillions, but, rather likely, it will be in the high single digits, or low double digits. My personal estimate is from a 4 to 10 to 1 devaluation, although anything is possible.
9) The Reichsbank claimed that it could control the events it created, just as the Federal Reserve does now. Questionable statistics were regularly published, just as is now the case in the USA. German authorities believed, just as American authorities now believe, that the perception is more important than economic reality. Eventually, however, when the foreign cash flows dried up, reality did reassert itself, as it always does, and the German economy entered hyperinflation.
10) Finally, most tellingly, the German "professional" economists called the 1918 post war depression, prior to the hyperinflation, "the credit crisis", or "the credit crunch", and the prevailing complaint was that banks were hesitant to lend money. Unwittingly, American professional economists, including Mr. Bernanke, have dubbed the present crisis with the same names, and the complaint is exactly the same. Notoriously, the prescribed remedy is also exactly the same, even though, from all the speeches given by Federal Reserve officials, rather than overtly intending to copy the Reichsbank, they seem to be blissfully unaware of the entire German event. Frightening...
Speaking frankly, in all the years I have studied history, I have never seen two historical events that turn out to be exactly the same. Yet, the parallels between the German hyperinflation and the current Credit Crisis are astounding, and the likelihood that the eventual outcome will be similar, is very high. The parallels that link this crisis to the Great Depression are far weaker.
For more information about the German hyperinflation experience, read the following book. It was written long before the current crisis, and even before the full impact of the Great Depression hit the world, back in the 1930s. Thus, it has no bias. It will be an eye-opener for the "doubting Thomas". In the German hyperinflation, only gold and silver, agricultural lands and, to some extent, rationalized modern plant and equipment, held its value over time. The word rationalized is very important, because a lot of useless stuff was purchased by German manufacturers who thought that all "hard" goods would protect the value of their money.
Turroni-Bresciano, Constantino, The Economics of Inflation – A Study of Currency Depreciation in Post-War Germany (George Allen Unwin 1931)
DISCLOSURE: Long gold & silver.
bfl
How accurate is this article?
I was under the impression a major component of Germany’s economic problems after The Great War were the reparations payments imposed by the Treaty of Versailles; this article seems to make no mention of them at all.
Cuz, the wolf is in the hen house, drowsy, and just getting ready to wake up and start chomping a new a$$ on the US economy.
I'm waiting for the Bushbots to show up and bleat that these wars were necessary to "keep us safe," just like the creation of the Department of Homeland Security, an agency now being used against "right-wing extremists" (conservative activists).
Good point - I don’t know. The author seems to mix fact and fiction.
EG, his talk of “mark-to-market” is nonsense.
ping
Those payments were, indeed, a small part of the problem an, of course, got all of the blame from the politicians who needed something foreign-caused to focus on.
Weimar led directly to Hitler. I think that is inherent in the German financial situation in 1919 and after.
In the aftermath, there was starvation, recriminations and chaos, compunded by punitive demands from the victorious powers for reparations that the new, unstable government had no ability to pay on time.
The answer is when in article 1 the author desribed post WW I Germany as the biggest debtor nation in the world.
He explains that Germany had assumed huge internal debts fighting the war, but England had accrued even larger debts during the same period.
He fails to make clear that it was the astonishing, open ended, unpayable debts piled on by the victors in 1919 that made Germany far and away the biggest debtor nation the world has ever seen.
Their burden of debt to GNP makes America’s debt today seem like pin money and perhaps explaining that would have weakened his comparison.
You have to pay for government, even republican government, or it grows endlessly and you pay much more in the long run.
Well, I’ve been a professional economist, an amateur history buff, and an avid follower of the recent crises from economic, financial, historical and geopolitical perspectives. The parallel to Weimar Germany is just wrong. There is a much much stronger historical parallel - the British Empire a century ago.
In 1900, Britain was the world’s lone superpower, based on the massive power of its industrial economy, as a massive net industrial exporter and net lender. Its empire controlled massive swaths of land in Africa, North America, Australia and Asia. London was the world’s financial center, and the system of global trade was centered on the pound sterling - giving British subjects the most desired currency in the world and the most favorable position for access to strategic natural resources. But there were vulnerabilities - the cost of militarily protecting its position was growing while dozens of small threats ganged up strategically against the giant. Up and coming competitors and recent entrants into the industrial revolution seemed poised to take its position - most notably Germany and the US. Then came WW1 and the Great Depression. The world expected the impossible - that Britain’s industrial power and its pound sterling would be able to save the world. But it couldn’t - the policy required to maintain the global system of London-based, Pound-focused trade and finance was the exact opposite of that required to prop up British production and employment. Britain became a net importer from the US during the wars, and a net borrower to pay for its war and economic recovery efforts. The global system collapsed in the 1930s, currency crises reduced the value of the pound, the empire began to unwind, and Britain was saved only by the power of the US, which emerged from WW2 and finally from the cold war at the top of the power pyramid.
On to Washington and New York. With the destruction in Europe in WW2 and the loss of London and the Pound in the 1930s as the anchor of international finance & trade, the US and the Dollar took their place. First at Bretton Woods, the US promised convertibility to gold in exchange for the Dollar as the global standard. But the cost of the Marshall Plan, the Cold War, and the Great Society cost the US too much gold to maintain convertibility. Nixon cancelled gold convertability, and Nixon & Kissinger (with help from Volcker) protected the dollar’s supreme position with a promise of US trade deficits (to provide foreigners a way to earn dollars and grow their economies), US budget deficits (to provide foreigners a safe place to invest those dollars), and growing imports of foreign energy (to increase demand by making the Dollar the currency used to buy oil). The unsustainability of the bargain was clear by Nixon economist’s comment to objectors that “if it can’t go on forever, it will stop.” Since 1973 - for 35 years - the US has gone from a net exporter and net lender to a net importer & net borrower, and its future liabilities are unsustainable at current levels.
Today, the dollar is still the global standard, but based on several vulnerable supports: the positioin of US treasury bonds as both a safe and profitable investment; the ability of the US economy to maintain its levels of net importing and net borrowing; its position as the medium of international trade for oil; the percention that the Fed can maintain its independence from US politicians, so that Fed policy does not hurt foreign dollar-holders. If any one of those supports gives, they all collapse, leading to something very similar to mid-20th-century Britain or worse.
“Those payments were, indeed, a small part of the problem”
JM Keynes became famous for his book “The Economic Consequences of the Peace” where he demonstrated that the reparations payments were impossible for the German people to fulfil. The reparations were small in the same sense that Katrina was a rain storm.
Good post, and a cheery forecast indeed. What will the next reserve currency be?
bttt
Probably unknownable. Some serious people are quitely rumbling again about SDRs and about return to gold and about some other type of commodity backing (like energy commodities!). Change in the system is inevitable in the long term (”if it can’t go on forever, it will stop”), although collapse in the short-to-mid term is not.
That being said, remember how we got out of the 1970s... we had just changed the system, still had not built the kinds of deficits required (sounds absurdist, doesn’t it?), domestic inflation had grown into the double-digits and (in combination with overseas devaluation) were seeing clear threats of a devaluation / spiraling-inflation crisis. Then Volcker came back into the picture - fully aware that the big problem was not the price of milk in New York, but the faith in London & Tokyo in the Fed’s ability to act independently to provide them a global currency - and he beat the US economy down into a double-dip, multi-year, worst-since-1930s recession. That’s why I don’t know any simple way to get to an easy recovery - not a single “recovery scenario” includes an fully-developed exit strategy, and the only ones that factor in both domestic and international considerations lead to a wide variety of types of protracted pain. Extreme uncertainty, although we can rule out a return to a happy stupor.
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