Syria in the Throes of Hyperinflation

Living in the United States or other “stable” countries, we tend to think that Hyperinflation is a relatively uncommon event but that is far from the truth. In our post What is Hyperinflation? We list 26 instances of hyperinflation 11 of which have occurred since 1990. It seems that every couple of years there is another one. Even in the midst of deflationary pressures we have seen Zimbabwe (which ended in 2008), North Korea (2010-13) and now Syria.

In Surviving a Hyperinflation we noted that “Hyperinflation only occurs in countries where the government has already broken down. Weimar Germany was mired in a social Civil War… Zimbabwe never had a working democratic government and the increasingly bizarre action of the Mugabe dictatorship, crashing the economy, divesting the (white) professional farmers of their lands and intervening in the First and Second Congo Wars, converted very high inflation to hyperinflation…”

Syria Central Bank

Syria Central Bank

Whenever you hear a country outlawing currency conversions or the use of foreign currency for local transactions a giant red flag should start waving in your head saying,  “Warning, Warning, Danger, Danger”.  Just as Zimbabwe and North Korea we now have Syria.

Syria is currently [Read more...]

Will Greece Follow Iceland or Weimar Germany?

In Iceland the bankers were told to stuff it. In Weimar Germany they resorted to the printing press. Which model will modern day Greece follow?

It seems that the words Weimar Germany and Hyperinflation are almost synonymous. The Weimar Republic (Das Weimarer Republik in German) is the name of the democratic government which was established in 1919 when Germany was defeated in WWI and Emperor Wilhelm II abdicated the throne. The problem came from the War repairations that were foisted upon Germany by the winners and the growing internal unrest which was allowing the Nazi’s to gain a foothold. In an effort to pay their debts, promote full employment, and fight back against growing competitive restrictions from France, the government took to the printing presses. Because of the lack of alternatives they continued on this course longer than most and ended up with a hyperinflation of historic proportions. See What is Hyperinflation? for a complete list of other epic hyperinflations.

Today we have Greece in a similar position to Germany in 1919 with one major difference, Greece doesn’t control its own money supply because they are tied to the Euro and Germany is deathly afraid of another hyperinflation.  Today’s article by Jeff Thomas of International Man compares the similarities between Weimar Germany and Modern Day Greece.

Weimar Greece

By Jeff Thomas

In 1919, the Treaty of Versailles was signed as a peace agreement after World War I. Under the treaty, Germany accepted that they had caused the war and therefore were obligated to pay reparations to the tune of US $31.4 billion (US $442 billion in today’s money). This was deemed excessive by many economists at the time, and should have taken roughly seventy years to pay. Incredibly, Germany did pay, and doing so took them more than ninety years, with the final payment being made in October 2010.

Greece Euro Weimar, GermanyNot surprisingly, most Germans at the time (and until the present day) have regarded the treaty as the brutal gouging by the victors of the war.

Today, the shoe, as they say, is on the other foot. The debt owed by Greece is in the neighbourhood of US $345 billion (reports vary). The likelihood of eventual repayment is very slim indeed. And, not surprisingly, the Greek people feel the same way the German people did following the signing of the Treaty of Versailles. Correspondingly, events in Greece bear similarities to those seen in Germany in the 1920′s.

Will we be looking at a repeat of Weimar Germany for Greece in the coming years?

The first developments will most assuredly occur in connection with the new Greek government. It most certainly is not in the interests of Greek politicians to recommend to the Greek people that [Read more...]

What is the Significance of the Fiat Currency?

Last month in an article entitled What Is Fiat Currency? we told you that “Fiat currency is a term that is used to describe a currency which is created by “fiat” or “arbitrary order or decree” of the government.”  This month we would like to talk a little about the significance of Fiat currency. ~ Tim McMahon, editor.

Fiat Currency

Currency that is declared by a government to be a legal tender is referred to as a ‘Fiat Currency’. This type of currency owes its value strictly to the government’s acceptance of it for paying taxes and requiring its acceptance for “all debts public and private”. It is not backed by reserves or any physical commodity and is defined as nonconvertible paper money made legal tender by a government decree. It has no intrinsic value and is based on faith, as compared to the olden days, when most currencies were based on physical commodities like gold or silver.

Today, all of the currencies in the world are fiat money. Examples include: the U.S. dollar, the Japanese Yen, the British Pound, the Euro, etc. Not being linked to physical reserves, there is great risk of Fiat Currency losing value either gradually through inflation or rapidly through hyperinflation.

A Short History of the Fiat System

  1. In the early eleventh century, Chinese Song Dynasty issued paper money subject to be redeemed for gold after three years. They were never redeemed, resulting in inflation due to a loss of confidence in the issuing authorities.

Result: The System was abandoned.

  1. The twentieth century began with several countries experimenting with fiat currency. Most countries controlled the money-printing through their governments, but began massive printing due to high military expenses incurred during the First World War.

Result: The teens and twenties are littered with countries that experienced hyperinflation including: [Read more...]

What is Hyperinflation?

Hyperinflation

Hyperinflation is an extremely rapid period of inflation, usually caused by a rapid increase in the money supply. Usually due to unrestrained printing of fiat currency.

 See: How Does Gold Fare During Hyperinflation?

Unfortunately, there is no exact percentage where inflation turns from “ordinary Inflation” to “Hyperinflation”. So you can’t say for instance that 9.9% inflation is ordinary but 10% inflation is hyperinflation. Typically in hyperinflation it just gets progressively worse. Every month the inflation rate just gets higher and higher until the curve goes hyperbolic.

Hyperinflation CurveClassic Hyperinflation

Classic examples are the Hyperinflation of Weimar Germany and the more recent Zimbabwean Hyperinflation which reached 2.2 Million Percent.

For instance in Germany prices doubled in only 5 years between 1914 and 1919, but then things got really bad…

Imagine…

 If you had your morning coffee in a café, and you preferring to drink two cups rather than one… it was cheaper to order both cups at the same time before the price went up on the second cup…

See What is Hyperinflation? for the full article.

 

 

 

How Does Gold Fare During Hyperinflation?

By Jeff Clark, Casey Research

Inflation is a natural consequence of loose government monetary policy. If those policies get too loose, hyperinflation can occur. As gold investors, we’d like to know if the precious metals would keep pace in this extreme scenario.

Hyperinflation is an extremely rapid period of inflation, but when does inflation (which can be manageable) cross the line and become out-of-control hyperinflation? Philip Cagan, one of the very first researchers of this phenomenon, defines hyperinflation as “an inflation rate of 50% or more in a single month,” something largely inconceivable to the average investor.

Hyperinflation has One Root Cause

Hyperinflation 100 Million MarksWhile there can be multiple reasons for inflation, hyperinflation historically has one root cause: excessive money supply. Debts and deficits reach unsustainable levels, and politicians resort to diluting the currency to cover their expenses. A tipping point is reached, and investors lose confidence in the currency.

“Confidence” is the key word here. Fiat money holds its purchasing power largely on the belief that it is stable and will preserve that power over time. Once this trust is broken, a flight from the currency ensues. In such scenarios, citizens spend the money as quickly as possible, typically buying tangible items in a desperate attempt to get rid of currency units before they lose value. This process increases the velocity of money, setting off a vicious cycle that destroys purchasing power faster and faster. [Read more...]

Why Deficits Are Politically Convenient

Terry Coxon of Casey Research discusses the effects of deficits on the economy and politics. ~editor

Deficits: How Far to the Wall?

By Terry Coxon, Casey Research

Decades of manipulation by the Federal Reserve (through its creation of paper money) and by Congress (through its taxing and spending) have pushed the US economy into a circumstance that can’t be sustained but from which there is no graceful exit.

With few exceptions, all of the noble souls who chose a career in “public service” and who’ve advanced to be voting members of Congress are committed to chronic deficits, though they deny it. For political purposes, deficits work. The people whose wishes come true through the spending side of the deficit are happy and vote to reelect. The people on the borrowing side of the deficit aren’t complaining, since they willingly buy the Treasury bonds and Treasury bills that fund the deficit. And taxpayers generally tolerate deficits as a lesser evil than a tax hike.

Deficits are politically convenient for a second reason. They can take a little of the sting out of a recession. That effect is transient, and it’s not strong – more like weak tea than Red Bull. But it can be enough to help a struggling politician get past the next election.

Yes, sometimes there’s a big turnover in the personnel, such as with the 2010 election, when a platoon of self-styled anti-deficit commandos parachuted into Congress. As soon as they had taken their seats, they began offering proposals to deal with the government’s trillion-dollar revenue shortfall. But none of the proposals were serious. They were merely tokens intended to make politicians wearing anti-deficit uniforms look less ridiculous. Cut a ginormous $2 billion out of this program and a great big $500 million out of that program. Reduce spending by half a trillion dollars… over ten years. Balance the budget to the penny, but later. No one proposed anything close to dealing with the deficit now. [Read more...]

Hyperinflation and Double-Dip Recession Ahead

An interview with Karen Roche of The Gold Report

Economic recovery? What economic recovery? Contrary to popular media reports, government economic reporting specialist and ShadowStats Editor John Williams reads between the government-economic-data lines. “The U.S. is really in the worst condition of any major economy or country in the world,” he says. In this exclusive interview with The Gold Report, John concludes the nation is in the midst of a multiple-dip recession and headed for hyperinflation.

The Gold Report: Standard & Poor’s (S&P) has given a warning to the U.S. government that it may downgrade its rating by 2013 if nothing is done to address the debt and deficit. What’s the real impact of this announcement?

John Williams: S&P is noting the U.S. government’s long-range fiscal problems. Generally, you’ll find that the accounting for unfunded liabilities for Social Security, Medicare and other programs on a net-present-value (NPV) basis indicates total federal debt and obligations of about $75 trillion. That’s 15 times the gross domestic product (GDP). The debt and obligations are increasing at a pace of about $5 trillion a year, which is neither sustainable nor containable. If the U.S. was a corporation on a parallel basis, it would be headed into bankruptcy rather quickly. [Read more...]

Hyperinflation in Weimar Germany vs. The U.S. Now

Postcards From Weimar Germany

Justice Litle, Editorial Director, Taipan Publishing Group
Monday, September 20, 2010

The Weimar Republic is perhaps the quintessential example of hyperinflation. But the buildup took longer than one might think.

Walter Levy is a German-born oil consultant. His father, a German lawyer, took out a life insurance policy in 1903.

 

Every month he had made the payments faithfully,” recounts Levy. “It was a twenty-year policy, and when it came due, he cashed it in and bought a single loaf of bread.

 

Weimar Hyperinflation 100 Million MarksSuch was life in the German Weimar Republic.

Things got so bad there for a while, dentists and doctors stopped asking for currency, seeking payment in butter or eggs instead. But the farmers weren’t keen on trading their produce for paper money either.

Prices rose not just by the day, but by the hour — or even the minute. If you had your morning coffee in a café, and you preferred drinking two cups rather than one, it was cheaper to order both cups at the same time.

Here is how a Weimar factory worker described payday (which was every day): [Read more...]

How Paper Money Fails

Porter Stansberry, in the S&A Digest

About right now, I imagine 90% of our subscribers and most of the analysts in my building think I’m nuts. Truthfully… I feel a little bit like Chicken Little. I’ve been saying the risk of hyperinflation is a more serious threat to our wealth (and way of life) than a massive deflation. Meanwhile, just about every month it looks more and more like Europe’s banking crisis will cause another round of serious deflation in the world’s asset prices. I’m starting to look pretty foolish…

I thought economic growth would be stronger than expected, not weaker. I thought job growth would be stronger than expected, not weaker. I thought yields on long-term Treasury bonds would move higher, not collapse to less than 3%. And I thought silver and gold would soar, instead of stall out. What do I have to say for myself? [Read more...]

What the Deflationists Are Missing

by David Galland, Managing Editor, The Casey Report

An interesting article by Ambrose Evans-Pritchard came my way the other day. It’s worth a read, if for no other reason than that he paints an appropriately dark picture of the current state of the U.S. economy. You can read it here.

While I very much share Mr. Evans-Pritchard’s view that the global economy is far from out of the woods, our views diverge in that he sees devastating deflation speeding our way down the tunnel. Casey Research readers of any duration know that we see devastating inflation.

While we could both be right, with deflation first and inflation later, I’m not so convinced.

For starters, there is already a massive inflation operation being run by the Fed, evidenced in a historic spike in the monetary base over the last two years. [Read more...]