Tags: hans | parisis | inflation

Steps Away from Being the Next Weimar Germany

By Hans Parisis
Wednesday, 03 Jun 2009 09:43 AM More Posts by Hans Parisis

German Chancellor Angela Merkel has now put aside the German tradition whereby politicians do not publicly criticize central bank policies.

In a speech, she instead took them head on. “I am very skeptical about the extent of the Fed’s actions and the way the Bank of England has carved its own little line in Europe. Even the European Central Bank has somewhat bowed to international pressure with its purchase of covered bonds. … We must return to independent and sensible monetary policies, otherwise we will be back to where we are now in 10 years’ time.”

While it still isn't clear what triggered Ms. Merkel's unusual strong remarks, which came in a prepared speech, it is clear that German officials are starting to worry we could see in the coming years (and not just months) too much money chasing, proportionally of course, too few goods and services.

Yes, the Germans haven’t forgotten the lessons of the 1920s hyperinflation during the Weimar Republic, when on Nov. 1 1923, one pound of bread cost 3 billion German marks; one pound of meat, 36 billion German marks, and 1 glass of beer, 4 billion German marks.

To get somewhat of an idea about the value of the German currency at that time; during the first half of 1922, 320 marks bought $1.

By December 1922 you needed 8,000 marks to buy $1. At the peak of inflation, in November 1923, the German mark became practically worthless. Inflation ended with the introduction of the “rentenmark” that was secured by real estate (yes, a tangible!), and the Weimar Republic continued for a decade afterwards. It is widely believed that this hyperinflation period has contributed to the Nazi takeover of Germany.

These remarkable strong words of the German chancellor, whereby she openly criticizes the Fed’s and Bank of England’s quantitative easing policies shouldn’t be taken lightly at this moment where big dollar holders like China, Saudi Arabia, etc. and the investing community as a whole have their clear worries about the future value of the dollar.

Investors should start thinking in the coming months and even years about moving, in part, out of the dollar box, if they haven’t already done so. Nobody knows how the final act of the Fed’s quantitative easing play will end.

Personally, I see a trap in the making whereby the Fed will be forced to make unpopular decisions, such as when the moment comes that they will be obliged to tighten again even while U.S. consumers and industries continue to deleverage despite no sign of sustainable, positive job growth.

I believe that the U.S. economy is still in a gigantic mess and that risk-taking will not be rewarded on a sustained basis. I’m convinced the U.S. stock market is highly overrated as a forecasting device. It is not a lock that the stock market is going to stay on its current one-way ticket up.

This is a bear market rally, in my opinion, at least. In any case, I agree with Ms. Merkel that those policymakers’ hyperactive efforts to keep the global financial system and economy afloat may be setting the stage for new blowups in years to come.

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German Chancellor Angela Merkel has now put aside the German tradition whereby politicians do not publicly criticize central bank policies.In a speech, she instead took them head on. “I am very skeptical about the extent of the Fed’s actions and the way the Bank of England...
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