The Nightmare German Inflation

The comments below are an edited and abridged synopsis of an article by Michael J. Kosares

The many parallels between 1924 Germany and the US today are cause for concern. Though the US has not yet reached the depths to which Germany descended in that era, few can look at the constant depreciation of the dollar since the early 1970s and fail to be alarmed. It seems the US differs from 1924 Germany only in the duration between cause and effect. While the German experience was compressed over a few short years, the effects of the American inflation have been more drawn out.

This has occurred for two reasons. First, the Fed has learned from the German experience to delay and extend the consequences of printing too much fiat money.

Second, Germany was a small state isolated from the rest of the world following World War I. It had a difficult time finding a market for its government bonds. German deficits had to be financed internally, a difficulty that accelerated the printing of fiat currency.

Until recently, the US enjoyed strong world-wide demand for its government paper, so the negative effects of government deficits have been subdued. Now, there is a growing fear globally that US deficits are out of control, and foreign support for the US bond market has faltered. Without international buyers, the Fed could be forced to monetize portions of the debt, the modern equivalent of printing money.

The correlation between deficits and inflation is sacrosanct. Deficits lead to inflation, and uncontrolled deficits lead to uncontrolled inflation. Whether or not there will be a nightmare American inflation remains to be seen. The trend, however, is not favourable.

Those who survived the German debacle did so by purchasing gold early in the process. As an investor, the best you can do is prepare, and then hope that it doesn’t happen here. The report of Germany’s hyperinflation, published here, could play an important part in your  preparation process. There is little doubt it will affect your thinking.