Tag Archives: cash

Hyperinflation is a devastating phenomenon. It wipes out the middle class by destroying the value of cash, savings, bonds and other paper instruments.

After WWI, Germany suffered a severe current account deficit, just like the current account deficit we now have in the USA. About 1/3rd of their deficit was generated by the need to pay gold to European allied governments as war “reparations”. But, the rest was due to economic mismanagement, and 2/3rd of the German current account deficit was composed of non-war related spending. Back then, other than for war reparations, America was Germany’s biggest creditor, with American financial institutions, particularly J.P. Morgan, Jr., arranging for consortium loans to the Weimar government, its businesses and industries. News accounts, from that time, indicate that the Weimar German government, like the American government now, was far more concerned with avoiding recession, lowering the unemployment rate, and stimulating business activity than it was about inflation.

German economists in the 1920s thought, just as American economists think now, that a cheaper currency helps stimulate export activity and industrial production. Germany needed exports to buy raw materials, just as the U.S. needs them, now, to buy oil and Asian made consumer goods. Back then, however, the United States was a net creditor nation. It played that role in relation to Germany, similar to the role played by Asian nations, including China and Japan, toward the USA, except that, instead of exporting consumer goods, the 1920s USA exported mostly raw materials to Germany. United States financial firms, in the early 1920s had great faith in Germany, and were buying German government bonds, and supplying loans to facilitate purchase of American commodities. These loans offset the German trade imbalance, just as Chinese Treasury bill and bond buying now offsets the U.S. current account deficit.

At minimum, the U.S. dollar will depreciate by the amount by which the Federal balance sheet is corrupted by the toxic mortgage paper. Most frightening is the prospect of giving Hank Paulson, the prior Chairman of Goldman Sachs, one of the key creators of the toxic mortgage instruments that have caused the credit crisis, unlimited discretion in doling out $700 billion in bailouts, without any possibility of judicial review. Doing that assures that the money is used in the most inefficient and nepotistic manner. It will bring us deeper into hyperinflation.

We can rationally expect that the US dollar will lose about 75% of its value, within 2-3 years.

http://seekingalpha.com/article/96723-what-effect-will-hyperinflation-have