PAULSON AND THE WEIMAR REPUBLIC

by Michael M. Pennington 

The Federal Reserve was created in the US in 1913 in secret meetings and since that time they have slowly turned the United States into the greatest debtor nation the world has ever seen. History is littered with the graveyards of fiat currencies, i.e. money backed only by the worthless promises of someone else willingness to assume their debt. Every dollar ever created has a corresponding liability. The only exception is gold. It is the only asset that has no liability. The government’s answer to all economic problems, is to inflate, inflate, inflate until the problem goes away, or is replaced with a bigger one. I have had several people ask me about my references to the Weimar Republic of Germany following WWI. It is a classic example of hyperinflation and the terrible consequences it has on the effected society. The chart below gives you an illustration of what it was like during these times in Germany and what could be ahead for all of us.

July 1914            4.2 marks to the dollar
January 1919      8.9
July 1919            14.0
January 1920      64.8
July 1920             39.5
January 1921       64.9
July 1921              76.7
January 1922       1,919.8
July 1922              493.2
January 1923        17,972
July 1923               353,412
August 1923          4,620,455
September 1923    98,860,000
October 1923         25,260,208,000
November 1923     4,200,000,000,000 (yes, trillion. )

[Source: Gordon Craig, “Germany 1866-1945″]

By late 1923, the German government required 1,783 printing presses, running around the clock, to print money. Germans wheeled shopping carts filled with literally trillions of marks to pay for a single loaf of bread. Employees asked to be paid their wages each morning so that they could shop at noon before merchants could post higher prices.In 1919 they were tipping the bellboys with a gold piece and in 1923 the same gold piece would have bought the hotel.Today in the US we see Crude oil is $132. Corn is $6.The cost of everything is rising. Inflation is worsening, and it’s not hard to understand why. M3, the total quantity of dollars, is now growing by 17% per annum. Weimar inflation has arrived in America.The Federal Reserve is following the footsteps of the central bank in Weimar Germany. It is the same path taken by many central banks that have issued countless fiat currencies based on nothing but government promises. It is the path to the fiat currency graveyard, and the once almighty US dollar – which long ago used to be “as good as gold”, just like the Reichsmark once held that same exalted title – is knocking at the graveyard’s gate.

For those who scoff at the notion that this type of hyperinflation occurred many years ago and couldn’t happen today, you only have to look at what is happening right now in Zimbabwe. Weary Zimbabweans each day face a new wave of price increases that many basic goods and services out of their reach. A loaf of bread now costs what 12 new cars did a decade ago. Monthly inflation recently rose to 1,063,572 % according to a Reuters report. Economic analysts say unless the rate of inflation is slowed annual inflation will likely reach 5,000,000% by October.

Throughout history, it’s been proven that the basic laws of economics can be violated by governments for a short time, but in the long run, intervention and manipulation does not work in a free society.more stories like this According to FED records, they have loaned banks $188,000,000,000.00 per day over the past 3 weeks. This is nothing compared to the $1,000,000,000,000.00 that Paulson is now asking for. But there are many other “checks” being written as the printing presses work overtime, including:

* Treasury buying mortgage-related assets: $700,000,000,000.00*

Potential supplementary stimulus package favored by Democrats: $100,000,000,000.00*

 Insuring money market funds: $72,500,000,000.00*

Treasury fortifying the Fed’s balance sheet: $100,000,000,000.00*

Expansion of temporary swap lines with central banks: $180,000,000,000.00.*

 Loan to AIG: $85,000,000,000.00*

Fed purchase of agency discount notes and ABCP: amount not specified.*

Fed loans through the Primary Dealer Credit Facility: $20,000,000,000.00 through Sept. 17.*

Fed’s discount window: $33,000,000,000.00 balance.*

Treasury purchase of GSE MBS this month: $10,000,000,000.00*

Potential cost of Fannie/Freddie bailout: $500,000,000,000.00.*

Treasury Secretary Paulson’s Bailout Plan  700,000,000,000.00

Financing the current account deficit: priceless.

Investment implications: Sell the U.S. dollar.

“The fiscal cost to the US is likely to be enormous. Speculation will intensify on a possible US government paper downgrade. US policy-making and credibility have been put into question. The safety of US assets has been put into question. We remain concerned with the repercussions that this crisis will have on the financial flows into the United States against the context of a still large current account deficit

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