Not Learning The Lesson Of The Weimar Inflation

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The Sage of Ely tells us that tripling and more the money supply won’t lead to inflation:

One such myth that appears quite commonplace at present is that the creation of money by the government to tackle this crisis will lead us, in very short time, to a situation like that of the Weimar Republic, with hyperinflation following. This is quite empathetically not true for a number of reasons.

Firstly, for there to be inflation there has to be something that drives it. For example, there has to be a shortage of available labour in the market which drives up wages. Right now there is a prospect of mass unemployment, meaning that the chance of wage driven inflation is, therefore, incredibly low.

The Wiemar Inflation was also a period of substantial unemployment.

Alternatively, there has to be excess demand for what is available in market, meaning that prices are pushed up by supply-side shortages. Whilst there is more risk of this, particularly with regard to some basic products at present, what almost invariably happens during a period of crisis, which in this case is likely to last for much longer than most people realise, is that people save because uncertainty creates that natural reaction. In that case excess demand for this reason is unlikely.

We’re having a fall in production. As did Germany during the Weimar Inflation. So we don;t exactly seem to be all that different at present.

Of course there’s also another thing which is similar. Both governments printed lots more money. Meaning that there were more pieces of paper chasing the same or fewer goods – inflation as a result seems likely. Well, confirmed in one case, likely in the other.

Sure, all the stuff about banks loans creating credit, governments creating money, fine. And the inflation will only turn up at the end of the process, once something like normality is restored:

So, there is an inflation risk, but it’s at some time in the future. And we know how to deal with it then. That will not be by increasing interest rates – which creates debt insolvencies – but by tax increases, but these are required only when the pressure is apparent.

Cool. But note what the effect of that is. We all get to pay for the money being printed now through higher taxes in the future. That is, this Modern Monetary Theory doesn’t change anything at all about the overall effect. Spending now is paid for by taxes in the future.

And?

Well, an interesting and is that we’re pretty much at the Laffer Curve peak for getting money out of the rich. So it;ll have to be the poorer among us paying those future higher taxes. And, if taxation is to reduce inflation then we need to tax money that would be spent, not money that would be saved. That is, we’ve got to tax the poorer anyway because they have a lower marginal propensity to save, a higher marginal propensity to spend.

MMT, spending now on the back of higher future taxes on the poor. Most progressive, don’t you think?

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Boganboy
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Boganboy

I noticed the Zimbos all seem to spend any money they can get as soon as possible, because it drops in value so fast. But perhaps he feels we white wogs are stupider than the blacks.

Tristram Fuller
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Tristram Fuller

And then essentially they borrowed the money to cover the cracks from the US, life seemed to get better. Note this time round the US ( or anybody else for that matter ) will have no money to lend. And then everything crashed and things went from bad to worse. No this is not the way to go.

Spike
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Spike

Is it getting more obvious lately that Murphy is not measuring but groping for data to fit into his preconceived notions? Sowell: “Everything is different, except for the similarities.” I’ll take Tim’s analysis of the fundamentals: more banknotes, less stuff to buy with them.

Arthur Dent
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Arthur Dent

First rule of economics: there’s no such thing as a free lunch.

Snarkus
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Snarkus

Sigh. JR Sauls comments on the Athenian economic collapse after Persions burned Athens and a few plutocrats owned it all. That is what bankruptcy is for. Solution was for the means of production (farms in Athens case) went back to original owners and debts written off. How this would work in our much more complex economy I cant guess, but the concept that unpayable debts are a dead weight that must be dumped so a real economy can grow appeals.

Boganboy
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Boganboy

I understand the West Germans did something similar after WW2. The Reichsmark was abolished and each of the locals given a handout of some new Deutschmarks. In effect, all savings and debts denominated in Reichsmarks were written off. It seems to have worked.