Monday, November 8, 2010
Good Times in the Weimar Republic
There were some good times in the Weimar Republic, Oh yes, there were some good times. The picture above shows a party during the early days. The boys were home from the war, and things were looking up.
As we mentioned yesterday, the Treaty of Versailles, which ended World War I, sought to "punish" Germany. There were a lot of different things, but one of the toughest is that Germany would be required to repay pretty much the entire cost of the war. Many German men had been killed in the war, and the civilian manufacturing infrastructure had been decimated. So, the Germans were faced with an overwhelming debt, and little productive infrastructure. To explain the situation, I will give the following illustration. Lets say that the Weimar Republic has a bushel of wheat, worth 5 Marks. If they let the people in the country have it, they have nothing to pay their foreign creditors, and they default. If they use it to pay their foreign creditors, then people in the country would starve. Sort of like one of those No Win situations. However, the elites in Weimar had a brilliant idea. Keep the wheat, and print TEN German Marks. Use 5 of them to pay foreign creditors, and 5 to put back into the economy to try and get things back on track. It was the perfect solution. Creditors were paid, they kept the wheat, and there was 5 more marks floating around to "Stimulate" the economy. What could possible go wrong?
In a Completely Unrelated Story:
Last week Federal Reserve Chairman Ben Bernanke announced the Fed's new "QE2", or Quantitative Easing 2 program. In it the Fed will provide "stimulus" to the economy by injecting $600 Billion (and perhaps up to $800 Billion) in new money into the economy. The money will be used to "invest" in securities like Treasuries.
You see, I guess it is getting a little tough to continue to find new buyers for treasury bills, and well, the government does not want to cut spending because the people expect their government programs, and they can not raise taxes, because people do not like taxes, so the brilliant solution is to solve the problem by simply printing the money. The plan worked great. The next day the stock market rallied almost 200 points. In fact it worked so well, there is now talk about the need for "QE3". The idea is that when we see the value of our 401K's go up, we will feel wealthy, and go out and start buying new iphones on our credit card, like in the good old days.
Back to the original picture. To the Weimar Republic, I say, "Party On, Weimar". I hear a faint response from Weimar, "Party On, America".