Monday, November 8, 2010
Tough Times in the Weimar Republic
Yesterday we looked at Happy Times in the Weimar Republic. Unfortunately, those happy days were short lived. The picture above shows the Weimar Republic in more troubled days. You can see that people began to find it difficult to feed themselves, and breadlines and souplines developed across the country. In the image above, the army is trying to help provide some food for the people.
You remember that we discussed how the Treaty of Versailles put Germany in a position of having a huge National Debt. We then described the brilliant idea that German central bankers had to deal with the problem. Remember yesterday's illustration . . . Germany has a bushel of wheat. If it used the bushel of wheat to pay a creditor nation, it would have no food to feed its people. If it used it to feed its people, it would default on its national debt. So, it decided to print 10 marks. Five of the marks were sent help pay the national debt (monetization of debt), and five was injected into the economy to try and spur economic activity (stimulus, or quantitative easing). Also, remember, that somewhere out in Germany was a person with 5 marks that could have used it to buy the bushel of wheat to begin with. Now, this is what happens. That country that received the 5 marks wants something tangible for the 5 marks, so it tries to buy the bushel of wheat from Germany. The person that got the 5 marks through the stimulus program wants to buy the bushel of wheat, and the original person who had 5 marks to begin with wants to buy the bushel of wheat. Notice that even though there is now 15 marks, there is still only ONE bushel of wheat. The person who originally had 5 marks, the saver, finds that he is facing stiff competition for the purchase of the wheat. He finds that his 5 marks will no longer buy the wheat. The creditor nation that was paid 5 marks finds it was not a very good deal, because it is not enough to buy the bushel of wheat. The person who received the 5 marks through the stimulus program also finds that it will not buy the bushel of wheat. So, in the end, pretty much everyone loses.
I enjoyed reading the comments. Some suggested that the US is going down the same path as the Weimar Republic, and very dark days are ahead of us. I think this comparison is completely inappropriate. Even though we are printing money to buy our debt (monetization of the debt) and printing money to stimulate the economy (quantitative easing, TARP, stimulus, etc.), WE HAVE NO BREADLINES!!! So, obviously we are not in trouble, and the people running the FED are smarter than the central bankers in Weimar.
In a Totally Unrelated Story:
I compiled this chart from data provide by the US Department of Agriculture, and it shows the number of Americans receiving food stamps over the past two years.
Nope, no breadlines in the US. Hmmm . . . what if these people were in breadlines instead of getting food stamps. Well imagine that each state in the United States had 1,000 breadlines. Imagine that standing in each breadline was 1,000 people. That sort of helps you understand what this chart shows. But, food stamps are very different than breadlines, so we are not like the Weimar Republic. Everything is going to be just fine.