Where does all this money printing end? 1920s Germany?
What if all this money-printing crashes the economy?
That’s what money printing does right? Trashes things. Didn’t that happen to Germany once?
It did. In the Weimar Republic in 1923. Money printing led to severe hyper-inflation and economic collapse.
But let’s have a look at this because this is kind of interesting. And let’s think about how we would have made money out of it if we knew it was coming.
Ok, so first, let’s recap what happened in Germany.
So it is true that money printing was the problem. But it started way before 1921. Germany actually financed the war entirely through money printing, figuring that they’d make so much money after they’d won they’d be able to deal with the consequences then.
But I don’t know how good your history is, but Germany did not win WWI.
And when the Allies finally agreed on the reparations – how much Germany had to pay everybody – the final figure was brutal. Two billion gold marks plus 26% of the value of Germany’s exports.
Germany protested, but what could they do. They didn’t have an army any more.
The Allies also stipulated that they wouldn’t accept German marks. They either had to be paid in foreign currency or gold.
Tough deal.
With no feasible way to repay the debt, the Weimar government went back to money printing. They printed money and then bought the foreign currency they needed.
However, as they printed money, the currency started crashing – it became worth less and less because there was just so much of it around.
As the currency crashed, the foreign currency they needed to pay off their debts became more and more expensive.
Which meant they had to print more and more money, which caused more inflation, crashed the currency even further, which meant they had to print more money… and suddenly they were in a hyper-inflationary death-spiral.
The numbers end up being kinda stupid. Like you can’t even make sense of it. A loaf of bread that cost 160 marks in 1922, cost 200,000,000,000 marks in 1923.
So, hard times for Germany.
But there’s an important lesson here – and that’s the danger of having your debts denominated in foreign currencies.
If you print money and devalue your currency, the value of your debts goes up… and up and up and up… and then you’re stuffed.
But if you issue your debts in your own currency, then if your currency devalues, you don’t suddenly owe more money. You owe the same amount of money.
And this is where Australia is at. The Australian government, with one of the world’s strongest and most stable economies behind it, is able to issue debt in Australian dollars.
And so if the currency devalues relative to the US dollar or the Euro, then it doesn’t really matter. The Government’s debts don’t suddenly explode.
Many economies are not so lucky. Many economies in Latin America have to issue debt in US dollars. Greece’s debts are largely in Euros.
So, we’re the lucky country like that.
And it’s one of the reasons why I’m not really worried about hyper-inflation in Australia… even though we’re printing money hand over fist…
… while every other country prints money hand over fist as well.
So remember this. The denomination of debts matters.
That’s not to say that there’s no consequences to money printing – massive inflation in asset prices is probably one of them.
But the Weimar Republic’s experience is probably not going to be much of a guide.
But let’s assume that we think money-driven inflation is going to be a problem.
How would you make money in that story?
I’ll pick up that question on Thursday.
DB.