"The principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale." --Thomas Jefferson

Wednesday, January 21

I'd like to buy a newspaper.....That will be $1 Billion dollars Sir.

Something has been on my mind lately. I have discussed it almost daily with friends and colleagues. I have been trying to figure out a way to make what seems to be like a fourth-Sunday topic into something worth reading. So here goes....

I am extremely concerned about the amount of money our government is spending, printing and incentivizing. In history, this method has served no country well. Only hurt the long term interests of struggling nations. Forgive the coming ueber-simplified history lesson.

In post WWI Germany, the government found itself strapped with massive war debt. With no one willing to buy their country's debt, the government resorted to the equivalent of printing money. As the massive debt continued to increase, confidence in the governments ability to pay its obligations and already issued bonds begins to plummet. Consumer confidence was wiped out. The temptation of government to inflate increased.

Government did not want to upset the people with higher taxes, so it borrowed the war debt expecting the Allies to foot the bill after the war. When things didn't go as they thought, they monetized the debt. In reality, the equivalent of printing money. To compound things even worse, the German mark took a dive after the war reparations were announced and the new socialist party had promised multitudes of social welfare programs that over obligated an already strapped government. Confidence in the mark kept plummeting making the mark worth less and less and as it did, people started getting rid of their hoarded marks, flooding the market with massive amounts of money.

50 Million mark banknote from 1923

Caught in a Teufel's-Kreis the government, now dealing with a fully-employed and brutally underpaid workforce, had to deal with the poverty of a third world country. They kept printing money. Germany had 300 paper mills and 150 printing companies working night and day printing money as fast as they could. Most of the money was worthless by the time it was printed. Workers were paid three times a day because the the value of the money was usually worthless by the end of the day. Prices were doubling in a matter of hours. To illustrate, the price of a stamp in 1923 reached $50 Billion marks. Some of the results of these high prices and devaluation of the mark...
1. People's life savings were wiped out overnight
2. People were forced to sell personal belongings to eat
3. Food and clothing were the most valuable commodities
4. People burned German marks instead of firewood to heat their homes because it was cheaper than buying firewood.
5. The largest bill issued by the German government was $100 Trillion marks
6. Life Insurance policies became worthless

One of the main reasons that inflation grabbed hold so fast in 1922-23 in Germany was the velocity of money. Money flooded the market, the government kept printing money (if they kept printing money and inflating, the debt they had incurred was in effect, erased) and people's sole goal in life was to spend their money before it was worthless and eat their next meal. The government blamed everyone but themselves siting the stiff reparations of the Treaty of Versailles and the greedy speculators that bet against the mark. Life was horrible. The government was it's own worst enemy. Debt, spending and government interaction all contributed.

Allow me to indulge for a small moment.....I am not chicken little but I believe that our federal reserve can only pull so many rabbits out of the hat until the spaghetti doesn't stick to the wall. Ben Bernake has admitted repeatedly that the fed's rate cuts are not affecting the economy the way they should. Our national debt is $11 + Trillion, our entitlements for Medicare, Medicaid and Social Security are a giant ponzi scheme run by the government which hasn't even seen the start of the baby boomers. We have a newly elected liberal socialist government that has promised and over-promised our country things it can't begin to afford without borrowing from foreign countries. Our dollar has dropped against other currencies and other nations are not accepting our government issued treasuries as an iron-clad guarantee anymore. Consumer confidence is dropping and we are involved in 2 wars and a pretty strong recession. Conservative estimates peg the money that people are hoarding on the side lines in our current recession at $2-4 Trillion dollars. As we spend $750 Billion on bailouts, over a trillion on fiscal stimulus and hand out rebate checks to those who pay no taxes, we had better hope that our dollar is worth something and that China still wants to buy our treasuries because when our economy bounces back and people deploy this money into the markets, we will experience inflation. And not the normal kind. Do I think that we'll be burning money, no. Do I think we need to sell everything we have and buy gold? No. Do I think we should have the often counseled and responsible year's worth of food supply? Obviously. After examining the situation I don't think the Jimmy Carter era was a one hit wonder after all. Get out of debt and be responsibly prepared for inflation. We are a hankering for it people. What's that saying about history again?

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