We know most assets in EU & US financial markets are currently overvalued. We can say with confidence that we're in a bubble. And bubbles end up bursting. The only factors we ignore are the trigger and the timing (if you have the answers to these 2 questions, please contact me).
The inflation rate is currently the most talked about topic in financial circles. Since it could force the ECB & FED to raise interest rates, which would in turn negatively impact the financial markets, it is viewed as the main potential trigger of the next economic crisis. Even Dr Michael Burry (yes, that guy from The Big Short) fired several tweets (now deleted) warning that a “Weimar Republic style hyperinflation” may be imminent in the USA.
And whenever Weimar Republic’s hyperinflation period is mentioned, it is linked to the economic collapse that gave rise to Hitler & nazi Germany. It is used as an argument to warn of the horrible political & social consequences that inflation could have in the long term. But is that really true ?
Weimar Republic's Hyperinflation : WTH is that ?
So here’s a quick recap. In order to finance World War 1 (1914-1918), Germany suspended the convertibility of its currency into gold and started printing money. Why didn’t it fund it by borrowing money or raising taxes (as France & UK did) ? Well, they were overly optimistic. Germany thought it would quickly win the war and repay the cost by exploiting the resources of the conquered nations.
But instead, the opposite happened. Germany lost and the Treaty of Versailles (June 1919) forced Germany to pay the Allied Powers for war damages (among other sanctions, like a ban from producing military arsenal and handing back the Alsace-Lorraine to France). In the meantime, from 1914 to 1920, the country went into a deep economic stagnation since 20% of its population went to war and the previously mentioned money printing doubled the cost of living.
How did the government react ? More money printing to stimulate the economy & repay the Allies. And the inflation spiral started !
Despite that, Germany couldn’t always repay on time. When France didn’t receive the due amount in 1921, it seized control of some German ports. In 1923, when another payment couldn’t be made, France occupied the Ruhr region. This area contained most of Germany’s resources & industrial activity (coal mines, iron, steel) and represented the largest proportion of the government’s tax revenues. The cost of living soared even more. Food riots & protests demanding wage rises were commonplace. The middle class was decimated & wealth inequality grew.
How did the government react this time ? By printing even more money to hand subsidies and social benefits to small businesses and the unemployed.
I will not bore you with more details, but the main thing to keep in mind is that the government kept printing money to buy its way out of socio-economic problems, only to find itself facing new problems, which they tried to solve by printing even more money, only to make the situation worse and they got caught into this vicious circle for years…
All classes were not equally affected though. Quickly, factory owners and, most importantly, the jewish community became the scapegoats. The growing lack of trust in the government led people to avoid paying their taxes (forcing the government to print even more money to compensate). All of it led to the rise of populist leaders & extremism on both sides of the political spectrum.
And so you think that’s how Hitler came to power, right ?
Well, not too quickly…
Great Depression, Great Unemployment, Great Deflation and Great Catastrophe
Starting from 1923, new economic policies were implemented. Interest rates were raised (according to Global Financial Data, it hit 9%... per week!) which led to prices & currency stabilization. Consequently, from 1925 to 1929, Germany experienced years of relative economic stability and low inflation. But it was still too fragile. After the stock market crash of 1929 (that kicked the start of the Great Depression) impacted all major countries, bankruptcies started piling up in Germany.
But throughout this whole period, the government, led by Chancellor Brüning, kept the same austerity policies in place : reduced government spending, high taxation, high interest rates and a stable currency. The low inflation quickly became a deflation (a decrease in prices) and the unemployment rate reached 30%. Similarly to the 1919-1923 period, there were riots & protests and the Nazi party channeled that popular discontent.
Anyway, this little historical recap was just meant to burst the myth that the Weimar Republic hyperinflation (which was effectively under control since 1924) played a direct role in Hitler’s rise to power (1933). It’s rather the tight fiscal & monetary policies (1925-1932), coupled with a high unemployment rate as a consequence of the Great Depression, that provided a fertile ground for the Nazi Party.
Note : Based on historical voting data from hundreds of districts & cities, this research paper provides empirical evidence that people living in areas that were more affected by austerity (cuts in government spending and/or tax hikes) were significantly more likely to vote for the Nazis. So, again, no correlation with the hyperinflation, but rather with the austerity measures.
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