Hyperinflation. Could History Repeat Itself?
Do you know how hyperinflation occurred in Germany in the 20s? Do you know what steps to take to protect yourself, if history repeats itself? In this post, we will look at that moment in history when preparedness was key for citizens and how you can apply those lessons in today’s environment.
The history in 1 min
We are in 1921, a couple of years after the end of the First World War. Germany lost and has to pay tons of money to the winners as reparations. This leaves Germany with a very high level of debt.
When you have a big debt, you are in a tough position because you have to reach a compromise between your needs and your payments. To pay the debt back, the German government at the time came up with the idea of printing money to buy gold or foreign currency so they could pay their obligations.
All of a sudden, there was too much currency in the market. Everyone had plenty of money to spend, pushing prices up. In the case of Germany, they ended up with an inflation level of 100% by 1922.
Eventually, the Mark was not accepted to buy gold, and the Germans missed a payment. Unhappy with the missing payment, the French decided that if Germans couldn’t pay them in foreign currency or gold, it would be in goods. They picked coal which was the energy source of the time. So they occupied the Ruhr, a mining region.
The Germans couldn’t do anything to stop them except protest passively. As a way to incentivize that, the German government offered the miners cover their salaries if they wouldn’t work for the French. This was financed again by printing money.
In the end, the situation got extended for several months. What was a temporary measure at the time, left Germany drowning in bank notes. To the point that burning those was more useful than using them as actual money.
In a span of two years, Germany’s savings got vaporized with a level of inflation of 29500%, leaving them in an absolute depression. Ten years later, Hitler was elected…
In the graph below, you can see the value of 1 dollar in Marks during the period. In 1923 1USD = 10.000.000.000.000 Marks.
How this story relates to today’s world?
There are a few key elements that are similar to today’s situation in Europe, and we should consider: high levels of debt, energy supply restrictions, and subsidizing the population through more debt.
- High levels of debt: Currently, the countries of the world, including the EU, have very high levels of debt. The south of Europe has scary levels above 120% of GDP and an average of 95% for the whole eurozone. To make sense of this figure, imagine all the cost of your expenses for a whole year, then instead of spending it as usual (food, rent, electricity…), you just give it all away to the bank. That represents Europe’s situation nowadays.
- Energy supply restriction: Europe is in an energy crisis. The energy cost is too high, and some companies start shutting down for not being profitable at those energy prices. In the 20s, the coal miners stop producing and were subsidized by debt. Today that is done in the energy sector. Germany nationalizes energy giant Uniper… – CNBC. Now Germany produces/imports energy at a loss, increasing their debt levels (point 1). If on top of that, more companies would continue shutting down, they might subsidize the workers, leading us to point 3.
- Subsidizing the population through debt: During Covid, we all were sent home. The state compensated companies for stopping their production and increased its debt levels, causing high inflation today, just like the German government did in 1922.
See below how the amount of money in the EU increased in 2020 during the lockdown. Almost 30% in the span of 2 years.
In the middle of the energy crisis, more companies will close, and people will lose their jobs. The government might choose to compensate all of them for their losses. If the amount of money given away is big enough, we will see a new spike in the amount of existing money and, with that, a new inflation wave, just as we did after Covid.
As you see, we have in the mix the same ingredients Germany had in the 20s. This does not mean we will end up having the same result, but we have to account for the possibility.
What can we do as individuals?
Fortunately, central banks know about this dynamic, so that should play in our favor. However, governments don’t, so we have to ask ourselves how much we trust our current government, national and European, to manage the problem with the high level of debt.
The second question we should ask ourselves is if the energy crisis will get worse or better from here.
If you don’t have a big trust in the government or you think the energy crisis will get worse, the possibilities for a new inflationary wave are considerable, so we should prepare for that. Consider that at a 15% inflation rate, your savings will lose half of their value in 3 years. So read my previous post for inspiration, diversify your savings, get some gold and increase your financial education to be better prepared.
If you are interested in knowing more about this period, you can take a look at “When the money dies” by Adam Ferguson.
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Image credited to Upklyak in freepik
