Weimar: Hyperinflated! 100 years later

In 2012 I wrote an article that followed the events that occurred after the Subprime crisis that ended the existence of several large banks in the United States, including the largest bankruptcy up to that time, that of Lehman Brothers investment bank.

The point that was highlighted in that article (1) was the possible appearance of a phenomenon of rising prices of goods due to the excessive printing of paper money, as a response to the crisis by the central banks of the world, thus called quantitative easing. This expansion of the monetary base is literally the definition of inflation. A runaway inflation with exponential growth that, according to yours truly, could become a phenomenon of hyperinflation, as occurred in 1923 in Weimar Germany.

The prediction I published did not come true, due in part to the fact that the world's central banks pulled all the tricks out of their magic hats, calming and managing (manipulating) the most important markets in the world until an apparent calm was generated.

11 years after that article and 100 years after the hyperinflation event in Weimar Germany, my apprehensions have not disappeared, but on the contrary, life has become more expensive globally, due to various events, not only financial.

The response of the markets to the disruption caused by the pandemic, the war in Ukraine and other events noted in previous articles (2) has been one of resilience and recovery. However, there is systemic wear and tear that is developing and has no reverse; the end of the leadership of the US dollar as the world reserve currency, mainly due to the excess debt burden (3) of the largest economies.

The end of the dollar standard may become the biggest economic event of the century. Regardless of your financial position or strength, it is most likely that a financial event of this type will affect you.

The world economy is currently slowing down due to higher interest rates that make credit more expensive and attempt to contain the prevailing inflation. This decrease in the velocity of money is a symptom of the action of central banks.

The day the end of the dollar standard is unleashed, central banks will find themselves between a rock and a hard place, trying to find a solution to a devalued dollar, printing money and lowering rates, while trying to save the economy and stick to another standard, which could again be gold, bitcoin or another basket of assets that generates the confidence and stability required by the markets.

If an ordinary person like me can see these high-level events happening in slow motion, it is assumed that large economic interests can see them too and would be taking some precautions against possible scenarios of a change from the dollar standard.

I think that one of those safeguards is the implementation of SOFR (Secured Overnight Financing Rate), which is the mechanism that defines credit interest rates around the world (4). This is a mechanism that began to operate this year and that, unlike the previous mechanism (LIBOR), has associated insurance against rate changes that negatively affect the granting of credits of financial derivatives. This insurance would cover any loss at the time of unforeseen variations when collecting the credits. This mechanism would be a measure that would protect large capitals (creditors) and would mean a sharp sword over the head of every debtor, apart from requiring large emissions of fresh money, which would simultaneously generate more inflation.

100 years after the Weimar hyperinflation, a pound of bread no longer costs billions of marks, but history sometimes rhymes and the dollar could give us a hyperinflationary surprise if what I have been talking about for more than a decade comes to pass. 

Blessings,

Luis Leighton

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