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Hyperinflation, Money Demand, and the Crack-up Boom
Hyperinflation, Money Demand, and the Crack-up Boom
In the early 1920s, Ludwig von Mises became a witness to hyperinflation in Austria and Germany — monetary developments that caused irreparable and (in the German case) cataclysmic damage to civilization.
Mises’s policy advice was instrumental in helping to stop hyperinflation in Austria in 1922. In his Memoirs, however, he expressed the view that his instruction — halting the printing press — was heeded too late:
Austria’s currency did not collapse — as did Germany’s in 1923. The crack up boom did not occur. Nevertheless, the country had to bear the destructive consequences of continuing inflation for many years. Its banking, credit, and insurance systems had suffered wounds that could no longer heal, and no halt could be put to the consumption of capital.1
As Mises noted, hyperinflation in Germany was not stopped before the complete destruction of the reichsmark. To illustrate the monetary catastrophe, one may take a look at the exchange rate of the reichsmark against the US dollar. Before the start of World War I in 1914, around 4.2 marks would buy 1 US dollar. As soon as war action began, the convertibility of the mark was suspended and paper marks (papiermark) were issued, largely for financing war-related outlays. In 1918, after the end of World War I, 8.4marks bought 1 US dollar.2 In December 1919, the mark had depreciated to 46.8 per US dollar, and in December 1920 to 73.4 per dollar.
In July 1922, the US dollar cost 670 marks. When French and Belgian troops occupied the Rhineland at the beginning of 1923, however, the exchange rate of the mark plummeted to 49,000 marks per US dollar. On November 15, 1923, when hyperinflation reached its peak, the currency reform effectively made 1 trillion (1,000,000,000,000) papiermarkequal to 1 rentenmark, and as 4.2 trillion papiermark exchanged for 1 US dollar at that time, 4.2 rentenmark would equal 1 US dollar.3
Increases in the Money Supply
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On Borrowed Time
On Borrowed Time
There are a number of things you don’t want to hear a central banker say. One of those things just popped out of Janet Yellen’s mouth – “I don’t believe we will see another financial crisis in our lifetime.” That has to be up there with Irving Fisher’s deathless observation from 17 October 1929 that “Stock prices have reached what looks like a permanently high plateau” or John Maynard Keynes’ comparably adept forecast from 1927 that “We will not have any more crashes in our time.”
So far, so anecdotal. How about some data to back up the thesis that, as Thorstein Polleit puts it, the super bubble is in trouble ?
First, define your Super Bubble. We can do this in two ways. One relates to longevity (how long has the bull run lasted ?), the other to valuation (how expensive is the market now ?). The global bond bull began back in 1981, when 30 year US Treasury yields peaked at 15.2%. Now, over 35 years later, long bond yields are below 3%.
Polleit expresses it a little differently, citing the p/e ratio of bonds so that they might more fairly be compared to stocks. To calculate the p/e ratio of a government bond, he divides 1 by the 10 year government bond yield. His results are shown below.
Source: Thomson Financial / Thorstein Polleit
¹For bonds, calculated as 1 divided by the 10 year government bond yield
In his words,
You do not need to be a financial market wizard to see that especially bond markets have reached bubble territory: bond prices have become artificially inflated by central banks’ unprecedented monetary policies. For instance, the price-earnings-ratio for the US 10-year Treasury yield stands around 44, while the equivalent for the euro zone trades at 85. In other words, the investor has to wait 44 years (and 85 years, respectively) to recover the bonds’ purchasing price through coupon payments.
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