Copyright 2012 by John T. Reed
Here is the first paragraph from the top story on the 9/7/12 Wall Street Journal front page:
The European Central Bank, acknowledging that Europe’s debt crisis has reached a critical stage, said it was prepared to use its most powerful tool—its printing press—to save the euro.
The headline was that stock markets around the world rallied on the news.
The planet has lost its mind.
Actually, I could state it more technically. How long does it take a continent to forget the most horrible financial crisis in all its history? Apparently 88 years. That is how long it has been since the hyperinflation in the Central Powers countries (World War I’s losers) ended in 1924.
No one who knew the history of that time would ever turn the printing presses on again to solve sovereign debt problems. I can’t believe Germany and Austria, the two main sufferers in early 1920s hyperinflation, are allowing this to happen. Does this mean that 88 year after the end of World War I—2033—they will do another holocaust?
Why did the stock markets go up all over the world? Ask Niall Ferguson. He is a Harvard financial historian. He says the average CEO only got into the business world 25 years ago and thus only knows 25 years of history. In light of Santayana’s admonition that those who do not learn from history are condemned to repeat it, only knowing 25 years of history is a really stupid omission in the education of financial decision makers.
Actually, these guys are useful idiots. They prolong the time period when those of us who know financial history can get out of the way of the train that is coming. But that requires that you NOT be an idiot and waste that extra time to prepare.
I got religion on financial history in 2008. kSeeing the horrible crash in real estate, I decided to write a book that, had you read and followed its advice in the early 2000s, would have saved you from being hurt by the Subprime Mortgage crash. That book, Best Practices for the Intelligent Real Estate Investor,
has a chapter titled “The history of real estate investment.” Within that chapter are multiple timelines.
One shows the price-earnings ratios during the 20th century. Another has the interest rates on U.S. government bonds and home mortgages and the spread between them going back to 1890. Another shows the inflation rate and the home price appreciation rate for each year starting in 1914 for the CPI and 1890 for home prices. Another shows the maximum ordinary income tax rate, trigger income level to making you pay that rate, and the long-term capital gains tax rate for every year since the income tax was passed in 1913. Another shows the major income tax events related to real estate since 1913. Another shows the booms and recessions in the U.S. since 1857. Another has the important major, non-tax events in real estate history. and there are a number of other tables and discussions of other real estate historical events. After you read it, you lose your “I only know 25 years of financial history” naivete which is an extremely important step in the education of a real estate investor.
To my surprise, I find myself often referring to that chapter in my other writings.
My book How to Protect Your Life Savings from Hyperinflation & Depression also has a history chapter titled “History of Inflation and Deflation.” It covers 6,000 years of inflation and deflation episodes and related events.
After my wife, a federal reserve bank examiner, proofread it, she told me to put in a statement that readers should not skip over the chapter because the timelines are daunting to read. They should force themselves to read every line of it.
I recommend that readers read the books about hyperinflation around the world in the 20th and 21st centuries. But if you are too lazy to do that, at least read my chapter summarizing them. It should cure you of thoughts like “it can’t happen here” or that the government would never be so stupid as to “print” so much money that the value of the currency fell to zero. The history shows you that governments are always too stupid to refrain from doing that when they cannot borrow enough to pay their bills.
The stock markets that went up are propelled by Niall Ferguson’s 25-years-of-history-only ignoramuses. And central banks are run by people whose hyperinflation-veteran grandparents died forty years ago.
Europe’s failure to remember its own 88-year-old history will doom them to repeating the horror happened to their ancestors 88 years ago. That will hurt America because Europe is one of our main trading partners.
But there is a chance that watching Europe’s ECB “printing-press”-induced hyperinflation in the next several years will scare Americans enough to head off our own imminent, but a few years behind the Europeans’, hyperinflation.
Hyperinflation is easy to end. You just repeal the legal tender laws. That allows people to reject the U.S. dollar and use stable foreign currencies instead. And the cure works 100% overnight.
But it is not politically easy to repeal the legal tender laws because it forces the government to reduce its spending to the amount of taxes it receives. At present, the U.S. is spending $3.6 trillion a year and collecting only $2.4 trillion in taxes. That means ending the legal tender laws, which would make “printing” the money to pay bills useless, would force a $3.6T - $2.4T = $1.2T cut in federal spending or $1.2T ÷ $3.6 T = 33%. Such a cut would be impossible unless you made huge cuts in Medicare, Social Security, and defense. Thus, the federal elected officials will “print” money instead for as long as they can get away with it—I estimate about 6 months to 2 years.
But maybe, just maybe, if the Europeans do this to themselves first and it appears on our TV sets, we will not let the politicians do that to us. The problem is, I cannot find any country that did that in 6,000 years of timelines. So you should take the preparatroy steps that I have advocated in my headlines news articles and in my book How to Protect Your Life Savings from Hyperinflation & Depression.
John T. Reed