• Rasheed Saleuddin

Is Weimar Germany-style hyperinflation inevitable?

It somehow seems so convincing, especially when well-known goldbugs and famous “Big Short” hedge fund managers repeat and retweet it: Governments can’t help themselves and will eventually will print so much money that hyperinflation – a catastrophic erosion of the value their own fiat currency – is the inevitable result.

It's getting hard to avoid. Parallels are being drawn between 1921 Weimar Germany and the United States of 2021 (see Michael Burry below). USD is being “printed” so fast that we will soon need wheelbarrows of cash to do our shopping as in Germany (above), and gold, silver, real property and, now, Bitcoin will be the only effective stores of value in the upcoming hyperinflation winter.

Bitcoin maximalists have taken Satoshi’s dream of censorship proof decentralized payments and focused more recently on BTC’s anti-inflation properties: Bitcoin is a hedge against profligate government spending that will end with the demise of the US dollar’s purchasing power.

The hyperinflation history functions for Bitcoin’s best shillers as an anti-tulip allegory. Countering the “irrational” bubble hypothesis, maximalists and their "HODL" followers justify ever-increasing BTC prices by pointing to the inevitable erosion of dollar purchasing power. BTC should rise in price because it is supply-limited, and thus an inflation hedge, while the US dollar is doomed to be hyperinflated to zero value as denominated in BTC, real property, or gold.

How does (1920s) Weimar Germany, invoked by Michael Burry and Bitcoin maximalists, compare to the 2021 United States?

I will cover this subject in more detail in my Before and Beyond Bitcoin series next week. In the meantime here is a very short summary of the Weimar problem.

Certainly, M2 has gone hyperbolic in recent months (see below). Even a cursory understanding of the economic history of the period reveals, however, that Weimar Germany has few if any parallels with the current monetary and fiscal situation of the US. I supervised the undergraduate interwar economic history course at the University of Cambridge last year, and my intelligent and thoughtful Gen Z student economists all understood that the inflation troubles Weimar Germany offer no lessons for today’s United States, given that the crisis was caused by (1) an external hard money shock (Germany were to pay an (initially) overwhelming gold-denominated reparations bill) combined with (2) declining real output and (3) concerted German government action to lower its external burden while hesitating to initially inflict economic pain on its citizenry.

The German government feared losing power if it taxed and deflated wages, choosing instead to make itself an economic basket case in the face of potentially overwhelming demands from other countries for gold-denominated external payments.

Is the US currently in anything resembling the same situation as Weimar Germany? It is hard to imagine the US being subject to an external payment demand in metallic money equal to 60% of its exports annually. It is equally unlikely that the US government would purposefully (and successfully) sabotage its own economy and leave it in ruins if faced with such an external shock.

Bitcoin may or may not be a useful inflation hedge, functioning as a store of value in uncertain times (it certainly isn’t currently much of a medium of exchange). In fact, I am not even suggesting that hyperinflation cannot occur in the US sometime in the future. However, it should be clear that the Weimar history is nothing more than a historical curiosity as compared to the present-day currency hegemon’s current economic situation. We need a different model of the risks to the USD. So far, a slow bleed versus other major currencies in 2020 (though still above its 15-year average, and gold hasn’t done much) has been the result of recent monetary and balance sheet expansions.