John Mauldin shares with his readers a private letter from the Boston Consulting Group.
David Rhodes and Daniel Stelter analyze the current financial/economic situation and the solutions being devised by Western governments and go on to tut-tut what is being done, proposed and implemented.
Let me just jump straight to the conclusion where we have this pearl:
“The euro zone needs a comprehensive plan to deliver a combination of higher inflation (to reduce real debt and address diverging unit-labor costs), deleveraging in the periphery, and higher consumption in the northern countries. ”
And there you have it. Do more of the same and ensure that those that are not yet mired in stifling debt do get into it so that in time we should all be equally in the shit pool.
Throughout the entire analysis, not a mention of the monetary system. Not one. Not even by implication. But what Messers Rhodes and Stelter do say should be done is…. wait for it… deliver more inflation.
You can read the letter if you wish. You may have to subscribe to Mauldin’s letter which is free and, anyway, often contains interesting information and data. But the long and the short of this “analysis” is that governments should simply do more of what has already been done till now. The only difference is that now they should do it in spades… you know… go nuclear.
There are two ambiguous paragraphs in this letter. The first one states that: “Take, for example, the history of hyperinflation in Germany in the early 1920s. The German Reichsbank funded the government with newly printed money for several years without causing inflation. But once the public lost trust in money, people started to spend it fast. This led to higher demand and an inflationary spiral.Today the velocity of money in the U.S. is at an all-time low of 5.7. If the number of times a dollar circulates per year to make purchases returned to the long-term average of 17.7, price levels in the U.S. would rise by 294 percent over that periodóunless the Federal Reserve simultaneously reduced its balance sheet by $1.8 trillion. Some inflation is probably attractive to those seeking to reduce debt levels.”
The second paragraph states that: “A recent article in The Economist compared the implied adjustments for the periphery of Europe with developments during the 1930s leading to the Great Depression. Back then, adherence to the constraints of the gold standard prevented an adjustment, and Germany had to achieve an internal devaluation to regain competitiveness. Although very few expect a repetition of the tragedy of the 1930s, it is obvious that a strategy of saving our way out of the crisis will not only fail but will run the risk of triggering significant tensions in Europe.”
I am unclear as to whether Rhodes and Stelter are suggesting that German interwar inflation was a clever strategy that yielded positive results. It certainly reads that way to this reader. If indeed this should be the case, Rhodes and Stelter are way off the mark… in my humble opinion… the opinion of an uninitiated geezer typing away at an $800 computer in some obscure corner of the world.
I am no Boston Consulting Group contributor but I have two things to mention at this point. First, German productivity in the interwar period did not pick up till Hitler and his central banker Hijalmar Schacht devised a system that is in all respects similar to a Debt Free Fiat Monetary system. Essentially, they cut the central bank out of the monetary deal and created a currency (MEFOs) that was issued directly by the state. Essentially, Hitler made use of Fiat Money but the crucial difference was that the productivity and profit generated by this new money were no longer leaked out of society to third party banks banks. Rather, productivity and interest were recycled within German society thereby increasing wages, savings, disposable income and investment. This strategy in turn allowed Germany to rearm despite the embargoes that had been imposed by the sponsors of the Treaty of Versailles. This is not a judgment of what was done with those profits. It is simply a statement of fact. Which, by the way, in turn may also explain Germany’s current reluctance to allow the ECB to create debt based inflation to monetize the sovereign debt of individual EU member states.
The second thing is this: