German Hyperinflation & the Dawes Plan

Posted Dec 26, 2018 by Martin Armstrong

The German Hyperinflation was by NO MEANS about inflation created by an increase in the money supply under the Quantity Theory of Money (QTM). Today, Angela Merkel has forcefully imposed Austerity upon the whole of Europe because she really does not understand what even caused the hyperinflation. It was at the Palace of Versailles outside Paris when Germany signed the Treaty of Versailles on June 28th, 1919 with the Allies, officially ending World War I. AT that time, the English economist John Maynard Keynes attended the peace conference. However, Keynes left in protest of the treaty becoming the first outspoken critic of what would prove to be the most punitive agreement that only set the stage for World War II and the rise of Adolf Hitler in 1933.

John Maynard Keynes wrote in his The Economic Consequences of the Peace, which he published in December 1919, that the harsh war reparation payments and other harsh terms that they were to impose on Germany by the treaty would lead to the financial collapse of the country. Keynes further warned that this Treaty would result in serious economic and political repercussions on Europe and the world as a whole. The political trend at the time refused to listen. This was all about punishing Germany.

We must also understand that wars are created by politicians – not the people. Prior to the Treaty of Versailles signed in June 1919, there was the German Communist Revolution which began the Weimar Republic. It was this 1918 German Communist Revolution which was inspired by the 1917 Russian Revolution that resulted in the overthrown of the monarchy in Germany ending the Emperors and the king of Prussia. The revolutionary period lasted from November 1918 until the adoption in August 1919. But what also seems to be omitted from many accounts taught in school, is the simple fact that the German government interfered in the Russian Revolution and was instrumental in creating the Russian Revolution.

The German Emperor Wilhelm II Imperial Government actually feared that Russia would enter World War I. The rising communist movement in Russia was anti-war. Germany saw a chance for victory in Europe if it kept Russia out of the war. Hence, Germany supported the Communist anti-war sentiment of the Bolsheviks in Russia. Germany permitted Vladimir Lenin (1870-1924) to travel in a sealed train wagon from his place of exile in Switzerland through Germany, Sweden, and Finland to Petrograd. Since the start of the February Revolution in Russia, Lenin was trying to figure out a way to get back into Russia. Germany aided his return assuming he was anti-war and would thus keep Russia out of World War I. Lenin returned to Russian on April 16th, 1917. Within months of arriving, Lenin led the October Revolution in Russia and the Bolsheviks seized power and indeed Russia withdrew from the world war. According to Leon Trotsky, the October Revolution would not have succeeded without Lenin.

With the success of the October Revolution in Russia and the Dream of a new Marxist Utopia, the Germans entered into a civil war and invited Lenin to please take Germany. Clearly, the scheme of the Imperial German government had backfired. It not only was instrumental in creating the Soviet Union by turning over Russia’s socialist transformation decisively into the hands of the Bolsheviks, its plan led to the overthrow of its own hold on power. This is all recorded in contemporary newspapers (see New York Times Nov 11, 1918).

The Prussian Emperor Wilhelm II (1859-1941) found himself in the midst of troubling economic and social disorder. A series of mutinies by German sailors and soldiers undermined Wilhelm II’s government and he lost the support of his military which enabled the German people to revolt. Wilhelm II was forced to abdicate on November 9th, 1918. The very following day, a provisional government was announced composed of the Social Democratic Party (SDP) and the Independent Social Democratic Party of Germany (USDP). To this day, the SDP has remained as a major part against all opposition. Then in December 1918, German elections were held for a National Assembly with the goal of creating a new parliamentary constitution. On February 6th, 1919, the National Assembly met in the town of Weimar and formed the Weimar Coalition. They also elected SDP leader Friedrich Ebert (1871-1925) as President of the Weimar Republic who served from 1919 until 1925.

It was Friedrich Ebert who had to deal with the Treaty of Versailles. When the terms became known on May 7th, 1919, the German people rose in protest. Ebert himself did denounce the treaty as “unrealizable and unbearable” yet he understood that Germany was not allowed to negotiate nor reject the treaty. Ebert even asked Hindenburg if the army could put up a defense if the Allies renewed hostilities. Hindenburg said that the army was not capable of resuming the war even on a limited scale. Ebert then advised the National Assembly to approve the treaty, which it did by a large majority on July 9th, 1919.

The Treaty of Versailles commanded Germany to reduce its military, take responsibility for the World War I, relinquish some of its territories and pay exorbitant reparations to the Allies. It also prevented Germany from joining the League of Nations at that time. Thus, the treaty punished the German people for the sins of its government. Indeed, the military created World War I for it is generally accepted that Wilhelm II was largely just a ceremonial figurehead. During the Sarajevo crisis with the assassination of the Archduke Franz Ferdinand of Austria on June 28th, 1914, he was Wilhelm’s friend and he offered to support Austria-Hungary in crushing the opposition who assassinated the Archduke. Wilhelm went on his annual cruise of the North Sea July 6th, 1914. Wilhelm returned to Berlin on the 28th of July that year and eagerly read a copy of the Serbian reply. Wilhelm wrote his comment on it:

“A brilliant solution—and in barely 48 hours! This is more than could have been expected. A great moral victory for Vienna; but with it every pretext for war falls to the ground, and [the Ambassador] Giesl had better have stayed quietly at Belgrade. On this document, I should never have given orders for mobilization.”

Wilhelm did not know at the time that the military had convinced the Emperor of the Austro-Hungarian Empire, Franz Joseph I (b 1830; 1848 – 1916), to sign a declaration of war against Serbia. As a direct consequence, Russia began a general mobilization to attack Austria in defense of Serbia. Wilhelm wrote a lengthy commentary containing his observations:

“… For I no longer have any doubt that England, Russia and France have agreed among themselves—knowing that our treaty obligations compel us to support Austria—to use the Austro-Serb conflict as a pretext for waging a war of annihilation against us … Our dilemma over keeping faith with the old and honourable Emperor has been exploited to create a situation which gives England the excuse she has been seeking to annihilate us with a spurious appearance of justice on the pretext that she is helping France and maintaining the well-known Balance of Power in Europe.”

In school, I remember being taught that World War I was the result of treaties among governments which then force one to come to the aid of another. Clearly, the Treaty of Versailles set the stage for World War II by its very crushing terms that nobody would be able to meet. The Treaty of Versailles set out a plan for reparations to be paid by Germany requiring to them to pay 20 billion gold marks, as an interim measure, with the final amount to be decided upon at later date. In 1921, the London Schedule of Payments set the German reparation figure at 132 billion gold marks divided into various classes, of which only 50 billion gold marks were required to be paid.

Meanwhile, the industrialists of Germany’s Ruhr Valley lost their factories in Lorraine. Germany had seized Lorraine back in 1870 and now this was to also part of the demands be returned to France. There was also an occupation of the Ruhr industrial area by France and Belgium. The Germans affected by the Treaty and the seizure of their property by France and Belgium now demanded hundreds of millions of marks as compensation from the German government and they paid the Ruhr Valley industrialists for their losses. This also contributed to the German Hyperinflation crisis and it effectively reduced the ability of the German economy to recover.

While the narrow neo-classical economic theory, hyperinflation is rooted in a deterioration of the monetary base, there is little attention paid to the collapse in public confidence that there is a store of value that the currency will be able to command later. Hence, people do not save and the velocity of money increases as people attempt to spend it as fast as they get it. There is a perceived risk of holding currency which rises dramatically at the core. Interest rates rise because they are the premiums people expect in the future when loans are repaid to make a profit. The hyperinflation that was set in motion by the Treaty of V was not limited to Germany. We also saw hyperinflations that I defined as a sharp and sudden doubling in prices (50% decline in the purchasing power of a currency) is less than three months in Austria and Hungary as well during this same period. In the case of Austria, hyperinflation began in October 1921 and continued into September 1922. In Hungary, the hyperinflation unfolded between March 1923 and February 1924. Philip Cagan’s (1956) The Monetary Dynamics of Hyperinflation widely accepted a definition which defines it as a price-level increase of at least 50% per month. However, even Cagan had to make exceptions because this cannot be defined precisely as some percent that is crossed will result definitively in hyperinflation. Therefore, the accepted definition remains rather vague and ill-defined.

In the case of Austria. here there was a separate treaty known as the Treaty of St. Germain which declared that the Austro-Hungarian Empire was to be dissolved. Under article 177 Austria, along with the other Central Powers, accepted responsibility for starting the war. The new Republic of Austria was to then consist of most of the German-speaking Danubian and Alpine provinces in former Cisleithania. Hungary was now split and Austria was commanded to recognize the independence of Hungary, Czechoslovakia, Poland, and the Kingdom of Slovenes, Croats, and Serbs. The Treaty of St. Germain also included ‘war reparations’ of vast sums of money that could also never economically be paid.

In the case of the Austrian Hyperinflation, the foreign-exchange value of the Austrian crown reflected the catastrophic depreciation of this event. In January 1919 one dollar could buy 16.1 crowns on the Vienna foreign-exchange market; by May 1923, a dollar traded for 70,800 crowns. According to the provisions of the Treaty of St. Germain, the newly created Republic of Austria had to overstamp the old paper money of the former Austro-Hungarian Empire still circulating in its territory, then had to replace the overstamped banknotes with new ones, and finally had to introduce an entirely new currency. To complete the first step, the circulating banknotes had to be overstamped with the inscription DEUTSCHÖSTERREICH, and new banknotes were also issued with this feature. Later, still under the name Oesterreichisch-ungarische Bank, banknotes were printed using the German-language clichés on both sides yet still displayed the DEUTSCHÖSTERREICH inscription. From 1920 onward, a new stamp appeared on banknotes: “Ausgegeben nach dem 4. Oktober 1920”. Next, in 1922 a new series of Krone banknotes was introduced with a completely new design to complete the second step. This series contained 1 Krone, 2, 10, 20, 100, 1000, 5000, 50 000, 100 000 and 500 000 Kronen, later 10 000 Kronen (1 000 000 Kronen was planned but not issued). Finally, in 1925, as the third step was to issue a new series of Austrian Schilling banknotes.

During this period, the printing presses worked night and day churning out the currency. At the meeting of the Verein für Sozialpolitik (Society for Social Policy) in 1925, Austrian economist Ludwig von Mises told the audience:

During the first five years after World War I, coal was scarce in Europe. France sought coal for its steelmakers from Germany. But the Germans needed coal for home heating and for their own steel industry, having lost many of their steel plants in Lorraine to the French. As a means of protecting their own growing German steel industry, the German coal producers—whose directors also sat on the boards of the German state railways and German steel companies—began to leverage high costs though shipping rates on coal exports to France.[3]

In early 1923, Germany defaulted on its war reparations payments and German coal producers refused to ship any more coal across the border. In response to this, French and Belgian troops occupied the Ruhr River valley inside the borders of Germany in order to compel the German government to continue to ship coal and coke in the quantities demanded by the Versailles Treaty, which, Germany which characterized as onerous under its post war condition (60% of what Germany had been shipping into the same area before the war began).[4]

This occupation by the French military of the Ruhr, the centre of the German coal and steel industries outraged the German people. They passively resisted the occupation, and the economy suffered, contributing further to the German hyperinflation.

Hyperinflation thus unfolded in Germany because those with money saw what Lenin had done in Russia and sent whatever wealth they had to other places, particularly the United States.  They got their wealth out through using foreign coins, but also collectibles such as stamps and coins in particular. By the end of World War II, most German rare stamps and coins were actually in the United States and were slowly making their way back to Germany during the 1960s and 1970s.

The Weimar Republic then just printed money to pay reparation payments and the entire system collapsed.

The Dawes Plan (as proposed by the Dawes Committee, chaired by Charles G. Dawes) was an initial plan in 1924 to resolve the World War I reparations that Germany had to pay, which had strained diplomacy following World War I and the Treaty of Versailles.

The Dawes plan provided for an end to the Allied occupation, and a staggered payment plan for Germany’s payment of war reparations. Because the Plan resolved a serious international crisis, Dawes shared the Nobel Peace Prize in 1925 for his work.

It was an interim measure and proved unworkable. The Young Plan was adopted in 1929 to replace it

Timing is absolutely everything. DO NOT ANTICIPATE anything. Time is MORE important than price.

Dow & the Future

Posted Dec 23, 2018 by Martin Armstrong

QUESTION: Mr. Armstrong; I understand at the WEC you told the audience the stock market would correct sharply into January/February. For those of us who could not afford to attend a WEC, are we to expect the slingshot you have been warning should take place?

Thank you;

HP

ANSWER: Yes. Timing is absolutely everything. DO NOT ANTICIPATE anything. Time is more important than price. But we also act on the reversals in conjunction with time. We have people already declaring this is a bear market. Many may not even be old enough to have traded a bear market. Let me explain one thing. We are NOT dealing with a bear market. We are dealing with a period where we must set up everything for what is to come. I have been warning that normally after an 8-year bull market, there is traditionally a correction.

The final prognosticate on time will arrive with this year’s closing. We need the year-end closings and the computer will then forecast what is to come between now and the end of this cycle wave in January 2020.

How we approach this will be critical. Nonetheless, we have a lot on the horizon. Besides BREXIT in March, we then have the May elections for the EU. The number of people who may be elected that are actually anti-EU is likely to rise. The European election will be as chaotic and we expect the Democrats to make the entire world economy unstable as they make a lot of noise in hopes of driving Trump from office in 2020.

The market will have to absorb a lot of political turmoil in 2019 and we are witnessing the rise of tensions on a grand scale.

We will have the 2019 Outlook Report out in January. We are trying to finalize the contracts for a European WEC in Rome during the first week of May. We will let everything know when that is confirmed.

The original design of the Federal Reserve in 1913 was PERFECT.

The Fed Relies Indirectly on the Banks & Cannot Stimulate the Economy Directly

Posted Dec 21, 2018 by Martin Armstrong

QUESTION: Hello,
Since the Fed ‘created’ ‘money’ after 2008 that was then deposited back at the Fed by the recipient banks ( say,75% of it), it is not easy to see why the Fed is to blame for the credit explosion since 2008- nor for the very slow ( like a paralytic centipede) hike in Fed Funds that seems already as I write to be seen as a problem.
Surely it is the banks who truly created the money ( out of nothing as usual) by financing the purchase of EXISTING assets at ever-rising prices (and also consumer spending) rather than new business expansion?
In other words, the fault is at the bottom to be laid at the door of the banks. They created the wrong kind of credit bubble ( not that any such is ever a good idea).
What say you, Sir?
Many thanks
B.

ANSWER: There is a deeper problem that nobody addresses. The entire Keynesian philosophy of increasing the money supply was based upon the practice whereby private money was being created during each crash since 1857. It worked perfectly. Here is a Depression Scrip for $1 to supplement the money supply during a crisis. There was nothing wrong with this concept.

The original design of the Federal Reserve in 1913 was PERFECT!!!!!! It “stimulated” by purchasing corporate short-term paper which created an elastic money supply. The paper naturally matured and thus the money supply contracted. When Congress usurped the Fed in World War I and ordered it to buy only government bonds to fund the war, they NEVER returned the Fed to its original design.

Changing the structure of the Federal Reserve has altered everything. Now the Fed “stimulates” buying government debt EXCLUSIVELY! It buys in that debt it THINKS from the banks, but foreign governments were selling it to them as well – particularly China. Therefore, the money NEVER made it directly into the economy. The banks complained to the Fed so it then created excess reserves DEFEATING the very Quantitative Easing.

Therefore, the structural alteration of the Federal Reserve for World War I transformed the theory of Quantitative Easing into an INDIRECT stimulus rather than DIRECT. They “hoped” the banks would lend but NEVER did. Interest rates did not decline on credit cards and consumer loans in proportion to what the Fed was doing. The entire stimulation theory fails BECAUSE the Fed does not act directly with the economy and relies on the banks

Roosevelt and Fed consolidation

Posted Dec 19, 2018 by Martin Armstrong

QUESTION: Hi Mr. Armstrong,

Quick question for you, as someone who grew up in Quebec in the 90’s, when Quebec was voting to separate. And now living in Alberta, and seeing the sheer anger here towards Canada, is there a legitimate chance Alberta moves towards the path of separation and actually brings it to a vote?
Thanks again

Mike

(as a kid growing up in Montreal, I wanted nothing to do with separation. If the vote was held today in Alberta, I would highly consider voting to leave Canada)

ANSWER: Alberta joined Canada in 1905. This separatist movement began precisely on the half-cycle of 112 years – 2017. What we are dealing with here is that when the Federal Reserve was formed in 1913, it was established with 12 branches. When the Fed was created, it was the solution to the Panic of 1907, which was set in motion by the disruption of the internal domestic capital flows caused by the San Francisco earthquake of 1906. The insurance companies were in New York. Consequently, the cash flowed to the West and a shortage developed in the East.

The original structural design of the Fed was to establish 12 branches to manage the capital flows domestically. Interest rates would decline where there was an excess of cash and rise where there was a shortage. This, they believed, would cause capital to move between the branches to balance the national capital flows and economy. Each branch acted independently to manage the capital flows. When crops would come to market, then Kansas would have an excess of cash and rates would decline as we can see from the table showing the rates set by each branch in August 1927.

When Roosevelt comes to power in 1933, he wanted to control the economy for his socialist agenda. He usurped the power of interest rates from the various branches of the Fed and consolidated then into Washington DC making it one-size-fits-all. He, therefore, abandoned the structural design of the Fed and ever since the capital flow focus has been international, not domestic.

This is the problem in Alberta. Governments have all followed Roosevelt post-World War II. In doing so, they have completely abandoned the proper management of their domestic economies and everyone is always focused on international capital flows and currency values with respect to trade. They have COMPLETELY ignored the fact that their domestic economies are not the same from one state or province to the next.

The commodity-producing states are booming when the financial states and at their lows. Our own model is warning that we have a commodity boom coming for the NEXT 8.6-year wave on the Economic Confidence Model. Right now, the stock market rallies and commodities linger. Central Banks will raise rates in the stock market booms to prevent inflation and that is when they put farmers and miners into bankruptcy.

I have called this the Texas-New York arbitrage. Here is a chart showing when oil peaks in price, it is typically counter-trend to the financial markets. Oil peaked in 2008 when the stock market was crashing. Once again, oil prices are down and Alberta suffers while the financial markets are booming in Toronto.

What is resurfacing is the regional differences within Canada as well as the United States. The one-size-fits-all policy of central banks with regard to interest rates pits East v West in both Canada and the United States. Farmers, oil producers, and miners are forced to pay higher interest rates when their economies are declining because of speculative booms in Toronto or New York.

This is the root cause of the regional separatist movements we are witnessing in Canada. The structure of the central banks was originally intended to manage the domestic capital flows. That has been part of the whole socialist agenda to abandon that policy and create the one-size-fits-all policy of Marxism. This is why Alberta SHOULD move to separate. The very economic survival is critical unless the central banks open their eyes and STOP this Keynesian manipulation of interest rates attempting to manage DEMAND which they fail to even understand. It is this Socialist philosophy which is destroying governments and reducing our standard of living to support a theory of Marx which resulted in the collapse of China and Russia. You cannot be just a little-bit pregnant.

Commodity cycle appears to be pointing to 2024 peak

Why Has Farmland Exploded in Price? The Accidental Trend Correlation

Posted Nov 29, 2018 by Martin Armstrong

Most people have little idea WHY big money was targeting buying farmland in Canada, USA, and Australia. It was more than just Chinese investment. With interest rates down to negative, capital has been looking for returns. They were buying farmland and then renting it out generally for 5%. This created what many call the farmland bubble which has now begun to burst in some Corn Belt states, such as Iowa, as interest rates begin to rise. In 2015, the average increase of 2.4% percent on the low end and up to 8% in some states where the crop yields were best. This has not been a small investor or spec market. This was driven by the big boys seeking yield thanks to particularly the European Central Bank (ECB).

The nominal high came in 1982 and the commodity boom peaked in 1980 and interest rates peaked in 1981. The rising dollar caused the correction in nominal terms declining into its low in 1987. The market began to recover while the days of inflation and goldbugs faded forging the final low in gold during 1999. As is often the case, people just never look at assets in terms of international value. The surge in prices of latter that domestic analysts have called a “bubble” truly reveal more of a Phase Transition type rally more than doubling in price when plotted in Euros. The key to any market lies hidden within the depths of international capital flows which are driven foremost by currency values.

The lack of individual investors infiltrating this market leaving the big agricultural bets being placed not on expectations of global food demand will increase over time, but looking simply for yield, has led most analysis astray. Institutions, like the pension fund TIAA-CREF, have been the big buyers throughout 2017. They have been looking for bargains as farm real estate values have started to decline. Small farmers are finding it difficult to borrow from the banks for a crop season which can involve loans into several millions of dollars. If crops are wiped out, then they have a real problem.

There have been stocks issued seeking to capitalize on the boom. Farmland Partners (FPI, NYSE) has been down about 20% since it was floated in 2014. It is a REIT which is a company that owns, operates or finances income-producing real estate. REITs were modeled after mutual funds to gather investors to collectively own valuable real estate and provide the opportunity to access dividend-based income and total returns. On its website, it states: “Farmland Partners Inc. is an internally managed, publicly traded (NYSE: FPI) real estate company that owns and seeks to acquire high-quality farmland throughout North America addressing the global demand for food, feed, fiber and fuel.” However, the play has NOT been the boom in commodities, but the yield from renting out the land.

Investors should be very careful with REITs because they tend to be illiquid and volatile.

When we look at the Array, we see turning points lining up for 2020/2021 and 2024 followed by 2026 and then 2028. The commodity cycle appears to be pointing to 2024. That is when we should see farmland values peak in real terms but keep in mind that it will all depend upon the particular region. The weather is going to kick in and that will reduce crop yields. Keep in mind that most of these REITs have entered this sector of the market for the wrong reason. It was not truly a commodity boom expectation as it was simply to get a 5% yield when interest rates were below that level. As interest rates rise above that 5% threshold, we will begin to see the big players bailout and begin to dump farmland at losses. Anyone looking to borrow against their land should use FIXED RATES only. If you decide to sell your land to the big boys while rates are still below 5%, the include a right of first refusal to buy it back at a reduced price when they decide to cut and run – which they will inevitably always do at the precise wrong time.

Kennedy – Roosevelt & Corruption?

Posted Nov 10, 2018 by Martin Armstrong

QUESTION: Mr. Armstrong; I had always heard that Kennedy made a fortune on Scotch. My question is, where they booze runners during the Prohibition?

Thank you

GR

ANSWER: No. But they actually used Roosevelt to secure that lucrative import trade of Scotch – my favorite drink. Joe Kennedy traveled to London in 1934 on the steam-driven ocean liner, the SS Europa. While he brought his wife with him he also brought James Roosevelt (1907 – 1991), the American president’s oldest son. The trip was portrayed as a please vacation, but bringing the President’s son was the clear signal it was not a vacation.

Kennedy’s main prize would be to gain the British rights to send Scotch whiskey, gin, and other imported liquors. He knew based upon inside information that Prohibition would be ended. Joe brought the president’s 25-year-old son to help organize a private visit with Winston Churchill.  He used Roosevelt’s son to get that contract. The deal paid off and Joe got the private meeting with Churchill and visited him at Churchill’s Chartwell home.

So you see, political inside favors have been going on a very long time. James Roosevelt was closely linked with Joseph P. Kennedy Sr. Many of James Roosevelt’s controversial business ventures were indeed aided by Kennedy. Jame’s dealings were often clouded. In fact, Treasury Secretary Henry Morgenthau even threatened to resign unless FDR forced James to leave a questionable company which became known as the National Grain Yeast Corp. affair (1933–35), which was believed to be just a front for bootlegging. It was James Roosevelt who lobbied his father to make Kennedy the ambassador to the United Kingdom.

James was a shading type of character in the eyes of many. Later on, during July 1938, there were allegations that he had used his political position to steer lucrative business to his insurance firm. He was then forced to publish his income tax returns and denied these allegations in an NBC broadcast and an interview in Collier’s magazine. This became known as the Jimmy’s Got It affair after Alva Johnston’s reportage in the Saturday Evening Post. Roosevelt resigned from his White House position in November 1938. The press was often highlighting how rich Jimmy was becoming when his father was a Socialist.