A Global Weimar

In the aftermath of WWI, the German economy was shattered. Large amounts of its physical capital had been destroyed, thereby undermining its potential even to produce the goods and services required for its own reproduction, let alone to produce a surplus product and surplus value, and thereby to grow. On top of that, the onerous terms imposed by Britain and France, as part of The Treaty of Versailles, required Germany to make massive payments of reparation to the victors in that war. The Weimar Republic that rose on the ashes of the war, in Germany, responded by printing money tokens, i.e. banknotes. The money they printed was used to pay those debts, but likewise also went into circulation in Germany itself. The result was inflation in Germany, and a devaluation of the currency. The more the currency was devalued, the more of it that had to be printed to cover the foreign debts. The result was a hyperinflation. The response to the moral panic over COVID19 is creating the same conditions, but now not just in one country, but in the most significant countries across the globe. A global Weimar is being created. 

In the 1960's, the US, as global hegemon, had the advantage that the Dollar acted as world currency. The prices of globally traded goods and services were priced in Dollars. In order to trade in the world market, businesses and nations had to acquire Dollars. Countries had to build up Dollar reserves, in the same way that previously they had built up gold reserves, which they used to settle their international accounts. As part of the global social-democratic settlement made after WWII, at Bretton Woods, countries traded at fixed exchange rates that were fixed against gold. For the Dollar, it was fixed at the rate of 1 oz. of gold to $30. This fixed rate continued for more than 20 years. In the 1960's, again reflecting this dominance of social-democracy, the US, along with other developed capitalist economies, created, or expanded greatly, welfare states. In the US, it was Lyndon Johnson's “Great Society”. As an early experiment in Modern Monetary Theory, the US government paid for this expansion of welfarism, by itself printing Dollars, in a similar way to that which Weimar had done in the 1920's, though not on the same scale. The vast amounts that the US also spent in fighting the Vietnam War, and the Cold War, was also financed by printing increasing amounts of Dollars. 

However, the US had an advantage that Germany did not have in the 1920's. The Dollar was as good as gold. Its price was fixed at $30 to the ounce of gold, and so, no matter how many Dollars the US printed, which it could then hand over to its creditors to settle its debts, the purchasing power of those Dollars remained unchanged. In essence, the US was destroying its currency without actually destroying it. It was buying goods and services from countries, across the globe, and paying for them with Dollars whose real value had been massively devalued, but whose nominal value was unchanged against gold, and against all these other currencies. Unlike the Weimar experience, therefore, the US was getting everyone else in the world to pay for its expansion of welfarism, and for its war in Vietnam. Eventually, something had to give. It did in 1971, when France got fed up of this situation, and demanded payment in gold rather than Dollars, and what is more, payment at the official exchange rate of $30 to the ounce. That would be a lot of gold. The US under Nixon quickly put a stop to it. Nixon removed the convertibility of the Dollar to gold, and at the same time, made it illegal for US citizens to hold gold as bullion. There followed a period in which it looked as though the global currency system would collapse. It ended with free floating exchange rates. 

In the meantime, with the fixed rates of currencies against gold being abandoned, the real value of the much depreciated Dollar, as a result of all that money printing became manifest. From its fixed rate of $30 to the ounce, the Dollar fell in value, by 1980, to $800 to the ounce, meaning that the Dollar had fallen to less than 4% of its previous value! Not anywhere near the kind of inflation, and destruction of the currency as Weimar experienced, but a massive amount all the same. Its nothing new. Throughout history, as soon as states were able to get control over the issuing of coins and other money tokens, they took advantage of being able to pay their debts in devalued currency, usually by minting gold and silver coins at less weight than their nominal value. In his Contribution to the Critique of Political Economy, Marx notes, 

“As a result of an historical process, which, as we shall explain later, was determined by the nature of metallic currency, the names of particular weights were retained for constantly changing and diminishing weights of precious metals functioning as the standard of price. Thus the English pound sterling denotes less than one-third of its original weight, the pound Scots before the Union only 1/36, the French livre 1/74, the Spanish maravedi less than 1/1,000 and the Portuguese rei an even smaller proportion. Historical development thus led to a separation of the money names of certain weights of metals from the common names of these weights.” 

(A Contribution To The Critique of Political Economy, Chapter 2, p 72) 

The fact that these gold and silver coins could be debased in this way, and yet still circulate as though they represented the same amount of gold or silver, and thereby, the same amount of social labour-time/value, is what enabled states to replace them with cheaper base metals, and with paper banknotes. And, states, via their central banks, could then print as many of these paper money tokens as they desired to finance their debts. It is what they have done, as in the case of Weimar, the US in the 1960's, in Zimbabwe, in Argentina to name but a few, and the result is always a massive rise in inflation. The state can achieve the same effect by increasing the amount of credit it provides via the banking system, as this credit itself acts as currency. It leads to the same kinds of inflation, but often taking the form of an inflation of asset prices, creating asset price bubbles, which then burst, creating a financial as opposed to an economic crisis. Such instances can be seen with the South Sea Bubble, Tulipmania, John Law's Mississippi Scheme, Railwaymania, The Tech Bubble, and the current property, bond and stock market bubbles. 

What all of these have in common is the delusion that money itself is value, rather than the reality set out by Marx that value is labour. If money is value, then the obvious road to fortune is simply to print more money! That was the delusion that John Law and the Perreire Brothers sold. It is the same delusion that resides behind MMT, and that has fuelled the economic polices of conservative social democracy over the last 30 years. It was also used by Stalin in the 1930's. Trotsky writes in The Revolution Betrayed, 

“During the first period of the five-year plan, on the contrary, all the sluices of inflation were opened. From 0.7 billion rubles at the beginning of 1925, the total issue of currency had arisen by the beginning of 1928 to the comparatively modest sum of 1.7 billions, which is approximately comparable to the paper money circulation of tzarist Russia on the eve of the war – but this, of course, without its former metallic basis. The subsequent curve of inflation from year to year is depicted in the following feverish series: 2.0 – 2.8 – 4.3 – 5.5 – 8.4! The final figure 8.4 billion rubles was reached at the beginning of 1933. After that came the years of reconsideration and retreat: 6.9 – 7.7 – 7.9 billion (1935). The ruble of 1924, equal in the official exchange to 13 francs, had been reduced in November 1935 to 3 francs – that is, to less than a fourth of its value, or almost as much as the French franc was reduced as a result of the war. Both parties, the old and the new, are very conditional in character; the purchasing power of the ruble in world prices now hardly equal 1.5 francs. Nevertheless the scale of devaluation shows with what dizzy speed the Soviet valuta was sliding downhill until 1934... 

The most utopian views of the period of military communism were thus restored on a new economic basis – a little higher, to be sure, but alas still inadequate for the liquidation of money circulation. The ruling circles were completely possessed by the opinion that with a planned economy inflation is not to be feared. This means approximately that if you possess a compass there is no danger in a leaking ship. In reality, currency inflation, inevitably producing a credit inflation, entails a substitution of fictitious for real magnitudes, and corrodes the planned economy from within. .. 

It is needless to say that inflation meant a dreadful tax upon the toiling masses. As for the advantages to socialism achieved with its help, they are more than dubious. Industry, to be sure, continued its rapid growth, but the economic efficiency of the grandiose construction was estimated statistically and not economically. Taking command of the ruble – giving it, that is, various arbitrary purchasing powers in different strata of the population and sectors of the economy – the bureaucracy deprived itself of the necessary instrument for objectively measuring its own successes and failures. The absence of correct accounting, disguised on paper by means of combinations with the “conventional ruble”, led in reality to a decline of personal interest, to a low productivity, and to a still lower quality of goods... 

The question of the fate of the chervonetz has occupied a prominent place in the struggle of factions in the Communist party. The platform of factions in the Communist party. The platform of the Opposition (1927) demanded “a guarantee of the unconditional stability of the money unit.” This demand became a leitmotif during the subsequent years. “Stop the process of inflation with an iron hand,” wrote the émigré organ of the Opposition in 1932, “and restore a stable unit of currency,” even at the price of “a bold cutting down of capital investments.” The defenders of the “tortoise tempo” and the superindustrializers had, it seemed, temporarily changed places. In answer to the boast that they would send the market “to the devil”, the Opposition recommended that the State Planning Commission hang up the motto: “Inflation is the syphilis of a planned economy.”” 

(Chapter 4) 

This same process is what central banks around the globe have been doing for the last 30 years. The difference being that, instead of using this additional money and credit to stimulate economic activity and investment, they have used it to encourage speculation in financial and property assets. Its on that basis that the Dow Jones rose around 1300% between 1980 and 2000, compared to US GDP rising by only 250%. But, following the crash of 2008, even greater amounts of money printing has been undertaken, sending the Dow Jones to 3 times the level it was at in 2009, and even twice the level it reached at its peak prior to the 2008 crash. Its often said that all this money printing had not led to hyperinflation this time, as in the past. But, of course it has, its just that the hyperinflation has been deliberately directed into the inflation of asset prices. The Dow Jones in 1980 stood at less than 1,000, today, even after 2008, and after the drops of recent weeks, it stands at over 20,000! And the same astronomical levels of inflation can be seen in the price of bonds, which now produce negative yields for trillions of dollars worth of those bonds, and in property prices which stand at around 500% and more of their long-term average. 

Now, governments propose to repeat the experiment of Weimar on a global scale, in addition to these vast amounts of liquidity that have been flying around asset classes, like a game of pass the parcel. In 2008, it cost the British state £2 trillion to bail out the banking and financial sector. Today, the government proposes to bail out the entire economy. The cost of doing so is phenomenal. Rather than £2 trillion the cost is likely to be more like £20 trillion or about the equivalent of ten year's GDP. It puts the government's proposed £300 billion of financing to cover guaranteed loans and so on into perspective. Marx once wrote that crises cannot be resolved by having central banks buy up all of the unsold goods, but what the government is now proposing is even worse. 

Whether the government hands over money directly to businesses to cover their loss of sales, and in order that those businesses can pay their workers and suppliers, or whether it does so by providing banks with the liquidity so that those banks can make loans to those companies, the effect is the same. It amounts to a vast amount of additional liquidity being put into circulation. But, unlike the liquidity put into circulation over the last 30 years, which was directed into financial and property speculation, and so drained liquidity out of general circulation, all of this additional liquidity is being pumped directly into financing consumption, and commodity circulation. Its what is called helicopter money. That is its based on a proposal put forward by Ben Bernanke some time ago that if normal means of increasing liquidity didn't work, central banks could simply print money, and throw it from helicopters, so that people would pick it up, and then spend it. This is the crazy Alice In Wonderland capitalism that conservative social-democracy has created over the last 30 years as a result of promoting the inflation of asset prices over the needs of the real economy, and real capital accumulation. 

This proposal has already been implemented in a number countries, not by throwing money from helicopters, but by the easier method of simply sending people cheques for $1,000 or so. But, now countries across the globe are implementing a similar policy. They are doing so in similar conditions that led to hyperinflation in Weimar, Zimbabwe and elsewhere. In other words, in Weimar, production capacity had been massively curtailed. Simply printing money, and putting it into circulation had the inevitable result that when people came to spend all of these notes, there was not enough supply of goods and services as their counterpart. So, the value of each note fell, it was depreciated, and so the prices of the goods and services of which it was a unit of account rose. As those prices rose, so wages rose, and the prices of inputs into goods rose. The government's expenditure also rose, which meant that it then printed more money to cover that expenditure, and as more money was printed, so that money was depreciated further, and so prices spiked higher again. In Weimar, the inflation reached such a degree that a loaf of bread costing 1 Mark in 1919, cost 100 billion Marks in 1923! Of course, in the 1970's, the same kind of money printing, but on a tiny fraction of the scale, led to inflation, in Britain, the US and other countries, of around 25% p.a. 

What the government is doing currently is much worse than the situation in the 1970's, if not yet as bad as in Weimar in the 1920's. The government is pumping out trillions of Pounds in additional liquidity, and, at the same time, it is deliberately closing down production, and so the ability to supply the goods and services to be bought with all of that additional liquidity. That is a direct comparison with the situation that existed in Weimar in the 1920's. The consequence is inevitable. A sea of liquidity is going to rush in chasing after a supply of goods and services that simply will not exist, monetary demand will far exceed supply. First goods will disappear from shelves in stores, which has already been seen. The sellers of those goods will respond by raising their prices to ration demand. Consumers seeing goods and services disappear, and seeing prices rising by the hour, will begin to panic buy, which, as I have described before, is a perfectly rational response under such conditions. Black marketeers and spivs will also rush into buy up supply in order to sell it at hyper inflated prices later. 

The government is deliberately and unnecessarily closing down production by telling perfectly fit and healthy workers, in the 80% of the population who suffer no or only minor symptoms from COVID19, to stay away from work, to engage in social distancing, and self-isolation. It is a totally irrational response, and mitigates against providing the resources required to be able to isolate, and adequately provide for the 20% of the population who are actually at severe risk from the virus, and who actually do need to be effectively isolated from it! 

The government is proposing that banks and building societies give mortgage holidays to their customers, who are kept away from work by this policy, which means that the banks and building societies then do not have this income stream, to provide them with the circulating capital to pay the wages of their workers, and the bills to their suppliers. One way or another, that deficit has to be financed, either by the bank borrowing in capital markets, or else from the government/central bank, who in turn then has to borrow in capital markets, or by printing even more money, which destroys the currency at an even more rapid rate. It creates an inevitable and virulent dynamic towards rapidly rising inflation, rapidly rising borrowing, and rapidly rising interest rates on the back of it. No wonder all of those astronomically inflated asset prices are deflating rapidly, because rising interest rates spell the death of those asset prices bubbles, and a vicious asset price deflation. 

Governments around the world have fallen prey to a global moral panic, a moral pandemic if you like. It means that, especially populist governments such as that of Trump in the US, Johnson in the UK, Macron in France are led into taking idiotic measures for fear of losing the populist support on which they arose. Government's, across the globe, are being panicked and bullied by a mass media hungry for blood, in order to fuel its latest sensationalist headlines, and which in turn is being driven by trolling and moral panic spread across social media. And, even the “experts” are cowed by this harrying and bullying. The scientists that advised that, in the absence of a vaccine, the best hope lay in the rapid development of herd immunity amongst the 80% of the population that suffer no or only mild symptoms from COVID19, first found that politicians distanced themselves from that sound advice, and then found themselves under attack for suggesting it.  We are in the world of mass panics and witch-hunting.

The truth, of course, is that, contrary to what Donald Trump first suggested, COVID19 is real. But, the truth is also that COVID19 is not Ebola, or Smallpox or any of the other diseases that kill 90% of those infected with them. The truth is that 99% of the population will not die from COVID19, and 80% will have it, and not even know they do. In fact, the actual level of infection is already probably ten times what the reported number of infections is, precisely because of the fact that 80% of those that contract it will suffer such mild if any symptoms, and so will never be reported. That is why the actual mortality rate is likely to be much lower than is suggested by the number of deaths as against reported cases. 

Unlike Weimar, or other cases of hyperinflation, what we have is the creation of a global Weimar. Panicked, irrational government responses across the globe are shutting down production and distribution at an accelerating pace, which will rapidly cause supply to disappear, cause shortages to be created, cause further panic buying and hoarding, and will cause inflation to rise rapidly. Already, Paul Mason in a report pointed to rapidly rising prices, along with such shortages. Telling people to stay away from work, increasing payments for them to do so, in the midst of a moral panic in which those workers are being led to believe that they are all at risk from serious ill-health, when 80% of them are not, can only bring production to a halt in fairly short order. The businesses, from banks to car makers, who find they are not producing, and so not receiving any income, and yet who are still being told to pay wages, still have to pay suppliers, and so on, can only do so by massive borrowing, which must cause interest rates to spike. Putting additional monetary demand into circulation, via unprecedented levels of money printing and credit creation can only lead to a global hyperinflation. The effects of that, and the inevitable response to it will cause many more deaths than COVID19 itself. 

But, it will also have reactionary political consequences.  We already have free movement closed down, we have measures close to martial law, we have elections cancelled, and so on.  Whenever in the past this kind of economic crisis arises, the beneficiaries are always the authoritarian right.  Weimar led directly to the rise of Hitler.  In an age of populism and existing authoritarian populist regimes in the US, UK, Russia, Turkey, Israel, Hungary, Poland and so on, we should be extremely vigilante about a further development of such authoritarianism, and of those right-wing forces promoting easy populist solutions based upon blaming "the other".  We should let Brexit and Trump be a warning.  Labour should use it to immediately be calling for Brexit to be cancelled, and for the need for workers solidarity across Europe.