Philip Pilkington: Exorcising The Inflation Ghost – An Attempt To Cure Our European Compatriots of Their Inflation Phobia Through Regression Therapy

By Philip Pilkington, a journalist and writer living in Dublin, Ireland. Simuposted in German on Wiesaussieht

If the intensity of a phantasy increases to the point at which it would be bound to force its way into consciousness, it is repressed and a symptom is generated through a backward impetus from the phantasy to its constituent memories. All phobias are derived in this way from phantasies which, in turn, are built upon memories.

Sigmund Freud

There are certain words in our culture upon which so many taut emotions converge that they become nothing less than a breaking point for certain opinions and moral platitudes. ‘Sex’ is obviously one. ‘Inflation’ is another.

To even begin to unravel the complex of associations that the word ‘inflation’ brings to mind in the average citizen would be an enterprise worthy of a full book. But one of the key associations is that of robbery. People instinctively feel that if there is inflation occurring they are being robbed by someone or other – most likely some ominous governmental bureaucracy, like a central bank.

They are not wholly wrong, of course. Inflation certainly punishes creditors and savers and favours debtors. As the value of the currency falls while savings and loans remain nominally the same, the real value of these savings and loans falls – needless to say, the amount that debtors have to pay back in real terms also falls. Most people will then get an image of a grandmother in their mind and bring up the ‘pension’ trope. “Anyone who favours inflationary policies is advocating robbing poor old pensioners,” they will say.

You’ve probably heard all of these ‘arguments’ before. Of course you have. But they’re not actually arguments, they’re emotionally charged soundbites. But such is the nature of the game, unfortunately.

In reality inflation tends to favour the poor over the rich. Oftentimes it can be seen as an explicit rebalancing act as income or trade disparities close. Poorer people – or countries – are usually indebted to richer people – or countries – and inflation is one way that this debt might be evaporated and greater balance brought about.

This is one way of looking at what is happening in Europe right now. It is a little crude, a little rough and ready – but it is a good starting point. It is natural then, that the creditor countries should hate inflation or anything that smells of it with a passion and do everything in their power to suppress it.

But in the real world things are more complex again. In fact, Germany – THE key creditor nation in Europe – has a long-held phobia about inflation. Their’s is not simply the standard reaction of the rich creditor country ensuring that her economic serfs don’t break out of the debt contract; no, this has much deeper roots than that, this is a phobia proper that the Germans have lived with for decades.

This phobia has vastly exacerbated both the circumstances leading to the present crisis and the crisis itself. Like most phobias it is irrational, unrealistic and unfounded. In fact, as we shall see the great German industrial economy was largely built using policy measures many German policymakers would now consider inflationary and unacceptable for any European economy.

It is almost as if, having repressed this historical memory – this memory of an economy built on government spending – a phobia has been generated incorporating a different set of phantasies derived from a different set of memories. It would seem that the same process described above by Freud over a century ago in relation to the individual is also to be found at the collective level of national consciousness.

So, let us go right back to the root of this phobia; right back to the Weimar era in pre-Nazi Germany.

Wheelbarrows of Misery

It is January 1923. Germany and her allies lost the war and have been forced by the winning countries to make massive, bloody-minded and destructive reparations. (The phrase: “History does not repeat itself, but it does rhyme”, comes to mind…). Inflation in Germany is already high. Very high.

There are many contributing factors to the inflation. From the wartime wiping out of resources, to the new bargaining position of the trade-unions, to the large government deficits. This situation may have been manageable but for the political situation in Europe at the time. The inflation may have subsided without reaching epic proportions, as it did after many wars in history. But the politics in France at the time would not allow it.

The French were angry – very angry. Much had been lost for them in the war and they were determined to make Germany compensate them for this. As John Maynard Keynes noted at the time in his seminal pamphlet ‘The Economic Consequences of the Peace’, this strategy made no economic sense; but then politics and crass nationalism rarely make economic sense.

As an aside, it should be noted that the historical parallels with what is happening today are striking. Except today, it is Germany and France who are pushing together for the destruction of Europe by imposing debt peonage on the periphery.

Anyway back to our tale. Because the Germans could not afford the debt repayments the French marched into the Ruhr Valley which contained much of Germany’s productive capacity. (Greek asset-stripping, much?). This wiping out of Germany’s means of production together with the strikes it invoked finally sent the inflation into the stratosphere.

Day-to-day transactions were in chaos; people roamed the streets with wheelbarrows of money; and savings were wiped out within a matter of days or weeks. But perhaps the most important historical consequence was that the hyperinflation left an indelible imprint on the minds of certain influential German intellectuals of the day. This imprint would then be passed from generation to generation and that would rise time and again like a ghost whenever certain policies were considered in Germany.

Hitler’s Economic ‘Miracle’

So, what happened next? Well, this is part of the history that is often less talked about, as it tends to burst the inflationista’s fantasy understating of past events and break their assertions about the unremitting dangers of inflationary policies.

In November 1923, the German government issued a new currency, the Rentenmark. For the most part this was a psychological exercise. The government simply lopped twelve zeroes off the end of the notes and prices. There was some flustering that the currency remained stable because of elaborate land-backed schemes by the finance ministry, but the psychological mood was without doubt the most important factor. We see this clearly in the fact that the German people thought they had witnessed a ‘miracle’ – this was a leap of faith where the German government essentially tricked the population into believing in the Mark once more.

Germany then tied its fortunes to the rest of the global economy – most notably the US. Under the auspices of the Dawes plan, the Germans secured major loans from the US which floated the economy from 1924-29. These would become known as the Golden Year of the Weimar Republic.

But such was short-lived. The 1929 stock market crash in the US and the subsequent depression ensured that loans for the embattled German economy dried up. Germany fell back into an economic slump and unemployment soared once more. Much of this can be put down to the then German Chancellor Heinrich Brüning’s government who – with the memory of inflation still in their minds – ran balanced budgets despite the deflating economy.

The reasons for the rise of Hitler have been hotly debated by historians for years. But many, myself included, think that Brüning’s irrational anti-inflationary policies had a lot to do with Hitler’s election. Hitler gave a beleaguered people a new lease of life. And he did so by temporarily overcoming the inflation phobia so prevalent at that time and running large budget deficits. These policies were remarkably successful and have been ignored by many in the ensuing years.

Hitler’s government not only undertook the impressive feat of rearming the country to become a leading military power, but they also laid the foundations of the modern German economy – the most famous representative of which is the fantastic German road system, the Autobahnen, which was largely constructed under the Nazi regime.

One is loath to speak well of Hitler, for he was a monster the likes of which history has not seen before or since. His economic policies, however, were remarkably successful. And yet, in the ‘reasonable’ German mind of the day they would have been seen as dangerously inflationary. The great American economist John Kenneth Galbraith summarised the Hitlerite economic policies and their convenient historical forgetting in his book ‘The World Economy Since the Wars’:

Germany was the most distraught economic case in the early depression years; it was also the clearest case of action by the state to promote economic recovery. That this was accomplished under a government of repression, genocide and eventual military insanity has, in some measure, kept the economic achievement from being seen. Nothing constructive could be thought to come from Adolf Hitler. In reality, the German economy made a remarkable recovery in the depression years – the depression there was effectively over by 1936 – and this fact remains to this day largely outside the common reach of history.

This period of large-scale government spending was also, as we have said, the beginning of the new German economy. In these years the Nazi government laid the foundations that would be built upon after the war. This was the era when Germany began to leave behind the economic turmoil of the Weimar Era and begin once more to establish itself as a world power. This point cannot be stressed enough.

This recovery was achieved through the use of supposedly senseless and inflationary policies. And as we shall see, after the war the German economy would reconstruct itself in a very similar manner.

The Hitler economy has disappeared down the historical memory hole in Germany and in the wider world. No one wants to remember anything but horrors from the Hitler years and in that they their sentiments are correct. But in consigning this truth to the dustbin of history Germany continues to misunderstand just how they modernised as an economy and so they remain unable and unwilling to learn any lessons from their own economic development.

The Bailout of a Ruined Germany

It was soft money that drove the German recovery after WWII and allowed their ‘miracle’ economy to take off in the ensuing decades. Europeans should remember – and they should remember well – that it was deflationary policies or forced extraction that led to the second war; deflationary policies eerily similar to those that are being forced upon the periphery by Germany and France today. But it was inflationary policies and government intervention that ensured such a catastrophe would not take place again.

The money spent on rebuilding Germany was, in essence, given to them. Under the auspices of the now famous Marshall Plan the US gave Germany the money that she could then spend on the foundations of her new economy.

A few protested against this ‘irresponsible’ method. Some invidious individuals on the Allied side called for more policies like those enacted on Germany after the first war – and, more to the point, like those being enacted upon Greece and elsewhere today. But they were largely ignored as cranks. Then there were some who invoked the spectre of inflation once more. They, thankfully, were also ignored.

The Marshall Plan was an almost immediate success. In the three and a half years after its implementation the countries that received the aid saw their economies grow by a massive 25% of GNP. And another lesson was also learned from the experience that the Germans would do well to listen to today: much of the money circulated back to the US for the purchase of various goods. This reinforced the post-war boom in the US.

Today Germany essentially stands where the US stood over half a century ago. Now, as then, we can be sure that any expansionary fiscal policies implemented in the periphery would lead to higher German economic output rather than to inflation. But the inflation phobia continues nevertheless to loom large. Today, it threatens to destroy Europe.

Lessons Never Learned

The parallels between Germany’s rise to the status of an economic world power and the present situation in the periphery are so stark that one would almost allow them to speak for themselves. But perhaps it would be productive to briefly outline what is happening in Europe right now – and why the German attitudes toward these events are key to ensure the continued viability of the European project.

Germany is a rich country. As we have shown, her riches were built upon the twin foundations of deficit spending and international fiscal transfers – the very things that her leaders rail against today. The European periphery, on the other hand, is weak and poor. And it is these countries today that require the bailouts and the stimulus to grow powerful.

In accepting a single currency the peripheral countries have essentially pegged their exchange rate to the more powerful German economy. This puts them at a significant trade disadvantage. And so it was inevitable that they would have to run some sort of deficit – be it a trade deficit, a government deficit, a private sector deficit or some combination of the above – in order to absorb the goods that crossed their borders.

Today as this framework rots from the inside out, it is clear that a rebalancing is necessary, just as it was for Germany under Hitler and after the war. Wealth must be increased in the periphery by either budget deficits, fiscal transfers or a combination of both.

As it was for the US in the late 1940s, this is not to be seen as a zero-sum game. Germany will likely reap the benefits of the increased peripheral growth in the form of increased exports and, hence, increased output. This is fine in the short-term, but in the long-term Germany must further overcome her inflation phobia and increase the living-standards of her own citizens. In short, Germany must move away from the punitively mercantilist policies she has pursued until now and refocus her efforts of the prosperity of the German people.

Blocking all of these actions at their very root is Germany’s inflation phobia. She fears releasing funds to the depressed periphery because she fears stoking inflation. In like fashion she fears increasing the living standards of her own citizenry because she fears stoking inflation. But these fears are completely ungrounded and irrational.

Germany still fears the ghost of Weimar era hyperinflation. But this was a very different time in history. A time when Germany was under siege and her economy was cowed and weak. ‘Inflationary’ policies brought the German economy back to life and yet she still remembers only the hyperinflation.

Today there needs to be a sort of collective therapy in Germany; a complete revaluation of her economic history. Out of this she can then begin to see that what Germany faced through the 20th century, the European periphery now faces in the 21st. If Germany does not break through her childish fears about inflation and enter this century on good terms there is every chance that history will blame her once more for attempting the destruction of Europe. A silly phobia could then result in another generation burdened by a collective sense of guilt. No one wants to see this happen, not least the Germans themselves.

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  1. yoganmahew

    Eh, right.

    So inflation in an era of zero nominal wage growth (never mind real) favours the poor over the rich?

    Tell me something, how do your debts decrease if your income is not rising?

    Now tell me who gets inflation busting payrises? Or can hedge against inflation?

    1. wunsacon

      Inflation hurt the rich when income taxes were progressive. (Inflation + progressive taxation = wealth tax.) Without progressive income taxes, the rich keep their inflation gains.

      What happens to the poor in this environment? First consider that relative spending power is a zero sum game, by definition (because I said “relative”). If the rich are losing real relative spending power thanks to progressive rates and inflation, then someone else should be gaining. But, now the question is: *who* amongst the non-rich will benefit? The answer is: whoever has bargaining power. In the global economy, that’ll be foreign workers, mostly. But, it might be some Americans, too.

      Whether in inflation or deflation though: to reduce wealth inequality, we must bring back progressive income tax or simply a wealth tax.

      1. Mike M

        We have. Walk into any modern factory. It’s not the nostalgic Henry Ford era of hundreds and maybe thousands of workers toiling away. It’s computers and robots and technicians manning them, and maybe a few low paid guys driving fork lifts. That’s manufacturing in the 21st century.

        1. Steve

          I disagree. When this playing-with-computers bubble burst the U.S. is going to be hit hard. Very hard.

        2. rotter

          drivel. nonsense. lies. The American (or were you speaking of Germany? if so i apologise) manufacturing industry is just as dead now as it was before you made that comment.The Robot workforce aside, there really is no signifigant American manufacturing industry anymore. Tiny enclaves of “speciality” manufacturing critical to defense is all. I defy you or anyone else to find any consumer products manufacturesd in the US. From Clothing to electronics to tools, etc., We dont even process an economically signifigant amount of raw manterials anymore. They destroyed an entire strategic, industry in the name of avoiding taxes and not paying workers and when(not if) we are forced to start producing in the US again we will have to rebuild the entire industry from the ground up. At a disadvantage to Germany, Russia, China and any other nation that maintained and preserved its manufacturing infrastructure.

        3. Yves Smith Post author

          IKEA make all its furniture for North America in the US. There is NO good reason for furniture not to be made in the US, but Wall Street gave companies like Ethan Allen a pop in their stock when they said they were offshoring.

          There are tons of car plants in the US.

          American Apparel makes its goods in a factory in LA. They’ve had trouble financially, but the reports I get are it’s not the factory which is very efficient, but other operations + not checking whether workers were illegals (they pay $12-13 an hour.

          That’s off the top of my head and I’m hardly a manufacturing guru.

          In general, direct factory labor is only 10% to 15% of the wholesale cost of manufactured goods. When you offshore or outsource, you have lots of offsets: greater managerial costs, longer lead times and related shipping/financing costs, greater risk of losses (either actual for not being able to respond to having a dud product as well as opportunity costs).

          This is nowhere near as clear cut as you suggest for good intended for the US market.

      2. Johnny Clamboat

        Forgive me if I’m inferring something that’s not there but are you saying that the US does not currently have a progressive income tax?

        1. YankeeFrank

          The US has a minimally progressive tax structure, where those earning around $100k pay the same rates as those earning $10 million. We used to have a truly progressive tax structure, with the highest nominal rate at 90%.

        2. carol

          Frank is absolutely right: “The US has a minimally progressive tax structure”

          Did you notice that when discussing financing the WH ‘Jobs Plan’, by a small tax increase for those earning $ 250.000+/yr the NY Senator Schumer said: that cutoff income should be increased to a million dollar plus income per year, as people getting $250000 a year are by no means rich. Also note that Senator Schumer and colleagues suggested that a person getting $ 990000 a year is not rich either.

          In that same discussion I noted that previously ‘a millionaire’ used to be someone who owns a million dollars in house equity, cash, investments.
          Apparently, nowadays ‘a millionaire’ is someone who gets a million PER YEAR. (talking about inflation).

      3. carol

        “to reduce wealth inequality, we must bring back progressive income tax or simply a wealth tax.”

        Progressive income tax plus wealth tax plus abolishment of tax heavens!

        Without abolishment of tax heavens the other 2 will not work.

        E.g. The Swiss government has approached the Greek government to give it the same deal as the Swiss made with Germany: tax (anonymously) the capital gains of foreigners and give that money to the foreign government.

        It is remarkable that Germany had to negotiate with the Swiss to get a deal; the Greek government did not negotiate at all. According to the Swiss, the Greek government has not yet accepted the Swiss offer.

        This is all the more remarkable as some estimate that euro 200 billion of Greek ‘citizens’ has been deposited at Swiss banks!!

        Of course, all the money in the “fakelaki’s” (envelopes) to doctors and lawyers etc. has to go somewhere.

        By the way, how Philip can compare a war ravaged Germany in 1945 to a for many decades/centuries “fakelaki’s” and tax- evasion-country like Greece is beyond imagination.

    2. Mike M

      Yeah, brilliant idea. Just imagine what 5% inflation will do to our economy with 70 million boomers entering the end game with minimal savings and, if their lucky, a fixed income pension. Smart.

      “‘Inflationary’ policies brought the German economy back to life and yet she still remembers only the hyperinflation.”

      I thought it was the Marshall Plan. Silly us for doing that.

  2. ArkansasAngie

    Inflation is equivalent to a butcher’s thumb on the scale. It’s a means by which you can siphon money from the real economy and give it to those who live on the imaginery goodwill of producers … aka granny, entrepreneurs, teachers etc.

      1. Mitt

        I believe Ms. Arkansas’s point was that she knows where the real economy is and she is, quite conveniently, the only one with a map that tells us how to get there.

        Its a shame that the rest of us lack access to this real economy, but its also refreshing that she sees it fit to tell us that our current economy is merely a figment of our imagination.

  3. Jim Haygood

    ‘… childish fears about inflation … a silly phobia’

    U.K. inflation is 5.2%; U.S. inflation is 3.9%. The average in the BRICS countries is in high single digits. Some empirical work indicates that 6% inflation is a threshold beyond which inflation begins to exert seriously deleterious effects on growth and stability.

    Brazil provides an object lesson in the consequences of tolerating chronic inflation. Check out these double-digit interest rates charged to the most creditworthy borrower in Brazil, the sovereign:

    Many South American consumers are paying 30% and 40% APRs on unsecured credit, when they can get it at all.

    If you think things are bad now while the European periphery (almost uniquely in the world) is experiencing a disinflationary deleveraging, just wait till interest rates soar high enough to really grind the faces of the poor.

    Sir Alan Greenspan likely would advocate that you take out all the credit you can get at floating rates. Who’s your daddy, huh?

    1. Philip Pilkington

      I’m of the (rare) opinion that inflation in poor countries like the BRICs et all is a necessary historical transition. I think this takes place in most industrialising countries — China, for example, in trying to suppress inflation are unable to ween themselves off their dollar addiction by raising living standards.

      It’s nice to measure the deleterious effects of inflation against an economy with no inflation, but what this misses is that there might not actually be a choice. In some historical periods it might be either: (a) high inflation or (b) static and low living standards.

      Economic lesson part 1: Don’t measure against an ideal, you’ll always come up short.

      Anyway, what I call ‘inflationary’ policies here are not actually inflationary, they’re just thought to be. That’s the point of the piece. Your misunderstanding is a fine example of why I hold that ‘inflation’ is more so a moral issue than an analytical one. It’s like saying the word ‘rape’ or ‘child porn’. You instantly start drawing negative connotations. Except in this case it’s actually a fairly neutral phenomenon.

      Someday we might all be able to talk rationally about ‘inflation’ and ‘inflationary policies’ (two entirely different things). But not today.

      1. Jim Haygood

        Food riots which broke out prior to the Arab Spring were not ‘imaginary’ or ‘misunderstandings.’ Rising prices of consumer staples just provoke the hell out of people whose incomes aren’t inflation-indexed.

        Deliberate inflationary policies are a recipe for social unrest. Two US presidents who presided over double-digit inflationary spikes — Nixon in 1974 and Carter in 1980 — were ejected from office within a year.

        ‘What I call ‘inflationary’ policies here are not actually inflationary, they’re just thought to be.’ Try this line on a date — as you grope under a woman’s blouse, suavely inform her, ‘This is not actually a seductionary policy — it’s just thought to be! Then brace for the slap …

        1. Philip Pilkington

          Em… food prices are up because of inflationary policies? I thought they were a combination of supply side issues and speculation. This is a classic case where rhetoric and imagery replaces analysis.

          And no, ‘inflationary’ policies are not necessarily inflationary. If you pursue an inflationary policy in an economy with excess capacity or experiencing deflationary pressures there will be no consumer price inflation.

          You’re not really arguing analytically and as for your ‘date’ example… erm… what was that I wrote above?

          “There are certain words in our culture upon which so many taut emotions converge that they become nothing less than a breaking point for certain opinions and moral platitudes. ‘Sex’ is obviously one. ‘Inflation’ is another.”

          If you’re trying to prove my point, well, I guess I should thank you…

      2. donn

        It is very difficult to take this post seriously. Now one is to suppose that inflation is a matter of morality?

        While there may or may not be moral implications and consequences to inflation, it is nonetheless the case that inflation in and of itself is NOT moral or immoral.

        I have yet to understand why the insistence (it is the norm, however), on placing emphasis on price (the cost for goods and services, raw materials, etc.), as causality rather that as effect. Lets move away from market determinations of price and focus on real lives, for working people, the poor, for retired people, whomever.

        Perhaps then we can escape from the circular arguments that people with debt should get over their delusional fear of inflation and see it as somehow to their benefit. Mass psychological therapy isn’t going to work here.

        Addressing power relations, identify prevailing interests and who benefits from the status quo and who doesn’t will go a lot further than getting all twisted up in something that only reflects the writer’s presumptions than anything else.

      3. Jason Rines

        What I liked about your argument Philip was that it pointed out that malinvestment (French raiding German industrial region post WWI) seems to indicate the real cause of inflation.

        Simply, your government in collusion with private enterprise outsourcing away the nations entire productive base induces inflation.

        Debt being both the vehicle of the general transfer and the fluffy window dressing that helps the citizen still feel like they are growing instead of being asset-stripped.

        Where the currency value compared to other countries lands after the inflation/deflation/hyperinflation sequence reflect more precise amounts of wealth have been stolen.

        So let’s say that the U.S. dollar lands at two dollars for one Yuan (yes I know it trades 1/6 Yuan now). So let’s say the U.S. dollar is at .55 cents globally. Now the citizens fully realizes that .45 cents of wealth have been stolen from them incrementally. Sound about right?

        1. YankeeFrank

          The important thing is to get away from the hyperinflation fears. Hyperinflationary periods in history required the precondition, as when the French stole the German manufacturing belt, that the source of goods becomes massively restricted. Without such a huge loss of supply hyperinflation has never occurred in history. All the inflation-fearing dupes don’t see that. They also refuse to see the current inflation for what it is — partially temporary bumps in commodity prices due largely to speculation and supply shortages. We don’t currently have an inflation problem, yet all these inflation-fearmongers only see inflation, inflation everywhere! It would be silly if they weren’t so destructive and selfish (these types generally have a large savings/investment pool they are hoarding and guarding jealously, with no care for anything else occurring in the world).

  4. Ramon Creager

    The author makes a great historical argument for ‘inflationary’ policies, and yet deflationary policies are the only ones favored. Surely our policy makers aren’t that ignorant. Something else is afoot.

    How much of this is actual phobia, and how much of it is the desire of the current wealthy class to protect their wealth? Consider the US, a country that is theoretically devoid of this supposed phobia. Are their policy makers considering ‘inflationary’ policies that would benefit the poor and those on the periphery? No. In fact all indicators are that the wealthy classes are exclusively attempting to preserve and protect their wealth at all cost, that phobias have nothing to do with it. Any hint of taxation on wealth is immediately shot down. Any haircuts to creditors are similarly rejected, even when these same irresponsible creditors have been bailed out by the taxpayers. And yet, ‘inflationary’ policies are pursued with great zeal in the name of stabilizing the financial system, so that the wealthy may retain their wealth, and in the realm of the military-industrial complex, where many of the wealthy have made their fortunes.

    So I doubt phobias have anything to do with this. Inflationary policies may well bring general prosperity, but our current wealthy class feels it will be at their expense, and resist them at every turn.

    1. YankeeFrank

      You are largely correct with regard to the wealthy. However, the politicians and economic leaders are also extremely ignorant, and rely on discredited faith-based economic principles of the neoliberal bent. They are horribly ignorant, and will collapse the world economy with their willful blindness, sooner rather than later.

      1. Ramon Creager

        Oh, no doubt. I think that is true, but I also think it’s conveniently true: they use it as cover for their blatant protection of their wealthy patrons.

    1. IF

      I was wondering about that, as the FAZ search function did not show any article by Pilkington. I also didn’t realize one coult ‘post’ to FAZ. It seems the daily might be too conservative for that.

  5. ep3

    Yves, to communicate some “on the ground” info. It may not necessarily be totally related to the article.
    I work for a men’s clothing store (bookkeeping). All spring and summer, literature in the industry said to expect price rises in the 7-10% range for the fall season. Retailers were encouraged to purchase now to lock in prices, which my company did. Well, here we are and prices have risen maybe a quarter on most items. And, now sales are in the toilet. Were vendors front loading sales to avoid the impending next crash? Or was this just more bad info and false hope in the confidence fairy? Because now we are trying to discount goods more just to get things moving.

  6. reasonable doubt

    This argument seems to be based on the type of detached hypothetical economic thinking, which is often decried on this very blog. The entire argument is based on market theory with little reflection on the impact that would be felt by the every day person. If inflation essentially taxes savings and if savings are people’s hedge against the unpredictable nature of economies and life in general, then accepting inflation as a purely beneficial force seems willfully ignorant of the dueling realities. At the end, it is presented as a zero sum game. Isn’t this the problem with consumption based economies?

    1. The Heretic

      Before you accept the meme that inflation is a tax on savings,
      ask yourself this question: ‘ what are the conditions in an economy that can result in price inflation, and are there conditions under which supply can expand to meet demand, without increasing price….’

      Hint: utlizatiin rate for Capitol and labour and resources…

    2. YankeeFrank

      Phillip is not arguing for inflationary policies. He is pointing out that policies many THINK are inflationary, are in fact NOT inflationary, and will actually help to generate demand and create a virtuous economic flow. He uses the Nazi monetary/fiscal policies in the 30s, and the Marshall Plan, as examples of policies that were extremely effective, that today our foolish leaders would decry as inflationary. I will add the New Deal, which was good as far is went, as another example. A double-sized new deal would’ve ended the depression by 1937 easily, with little to no inflation. Unfortunately wisdom of this sort is in short supply these days, largely due to the inflation bogeyman.

  7. davver

    Yeah, German GDP went up up up in the Hitler years. Of course, it represented increased military production and the people had to live on rationing of the things they actually wanted, but whatever. GDP is God! Who cares what its composed of, as long as it goes up. I concede that if you don’t care about the quality of GDP you can make it increase by printing money.

    1. Piano Racer

      “Too much and too long, we seem to have surrendered community excellence and community values in the mere accumulation of material things. Our gross national product … if we should judge America by that – counts air pollution and cigarette advertising, and ambulances to clear our highways of carnage. It counts special locks for our doors and the jails for those who break them. It counts the destruction of our redwoods and the loss of our natural wonder in chaotic sprawl. It counts napalm and the cost of a nuclear warhead, and armored cars for police who fight riots in our streets. It counts Whitman’s rifle and Speck’s knife, and the television programs which glorify violence in order to sell toys to our children.

      Yet the gross national product does not allow for the health of our children, the quality of their education, or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages; the intelligence of our public debate or the integrity of our public officials. It measures neither our wit nor our courage; neither our wisdom nor our learning; neither our compassion nor our devotion to our country; it measures everything, in short, except that which makes life worthwhile. And it tells us everything about America except why we are proud that we are Americans.”

      — Robert F. Kennedy Address, University of Kansas, Lawrence, Kansas, March 18, 1968

    2. YankeeFrank

      Yes, so why do we humans never use fiscal stimulus in the correct amounts except when it comes to war? The New Deal would’ve ended the depression years before WWII, if we would’ve used the same size stimulus that was used for the war buildup, on the New Deal itself. Its an immense tragedy that humanity never seems to learn the most important lessons.

      A fiscal stimulus of $10-20 trillion, combined with a massive green energy and other manufacturing buildup, infrastructure repair, enhancement and replacement, expanded public service opportunities, increases in teacher and other beneficial worker compensation, a reimposition of solid banking regulation, a gutting and rebuilding of our regulatory infrastructure, an end to our wars (real and abstract), and other commonsense reforms would turn the USA around and make us the leading light of the world for decades to come, if not centuries. Will it happen?

  8. craazyman

    Those are ironic and forceful parallels to be sure, but it seems to me that there are also profound differences between Germany ca. 1930s and Greece today.

    I’m becoming more and more convinced of the rich potential psychoanalytical theories offer to expand the boundaries of economic analysis, and so it’s good to see that here. Carrying that further, it seems to me that Germany’s hyperinflation and subsequent recovery were both due to its strong foundational structures for social cooperation and unified collective consciousness — hard won to be sure after centuries of tribal conflict from the Roman occupation on down to recent times.

    These structures were utterly shattered by the war and French occupation of Rhur valley, which produced a sort of collective nervous breakdown. But the nation’s history of industriousness, recent achievement of cultural unity, and tradition of craftsmanship formed an adequate foundational underpinning to be re-animated by Hitler’s large-scale govt. spending. In other words, the money was spent into ready receptacles — forms of social traditions and organizations with considerable inherent potential for social cooperation and productivity.

    While I’m certainly no historian, it’s my perception that Greece’s history is not so similar. It’s one of fractured and conflict ridden social tensions and the lack of broad based organizational structures and traditions — outside of a few notable industries — that could “receive” the spending and use it productively in the current economic sense of the word — which admittedly contains an unstated and probably almost unconcious culturally-specific value judgment about how humans should organize themselves in a society.

    It seems that these potentials, these structures of group cosciousness, of culture (to put more colloquially) — are key determinants of what happens when they are liquified and energized by money, which is really no more and no less than a condensation of social energy into abstract and descrete units of cooperation potential.

    It seems to me that inflations and deflations are similar in that they are crises over the nature and definition of money, and more broadly, crises over the nature and structures of social cooperation and boundaries of community. Humans are the same the world over physically, but the operating systems of collective consciousnes seem to differ greatly and take their form from complex historical precedents. But they are real forms of energy, just as the psychic structures in the individual mind are real, as real as clouds and trees and automobiles, and can take forms that are inherently affirmative or destructive, as Freud spent his lifetime studying.

    1. Jason Rines

      Cool analysis but I’ll simplify it further. Evolutionary pattern of management paradigms: Triangle -> Square -> circle.

      A good theory to understand about behavioral sciences would be a bunch of other cultural variables you already mentioned Craazyman and plugged into a Quantum Computer (4d tool). The end of the 3d pyramid is what we are living through and the tools being used reflect the rapid shift between 3d and 4d thinking. 4 branch constitutional government for example as a tool or the corporation, actually even the Central Bank system. I could go on. These tools seemed to crop up all over the place after the Dark Ages.

      The Mason’s seemed to understand this fully and perhaps this is why they had such strict vows of silence. Roschild used a 4d tool in a 3d world as a vehicle for conquest. Maybe the Mason’s weren’t so good at keeping a secret.

      By the late 2020’s we’ll be asking any and every question we can think of mathematically into the Quantum Computer and the code will be 2 x 2 fractals as a ‘quad’. Since there is no time in the 4th dimension where we are shipping our questions to, we will have all the answers back instantly.

      That means we have the answers to all human questions on how to reach 5d management paradigm. I don’t think it will even be several hundred years before man reaches 5d. I speculate that by 2090 mankind will be clinically immortal. Food for thought :)

      1. craazyman

        Thank yiou Jason for your attention to my rambling. In fact, when I have 3 glasses of Chote du Rhone and 1 mg Xanax (I’m up to 1 mg now), I am able to penetrate the 5D space with my thought cloud. At that point, I can see and know everything in its pre-linguistic energy state, and the words that map all phenomenon flow effortlessly from that state just like when I used to have 5 beers in the first 45 minutes after arriving at the pub. No longer though. I’m not 23 anymore, but I can still run 4 or 5 miles several times per week but I’m lazy so it’s not every week it seems. :)

  9. ep3

    In relation to inflation in the 70s, and i was only born then, my feeling is that the ‘evil’ that people called the terrible inflation of that time was actually good wage inflation. Really, the problems that people associate with that time, the gas shortage, wasn’t caused by high prices, but a cut in supply. We can look at the last 4 years to see how inflation has really killed gas prices.
    But I believe the evil that was inflation that Volcker broke was that poor people’s incomes were rising faster than the elite wanted. As they say, interest rates were extremely high at that time, as a way to combat inflation. But why? Well, if you have a large group of people in the society earning more income at an increasing rate, their demand for goods will increase. If they are buying houses and cars, raising the interest rate (like if it was done tomorrow, tho currently it would blow up the world) to a number like 25% from 6%, of course ppl will stop buying, plus ppl making loans will get to suck wealth from the family via interest payments.

    1. Jim Haygood

      ‘If they are buying houses and cars, raising the interest rate (like if it was done tomorrow, tho currently it would blow up the world) to a number like 25% from 6%, of course ppl will stop buying.’

      Yes. An unfortunate mathematical fact of discounting is that high interest rates act to front-load real borrowing costs.

      In other words, although during high inflation your income will rise substantially during the term of a 30-year mortgage, you don’t get credit for this when initially qualifying for the loan at a maximum XX% of current income.

      That’s one of many reasons why the Misery Index is quite properly constructed of the inflation rate plus the unemployment rate.

  10. Jeff N

    inflation means that:
    * my wages go up (real value stays level)
    * my house’s price goes up (real value stays level)
    * stock market goes up (real value stays level)
    * my existing debt doesn’t change (real value decreases)

    The only downside is the real values of my bank account savings and 401k, which would be partially offset by (anti-inflationary) higher interest rates and higher stock prices.

    QE-caused inflation (what we have now) gooses stock prices & commodities; the latter does me harm.

    The key is the wages – you’re not living in true inflation if the amount on that paycheck (non-real) is stagnant.

  11. RT

    Good post, necessary points. But the “inflation phobia” is somewhat over-stressed, risking to implement yet another legend about Germany. As a German, I’d say it’s much more (i) a moral story, i.e., a story about “punishing someone” who can be blamed as being “irresponsible”, not living within his/her means (German gov’t is playing this even to it’s own citizenry), (ii) a story about “enforcing rules” and/or ideology (i.e., nowadays it’s neoliberal ideology), and (iii) an elitist story, i.e., a rather closed circle of peoples in power & charge who are steadily re-inforcing each others views about diagnoses and potential cures.

    One additional historical comment: IMO, it wasn’t really “Hitler’s policy” which helped German recovery from the Great Depression, but rather a monetary policy implemented by Hjalmar Schacht, then head of Germany’s central bank (“Reichsbank”). At best, Hitler was just letting Schacht doing this because Schacht promised to have a working plan for financing the state. Plus, Schacht invented a kind of “shadow money” (“Mefo bills”) which was used to finance military build-up during the pre-war years aside from public financial markets. Schacht was later dismissed by Hitler in 1939 because he began to opposing the regime. From a certain perspective one could argue that Schacht was some sort of an “early Keynesian” who coincidentally happened to have his tenure in 1933 to 1939 thus helping the nazi regime out of the economic depression. After WWII, he went to trial in Nuremberg but wasn’t convicted.

  12. tz

    Zimbabwe should then be heaven on earth, with all the poor well fed and driving around in fancy cars on their gold-paved streets.

    Introducing noise into the price/quantity – velocity/money supply – supply/demand equations is evil and fraudulent.

    You will demand COLAs to keep up with this wonderful inflation, but demand the store where you buy stuff freeze prices.

    Adding a zero onto every price changes nothing if it happens simultaneously.

    But it so happens that the 1% get the newly created money before it devalues, so they invisibly steal from the 99%. That is why Zimbabwe is a hell, but their 1% is comfortable.

    You are as bad as the Koch brothers, just arguing to transfer wealth to the rich oligarchs via a less obvios route.

    1. sidelarge

      Those who have the extremely liberal use of the word “Zimbabwe” like you usually only have talking points instead of actual arguments.

      “Introducing noise into the price/quantity – velocity/money supply – supply/demand equations is evil and fraudulent.”

      Thanks for your personal metaphysics. Can we move on to actual arguments, instead of statements no better than “because God says so”?

    2. AA

      I agree, lets give everyone a million dollars each. That will stoke inflation and be good for us all. What next, fairy godmothers really exist?

      1. F. Beard

        I agree, lets give everyone a million dollars each. AA

        Every US adult could be given $306/month (initially) till all mortgage debt in the US is paid off WITHOUT changing the size of the money supply IF the banks were put out of the counterfeiting business – so-called “credit creation” – at the same time.

        And actually the amount should be greater than $306/mo since other credit debt (credit cards, car payments, etc.) should be included.

        So yes, money can be “given away” if we combine reform with restitution.

      2. F. Beard

        What next, fairy godmothers really exist? AA

        Perhaps not, but an evil money system does exist. Is preventing the destruction of one’s lunch the same in your mind as a “free lunch?”

  13. Piano Racer

    “Wealth must be increased in the periphery by either budget deficits, fiscal transfers or a combination of both.”

    Paper (or electronic) money is not wealth; it is a claim on wealth. Wealth is comprised of tangible goods and services. You’re inability to grasp this simple yet ABSOLUTELY CRITICAL concept undermines your entire argument.

    Everyone PLEASE PLEASE PLEASE read the following text (it’s not THAT long) in its ENTIRETY to get an historical perspective from a very distinguished American on the ravages of inflation:

  14. Lew Glendenning

    Every day, 100s of 1000s of business and personal investment decisions are made with spreadsheets that use NPV.

    Changing the rate of inflation can make all of those decisions into bad, money losing decisions.

    You would not expect that changing the length of all of the EUs rulers at the same time would improve the economy.

    What simplistic ideology allows you to think that in the case of money?

    1. Wat

      Your comment shows you don’t understand the issue at all. In your scenario, inflation doesn’t affect whether the NPV of a project is positive, because inflation affects both positive and negative cash flows. If you really understand your ruler example, you would see this — inflation changes the units that you’re meeasuring in, but it doesn’t directly affect the real value of the project.

  15. F. Beard

    The entire population, including savers, could be bailed out equally WITHOUT serious price inflation risk from all private debt IF the banks were forbidden to create any more credit and IF the bailout checks were metered to just replace existing credit is paid off.

  16. Susan the other

    I enjoyed this synopsis Philip. Not to change the subject here, but I can’t help but think the solution is staring us all in the face. Since growth as we have known it up to now – exploitation of natural resources and rapidly expanding populations masquerading as economic growth – cannot go on, we are stuck with a giant “system” based on all of those follies and we must turn it around. If we do not turn it around and go forward to create green economies we probably will have a lot of worthless money. On the other hand, it will not be “inflation” if it is productive. Inflation is a truly relative concept. Germany is in a perfect position to lead the EU through these changes. And yes, it will take some big infusions of money. So what?

  17. Mitt


    Is the goal of this column to bring more of the cranks out of the woodwork or make some other point? Your hitting them on their home territory; inflation, Hitler, and the Marshall Plan.

    1. Philip Pilkington

      Hahaha! That’s the key point, isn’t it? Cranks latch onto the aspects of culture and history that are the gathering points for collective neuroses. That’s a sort of definition of crankishness: picking up on neurotic pieces of history or theory and obsessing over it.

      So, yes, in a sense we do need to drag the crankish elements of current policy debates out of the proverbial closet. If this takes raising all their favourite bugbears within a proper historical context then so be it. It’s what Freud would have done!

      1. Mitt

        Ah, I get it. The freud quote should have tipped me off that “yes that was the point of this post.”

      2. Jason Rines

        Admitting Guinea Pigging is probably not such a wise idea here Philip.

        I did register Raging Debate domain back in 2007 for your same reason and similar understanding of psychology. I’m just far more frank than you by asking the readership to openly participate research.

        Do you think doing so induces the Heisenburg principle? And forgive me for spelling and poor writing form. Some of us are restricted to more text/soundbite style as we still have to worry about income.

        1. Philip Pilkington

          I don’t know what ‘guinea pigging’ is. But I find a very useful way of making arguments is picking up memes and then giving them their proper historical/theoretical contact and seeing if they make any sense (they usually don’t).

          It’s a bit like Freudianism insofar as it says, “Hang on a minute. You say X but we need to take this in the broader context of X, Y and Z.”

          If you think I’m conducting psychological experiments on my readership, I’m not… well, no more than any writer is…

      1. Mitt

        Well, Susan the Other, its a good thing I never specifically said “you” were a crank for commenting on this post, but rather that this post would bring the Cranks out of the woodwork.

        Similarly if I were to write “David Graeber’s earlier post on Occupy Wall Street really brought the Communists out of the woodwork in the comments section” it would not neccesarily imply you were a Communist for participating in the discussion.

          1. Mitt

            Just to clarify: I don’t actually think the hypothetical statement I wrote there, but was saying “gee, If wrote that David was writing about a topic that interests a lot of reds it isn’t the same as calling someone a red.” I chose the Communism thing to make the point, but you can make the point with any equivalent example.

  18. Siggy

    If you think that the hubbub in Europe is all abou a singular focus on inflation, you just don’t get it.

    The hubbub is all about who’s going to take the hit when the unservicable sovereign debt is wrtten down to zero!

  19. slothrop

    “Em… food prices are up because of inflationary policies? I thought they were a combination of supply side issues and speculation. This is a classic case where rhetoric and imagery replaces analysis.”

    Pedestrian. I suppose Mr. Pilkington believes the US CPI numbers?

    Inflation is a result of how and where money moves. It may well be dispersed throughout asset classes. As soon as the money flows into fewer and fewer asset classes for lack of alternatives, IT IS TOO LATE.

    1. Susan the other

      If the food price index were more discerning food prices would never be inflationary because the demand is always so stable and predictable. Let us separate this shit out. Food (as in true nutrition), housing (including heat, elec. and communication stuff), education, transportation, medical, and then all the other crap. All the other crap is what I hope you are into.

  20. Paul Tioxon

    Phillip, the most damning evidence against using Weimar inflation as some sort of case study is that it is of no use to compare a situation that is a stand alone anomaly with other functionING economies, that somehow got off track, and you can deduce policy moves and capital flows to put iT back onto track. The German economy was manufacturing and exporting but getting no foreign hard currency in return, as part of reparations. German agriculture was inadequate to the task of food production for the populace. It was a net food importer and it only got worse with reparations. So, what you have is a nation working to produce goods and services, including food stuffs, and much of the production was sent outside the country. What ever currency you had could not command the purchase of food, and clothing and goods, if they were not there to be had. And if you could not produce enough food to begin with, no amount of money or price increases could fill all of the stomachs of Germany. The economy stopped working because Germany worked to reproduce the labor and capital of other nations and not itself. The money that was printed and thrown at the limited supply of goods was irrelevant and not an inflationary situation, it was a case of political dispossession. Instead of producing goods and services, the state produced money. And while people starved, at least they had barrels of money, but what good it did them WAS betrayed by the ships and railways carrying the fruits of their labors into other lands. The government just continued to print money, out of inertia, out tradition, out of not knowing what to tell a destroyed nation that they were being sacrificed to a lost war. It wan not a high finance gimmick in this instance. See “BEHEMOTH” BY FRANZ NEUMANN

  21. Sunny129

    During ‘Marshall plan’ resources went into ‘PRODUCTIVE” Economy in Germany unlike now where they are going to prop up ‘failed and over valued’ FIRE Economy on both sides of Atlantic!

    Western Economies crossed the line when the ‘Consumption’ model spilled and took over the ‘Production’ model. That consumption based Economy went on growing on the increasing availability of ‘credit’ through frac banking/ securitization etc. But now those houses of cards are crumbling but the policies remain in rebuilding the failed business models. Credit contraction and de-leveraging deflation has begun!

    Credit contraction is inevitable to cure the excess build up, for the last decades. All the measures to counter act this trend is just prolonging the agony. The charade continues with clueless leaders captive to corrupt Financial oligarchy!

  22. Mattski

    When 4-6% of a rich man’s wealth is lost to inflation he can still eat. Unfortunately, the Fed looks at it from his (usually a him, no?) view. Why is that?

    1. Mike M

      Hell, he can still put 20% of his wealth in speculative investments grinding along in whatever game the dealer calls, and, not only eat, but live first class. 80% of Americans are in the steerage, and will receive that much less gruel for tomorrow’s dinner.

      Freud my ass. But that reference explains a lot, I suppose.

  23. Tortoise

    Yves, You make a number of good points. One of them is historical, i.e., that the majority of Germans of the Weimar Republic suffered more during the deflationary period than during the hyperinflationary one. (Of course, every person’s experience is likely to be different.)

    But I will disagree on the basic premise as to whom inflation favors. One general principal is that inflation picks winners and losers but who and how many they may be is a different story because it depends on who gets first access to the new money and a number of other issues. Examples:

    1. Say the central bank issues a ton of money that creates inflation; but the money is lent to a government that uses it to re-distribute wealth through work programs and welfare. In this case you can argue that the poor benefit.
    2. If the same bank prints money to buy assets from the wealthy to prevent asset deflation and to fill the pockets of the haves with cash when they are faced with liquidity challenges, then inflation definitely does NOT benefit the poor.
    3. If the central bank of a country prints money to buy foreign exchange or goods to pay foreign debts or reparations to another state, then both the poor and the rich of a country are by and large harmed by the inflation that is created.

    Of course, there are many other issues and the most important may be that severe inflation can affect economic attitudes and make people take unreasonable decisions, like invest only in real estate or other unproductive asserts just to protect the value of their savings. Countries that systematically and consistently rely on inflation to support (insert good cause) end up with a destroyed real economy.

    Now regarding Europe: Part of the problem is that European countries had, before the euro, used their central banks to print money that was used by governments for welfare; the public could not borrow. The population and the economy were adjusted to this model. With the arrival of the ECB, the model changed. Interestingly enough, despite the ECB’s tight money policies, the cost of living went up dramatically in countries like Spain or Greece because people could now borrow. Much of the borrowed money went into real estate that people thought only went up in value. Furthermore, ECB was going to lend to banks and not governments and the governments instead went to the markets. These are some of the issues that have led to the mess we are all seeing.

  24. mac

    Folks we badly need to get over blaming “THEM” , you know “THEM” all those folks who might have a few $$ more than we do. We also need badly to get ver assuming “THEY” got what ever they have at our expense. We need badly to work on our own situation and no worry about or blame “THEM!!!

    1. F. Beard

      We need badly to work on our own situation and no worry about or blame “THEM!!! mac

      Baloney. We have a government backed/enforced counterfeiting and usury cartel that has driven borrowers into unserviceable debt and has cheated savers of honest rates.

  25. Linus Huber

    I do think that this essay misses on one major aspect. After the war, there was basically 0 debt, so the build up of debt produced enormous growth without any negative consequences.

    We are in a totally different situation today. We have too much debt already and the debt is hardly serviceable anymore and weighs on the economy like a heavy stone around the neck. At this point in time, to suggest to increase debt levels further, is simply to aggravate the situation further and to put on the blinders until the situation becomes completely out of control. There is no way to avoid the result of a credit bubble which is austerity, even if we do not like it. Trying to avoid this will only delay the final outcome.

    1. Philip Pilkington

      Have a look what’s happening with the EFSF right now. They’re expanding it to €2trn by ‘leveraging’ it through the ECB. Is this ‘debt’? Not really.

      *Whispers* They’re printing money and have been doing so since the ECB started buying bonds in the secondary market.

      People should be careful with this ‘we can’t go into more debt’ meme. It’s circulated cynically by conservatives and it’s not a real economic argument.

  26. Steve (the other Steve)


    If you have not read it, I highly recommend Adam Tooze’s “The Wages of Destruction” for a very good economic analysis of the Weimar and early Hitler economic policies.

    I agree with you that pro-cyclical inflationary policies, when there is an output gap, aren’t so bad.

    But it is hard to calibrate such policies and they can quickly become a dis-incentive to savings and capital formation.

    We are going to get a real-time test in the US about how much of a real output gap exists here. I hope all the experts are right (that the gap is big). I’m not so sure. Have you looked at the price of farmland in Iowa recently?

    1. Philip Pilkington

      The output gap is as large as the amount of people unemployed and underemployed. I don’t think any other definition is any good. Land prices are a particularly awful measure, as they are subject to so many other pressures (many of which are speculative).

      And I don’t believe that saving has anything to do with capital formation. In fact, I think you’ll find that — contrary to mainstream mythology — saving is actually a net drain on investment, as saving creates less aggregate demand (deflationary pressures) and so firms invest less.

      1. Philip Pilkington

        Also, on the savings issue:

        “…they (inflationary policies) can quickly become a dis-incentive to savings…”

        If a government spends that increases the private sector’s net savings by the exact same amount. That’s a simple accounting identity that the mainstream pretend doesn’t exist.

        If I’m the government and I give you an extra $10, your saving increases by the same amount. If you spend that, the recipients saving increases by $10. And so on…

        This is so misunderstood you’d have to wonder sometimes. But it’s so obviously true. Thus, not only does government spending NOT ‘discourage’ savings. All else being equal it FORCES savings by spending.

        Just look at any economy during wartime and you’ll see what I mean. The government spends beyond output and savings increase.

  27. allis

    An inflation is bad if it’s an inflation in wages and raw materials. Those who buy cheap and sell dear have to have others who sell cheap and buy dear.
    An inflation is bad for the 99% if consumer prices go up more than wages and salaries; an inflation is good for the 99% if wages and salaries go up more than consumer prices.
    Workers don’t riot against higher food prices if their wages are rising even more.

  28. Klaus Kastner

    For me, there are 2 pieces missing in (very good!) articles like this. One is the “human factor” (psychology) and the other is the value structure of the society whose economy is at issue.

    The “German miracle” after 1933 is to me very much a function of psychology. A national uprising of previously humiliated people and, I should add, of a people which doesn’t react so well to humiliation. A genius of a manipulator – supported by extremely skillful propaganda techniques – who could motivate the people “to give everything” to their country. The deficit spending after 1933 was in my opinion not the reason for this miracle; instead, it was the oil which made the psychological wheels turned loose move smoothly. Helmut Schmidt said in an interview: “If Hitler had been shot in 1936, his Finance Minister Schacht would have received the Nobel Prize in Economics”. And Goebbels would have deserved the Nobel Prize for the propaganda so that people would “give everything”… I think if leaders manage to passionately fire up their nation to one common goal, societies can achieve miracles. The only thing is that this sort of leadership and this kind of society’s reaction happens rarely in pluralistic democracies (or cannot happen there). Authoritarian manipulators have a better chance to accomplish that.

    Secondly, none of the money which Americans threw at the German economy after WWII could have achieved the miracle then if the value structures of the recipient society had not been driven by achieving economic success (or rather: by the German neurosis to achieve material success). Look at all the money the West Germans have transferred to the former East Germany for over 20 years now (nearly 100 billion EUR every year!). That money came upon a society whose value structures had been transformed over several decades into everything other than achieving economic success. And there, the money did not produce a miracle but, instead, a sad situation.

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