Is America on the Path to Becoming the Second Weimar Germany?

Following the Treaty of Versailles in 1919, which imposed severe reparations on the newly born Weimar Republic of Germany for the countries involvement in World War I, the Weimar Republic eventually was forced to print trillions in deutchmarks, leading The value of the Papiermark to declined from 4.2 per US dollar at the outbreak of World War I to 1 million per dollar by August 1923, leading to citizens purchasing loaves of bread and other basic staples of life with wheelbarrows full of cash. To counter the hyperinflationary environment, the Weimar Republic was forced to do a "monetary reset", introducing the Rentenmark at the previous ratio of 4.2 per US dollar.

Hyperinflation has become an increasingly dangerous calamity that may face the United States of America should the latest moves by the Federal Reserve go astray, or if the US dollar should suddenly lose its status as the World's leading Reserve Currency.

Currently, roughly half of Chinese reserves are invested in U.S. debt, and many other of the leading economies are heavily invested in US dollars.

Yesterday the Federal Reserve announced it's plan to pump another $1 Trillion dollars into the US economy through the purchase of long-term government debt, a move the central bank has not done in 50 years, and effectively creates the $1 Trillion out of thin air.

The US dollar is a "fiat currency", meaning that it's value is not pegged to any other commodity or currency basket. The Federal Reserve serves as the US financial apparatus in controlling the scarcity of the US dollar.

Calls from around the world for the Fed and US Treasury Department to maintain the stability of the US economy, most noticeably from China, have also been met with the upcoming recommendation to the United Nations from Currency specialist Avinash Persaud for the world's governments to drop the US dollar as the primary reserve currency and the establishment of a highly complex new reserve currency instrument that would be based on a basket of other currencies. Russa is expected to make a similar recommendation at the upcoming G20 Summit.

Given the recent inability for the Obama Administration to reestablish absolute confidence in the US economy, it may be difficult for the United States to effectively hold off such a move.

Should the governments that currently hold vast sums of US dollars begin to drawdown their holdings, the effect could accelerate inflation and contribute or cause a hyperinflationary environment.

In a Special Report titled "Manning The Barricades" the Economist Intelligence Unit of The Economist Group have created a novel approach to identify and rate the correlation of economic crisis and the potential for political and social unrest. In the reports conclusion the EIU states, "US policy will be the main determinant of which model emerges. However, the US can no longer be viewed as an unambiguous champion of unfettered globalisation and associated international political processes. For one thing, there has been a marked worldwide decline in respect for the US-unlikely to be reversed simply by the arrival of a new administration in Washington-that constrains US influence. For another, aside from the impact of domestic politics in the US, there is also what might be called the "paradox of globalisation": the fact that the US benefits from globalisation comparatively less than others, which (especially Europe and Asia) stand to gain far more. It is unclear to what extent such considerations influence US strategic thinking.'

In a 1995 article titled "American Weimar", Steve Erickson wrote, " America wearies of democracy. Thirty years after a war that wounded its heart, 20 years after a scandal that scarred its conscience, 10 years after fiscal policies that ridiculed its sense of responsibility and fairness, the country has nearly exhausted the qualities by which democracy survives and flourished. America feels at the end of its power, and the result is a hysteria of which we're barely conscious, a hysteria in which democracy appears as a spectacle of impotence and corruption. As Americans we have come to act more oppressed by freedom than invigorated by it, more concerned with freedom from rather than freedom to. We divide between the vast majority of us who -- out of futility, confusion or indifference -- are so disengaged from democracy we never vote at all, and those of us who vote not to thoughtfully resolve complicated issues but to express our rage.

"History is clear that democracy cannot long navigate a sea of national rage. Untempered by rationale and open-mindedness, fury eventually consumes democracy rather than nourishes it, because it overwhelms our tolerance, our willingness to be reasonably informed, our determination to hold ourselves accountable for what we decide. Most important, it overwhelms our basic faith in democracy itself and our belief in the individual freedoms that are inviolate to the power of the majority, identified by the Declaration of Independence as endowed by God and codified in the first 10 amendments to the Constitution. We display less and less patience with what we previously held to be inalienable, less and less patience with democracy's inherent messiness and inefficiency and the morass of conflicting interests that are read in democracy's results. We display less patience, in other words, with other Americans."

For those who believe the current systemic risk faced by hyperinflation in the United States may be overstated in this article, I was myself quite shocked at what I read in "The Big Takeover", an article released today, March 19, 2009, in Rolling Stone Magazine, actually dated more than 24 hours after I was originally done writing this article. Writer Matt Taibbi's sometimes crude, outraged take on the Wall Street Meltdown, subtitled "The global economic crisis isn't about money - it's about power. How Wall Street insiders are using the bailout to stage a revolution", does a great job explaining the events that lead to the collapse of the US Economy and led to the Wall Street and AIG bailouts last year, but what is most alarming is a few paragraphs near the end about the current actions being undertaken at the Federal Reserve.

"The H4 report (called "Factors Affecting Reserve Balances") summarizes the activities of the Fed each week. You can find it online, and it's pretty much the only thing the Fed ever tells the world about what it does. For the week ending February 18th, the number under the heading "Repurchase Agreements" on the table is zero. It's a significant number," Taibbi states, "Why? In the pre-crisis days, the Fed used to manage the money supply by periodically buying and selling securities on the open market through so-called Repurchase Agreements, or Repos. The Fed would typically dump $25 billion or so in cash onto the market every week, buying up Treasury bills, U.S. securities and even mortgage-backed securities from institutions like Goldman Sachs and J.P. Morgan, who would then "repurchase" them in a short period of time, usually one to seven days. This was the Fed's primary mechanism for controlling interest rates: Buying up securities gives banks more money to lend, which makes interest rates go down. Selling the securities back to the banks reduces the money available for lending, which makes interest rates go up.

"If you look at the weekly H4 reports going back to the summer of 2007, you start to notice something alarming. At the start of the credit crunch, around August of that year, you see the Fed buying a few more Repos than usual - $33 billion or so. By November, as private-bank reserves were dwindling to alarmingly low levels, the Fed started injecting even more cash than usual into the economy: $48 billion. By late December, the number was up to $58 billion; by the following March, around the time of the Bear Stearns rescue, the Repo number had jumped to $77 billion. In the week of May 1st, 2008, the number was $115 billion - "out of control now," according to one congressional aide. For the rest of 2008, the numbers remained similarly in the stratosphere, the Fed pumping as much as $125 billion of these short-term loans into the economy - until suddenly, at the start of this year, the number drops to nothing. Zero.

"The reason the number has dropped to nothing is that the Fed had simply stopped using relatively transparent devices like repurchase agreements to pump its money into the hands of private companies. By early 2009, a whole series of new government operations had been invented to inject cash into the economy, most all of them completely secretive and with names you've never heard of. There is the Term Auction Facility, the Term Securities Lending Facility, the Primary Dealer Credit Facility, the Commercial Paper Funding Facility and a monster called the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (boasting the chat-room horror-show acronym ABCPMMMFLF). For good measure, there's also something called a Money Market Investor Funding Facility, plus three facilities called Maiden Lane I, II and III to aid bailout recipients like Bear Stearns and AIG. While the rest of America, and most of Congress, have been bugging out about the $700 billion bailout program called TARP, all of these newly created organisms in the Federal Reserve zoo have quietly been pumping not billions but trillions of dollars into the hands of private companies (at least $3 trillion so far in loans, with as much as $5.7 trillion more in guarantees of private investments). Although this technically isn't taxpayer money, it still affects taxpayers directly, because the activities of the Fed impact the economy as a whole. And this new, secretive activity by the Fed completely eclipses the TARP program in terms of its influence on the economy."

What has been said there, and in comparison to the analogy with 1923 Weimar Republic Germany, should be desperately, frighteningly, clear. The Federal Reserve, the organization taxed with effectively managing Interest Rates, and more importantly, inflation, has now ceased to operate in that capacity. So for all the expansions of dollars being appropriated through Congress, or funnelled into the private sector through the newly created secret conduits of the Federal Reserve, are completely non-asset backed, completely untraceable by outside economic analysts, and completely unchecked by proper legislative channels or inflationary safeguards.

Even Terence Corcoran of the Financial Post asked today, "Is this the end of America?"

The Weimar Republic printed off at least $126 billion Papiermarks to pay off it's war reparations and who knows how much to maintain the countries vast social entitlements and own rebuilding efforts. The United States of America is right now printing and pumping as much as $8.7 trillion or more into the economy, while the effects of the US Housing Crisis and the Toxic Asset Crisis have seemingly been unaddressed as of this point. A very secret bubble is being reconstructed in some secretive sector of the very same Wall Street that quite willfully, as described in the first 6 pages of the article, purposefully devastated the world economy and could possibly be repositioning themselves to finish the job. What is clear now is that President Obama was voted into office on a wave of 'Hope" and "Change", reinvigorating the potentials of what an energized American Public can again find compelling about the political stage, bringing many back to a system that they had given up on, or bringing many too young to remember the turmoils of the 1960's and 1970's that made a vast swath of the population hardened and disillusioned with democracy.

Should he fail, should the economy collapse entirely, democracy could go the way of Communist Russia, or Weimar Germany.

Sources:

The International Herald Tribune, "Fed to pump another $1 trillion into U.S. economy", by Edmund L. Andrews
Reauters, "U.N. panel says world should ditch dollar", by Jeremy Gaunt
Special Report, "Manning The Barricades", The Economist Intelligence Unit, March, 2009
Los Angeles Times Sunday Magazine, "American Weimar", by Steve Erickson
Rolling Stone, "The Big Takeover: The global economic crisis isn't about money - it's about power. How Wall Street insiders are using the bailout to stage a revolution", by Matt Taibbi
Financial Post, "Is this the end of America?", by Terence Corcoran