In his latest note, famously bearish SocGen analyst Dylan Grice goes there. Big time.
The subject of the note is Weimar, hyperinflation, and all that money printing that anyone talks about.
But it’s not what you’d expect. He’s not saying Germany printed money, and that caused Weimar hyperinflation and that caused Nazis. He’s saying memories of Weimar caused Germany too adhere too much to hard money, and that caused unemployment and that lead to the Nazis.
This chart is a real punch in the gut.
Photo: Societe Generale
The lesson Grice tells?
And here enters a wistful historical counterfactual: how different might history have been if the Germans had inflated their economy when the crisis broke?
Photo: Societe Generale
Here’s his lesson:
It’s impossible to say, of course. By 1931 the world was in depression. Germany would have been too, with or without its pathological fear of inflation. The Nazis would presumably have made the same electoral gains. But suppose Germany had inflated in 1931, like the U.K. did. The following chart compares the trajectory of the U.K. unemployment rate after it had left the gold standard with that of Germany, who stayed on.
After leaving the gold standard, the U.K. saw its unemployment rate decline by about a third from 1931 to 1933, while Germany’s rose significantly over the same period. If Germany had been willing to follow the U.K. in inflating, and its unemployment rate had followed a similar trajectory, it would have stood at 17% rather than 33%. Would this have averted what followed? Would Hitler have won that March 1933 election with 45% of the vote? Would the world have experienced the evils of the Nazis in power? World history might have been very different. There might not even be a euro today, let alone a euro crisis.
And this is the killer conclusion
So even a hard money libertarian like me can see that there have been times in history when creating inflation would have been the right thing to do. Germany today has to decide if now is one of those times.
Europe’s crisis today is orders of magnitude smaller than that in the early 1930s. The stakes are much lower today than they were then. But they are not low. And, just as it might have done in the 1930s, flexibility on hard money principles might help turn the tide. ECB involvement cannot solve the underlying problems of the eurozone economies, which are anti- entrepreneurial and too heavily regulated. But it will buy time with which to address these problems and so allow eurozone policy makers to get ahead of the panic for now.