Monday, August 20, 2012

Citing the wrong period in Germany's interwar years


In the course of benchmarking Germany's position vis-a-vis Europe's current economic stress, the Germans are alleged to reference always the period of hyperinflation of Weimar Germany.

This is the wrong period in the interwar years to highlight for Germany.

For one thing, the hyperinflation years occurred 1921-1923.  While it was two excruciatingly painful years for Germany, it was only two years. 

In 1922 Germany announced it could not make its payments and year-long conversations resolved nothing.
Ed. note:  Sound familiar?  Say, 2008 through the present?

In 1923 a conference in Paris to restructure the debt/tribute, due to French intransigence.  Since Germany was unable to make payments on the reparations, France occupied the Ruhr.
Ed. note:  Not dissimilar from the Troika forcing debtor countries to sell off state assets at fire sale prices.

They also did not pay down their WWI reparations.*
*Which in the opinion of this author they correctly regarded as tribute and not debt.
By the way, occupation of the Ruhr was a violation of the Versailles Treaty, and Germany ceased all payments to France and Belgium.
Ed. note:  Seriously, Belgium - start being your own, schizophrenic country.

September 27 1923 the gov't of Germany abdicated, a new currency (Rentenmark) was introduced, and a new central bank (Rentenbank) on October 15 1923.  (Aka the First Crisis.)

What happened after 1923?  Well, Germany did NOT put their fiscal house in order, if that was the guess.  The Dawes Plan of 1924 provided for US. Britain, and France to loan $200mm in gold.  Surprisingly, it did not fix the problem.

And Germany tapped the private debt markets, selling sovereign and municipal debt by the boatloads, primarily in the American markets and often fraudulently.  That is, they misrepresented the seniority of the bond issues to American investors by indicating they took precedence over war reparations when in fact, per the Versailles Treaty nothing was senior to reparations.

As for the west side of the Atlantic, American investors were hoodwinked into believing the concept of "excess credit."  And all that excess credit was sloshing around in America.  Apparently it was still sloshing when Germany hit its Second Crisis in 1929.

In 1929 the Young Plan was hatched to fix the problem - again.  They concluded that Germany could not pay $625mm/year - that was reduced to $400mm/year.  It also called for US, Britain, and France to loan Germany $300mm in gold.  And the American investor - he of the excess credit?  Again, from Garrett's "Bubble That Broke The World", page 76:
American investors went on buying German bonds because the rateof interest was high; American banks went on puttingtheir surplus funds on deposit in German banks for thesame reason. They all said: "Oh, that is political propagandaabout reparations. It has nothing to do with privatefinance or private investments."

So what did Germany do with the receipts of all those bond issues, year after year?  Some was used to pay reparations, albeit partial payments.  The receiving countries in turn made their debt payments to creditor countries (primarily the United States, and to a lesser extent Great Britain), also partially.

With the rest of monies Germany invested in housing, industry, urban improvement, infrastructure.  Post-WWII's Marshall Plan is nothing but the winning side front-running the losing side's bond issuances and just giving the money!

After the Crash of 1929, when Americans realized they did not, in fact, have "excess credit" the pipeline to Germany dried up.

So once again the issue of reparations payments became the commanding issue of the day.

Germany lobbied/harangued every creditor country, telling them if the reparations were not restructured, or reduced, or loans were not granted they would have to regretfully default.

Since Europe was in the same predicament post-1929 as they are post-2008, all sovereigns agreed the loans must continue to Germany.  They also agreed that their own debts to the United States must be restructured.

August 1931, Germany has its third crisis since 1929.
From "The Bubble That Broke The World" (Garet Garrett), page 73:

Again, for the third time, Germany was threatening tosink in the sea of insolvency with all her creditors onboard; again it was the creditors who frantically workedat the pumps. Their anxiety was greater than Germany'sown. Why? For the singular reason that in this sea onlycreditors can drown.

You can see the similarities to today.

THIS is where Greece, Ireland, Italy, Portugal, and Spain should study.  Clearly it is not enough to take a page from Iceland's playbook (2008-2012), so perhaps studying what their nemesis of today did back in the 1930s should help.  This was Germany's successful game plan, again from Garrett's "Bubble That Broke The World", pp 73-74:

[T]here are two kinds of debt and two
kinds of creditors on board, all in the same dilemma.
There is what survives of the original reparations debt,
and there is now, besides, an enormous private debt,
owing not by the German Government to other governments,
but owing by the German Government, by all the
German States, by German municipalities, by German
banks, by German industry, to private lenders all over the
world. This is new debt, created in the last six or seven
years. The amount of it is nearly four billions of dollars.
Roughly two thirds of it is owing to American banks,
American investors, American lenders.
One value of this great private debt to Germany is that
she can play it against the political debt.
As she watches her creditors working at the pumps she
keeps saying: "Throw over the rest of the reparations
debt. That is what is sinking us. Cast that away and the
rest will float."
Then to her private creditors alone she says: "Don't
you see how you can save yourselves? Only side with us
and we will get rid of the reparations debt entirely. We
tell you the rest will float."
This suggestion tends to divide the creditors and they
begin quarreling among themselves. But they cannot be
sure that if the reparations debt be jettisoned the rest will
float. They are not sure of anything about Germany. So,
in frustration, they appoint an international committee
of experts to examine the ship from both the German point
of view and that of the creditors, to reconcile them, and
to say what burden of debt the ship can afford to bear,
Germany willing.

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