Why Hyperinflation is Coming to America and How to Prepare Now | Sovereign Investor

Germany in the early 1920s was a desperate place when prosperity was spreading across the United States. The Allied victory in World War I had forced a tremendous financial burden on the new republic with France and England especially hard on Germany for war reparations. Eventually, the Germans couldn’t meet the ridiculous terms of payment and in order to settle financing obligations in gold, had to start printing – and print they did.

322% to 19,000% Inflation Per Month

The German currency was relatively stable at about 60 marks per U.S. dollar during the first half of 1921. But the “London ultimatum” in May 1921 demanded reparations in gold be paid in annual installments of 2 billion gold marks plus 26 percent of the value of Germany’s exports. The first payment was paid when due in August 1921. It all went downhill from there.

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The Death of Paper Money

The crucial passage comes in Chapter 17 entitled "Velocity". Each big inflation -- whether the early 1920s in Germany, or the Korean and Vietnam wars in the US -- starts with a passive expansion of the quantity money. This sits inert for a surprisingly long time. Asset prices may go up, but latent price inflation is disguised. The effect is much like lighter fuel on a camp fire before the match is struck.

People’s willingness to hold money can change suddenly for a "psychological and spontaneous reason" , causing a spike in the velocity of money. It can occur at lightning speed, over a few weeks. The shift invariably catches economists by surprise. They wait too long to drain the excess money.

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