A Retrospective: From Inflation to Hyperinflation
With the outbreak of war in 1914, the possibility of exchanging banknotes for gold was elimi-nated, and Reich banknotes were only covered by government debt securities. The ever-increasing costs of war were not financed by tax increases, but the state went into debt with its own citizens and the Reichsbank, which printed and circulated more and more money in re-sponse. By the end of the war in 2018, the state was facing huge financial problems. In addition to the state’s war debts in Germany itself and to its guarantors, there were high social expenses and the huge reparations payments demanded by the victorious powers. For all this, the gov-ernment took out more and more loans from the Reichsbank without a corresponding increase in the supply of goods. The wage-price spiral was set in motion. In 1923, the galloping inflation finally turned into hyperinflation. Money lost its function as a means of payment and preserving value. Subsequently, in November 1923, the Reichsmark was replaced by the Rentenmark as the official currency in Germany. All debts and financial assets were dissolved in one fell swoop. With the introduction of the Rentenmark, Germany’s war debts of 154 billion marks now amounted to only 15.4 pfennigs! The state had no debts any-more, but the citizens had no money either.
How to invest in the face of Inflation ?
Definition of inflation and what does it lead to?
Germany and the hidden inflation
In World War II, the costs of the war were also financed by government loans from the central bank. This time, however, attempts were made to prevent the strong expansion of the money supply. Goods rationing, price and wage freezes and a system of ration coupons made inflation almost invisible. Thus, inflation in Germany was concealed. After the end of World War II, an-other currency reform followed in 1948. Reichsmarks were exchanged for Deutschmarks at a ratio of 10:1. And again, 90% of the debts, but also 90% of financial assets had disappeared. These two inflations left a traumatic mark on the German minds. As a result of these inflation experiences in Germany, a Bundesbank was created, which, as a body independent of the state, was primarily committed to monetary stability. The intention was to decouple monetary policy from state influence as far as possible, which worked very well until the 2000s. The Bundesbank served as a successful model for the introduction of the euro system. According to the rules of the euro system, price stability prevails if the inflation rate on the basis of the previous year is below, but also close to 2% in the medium term. Thus, in the 20 years since its introduction, the euro has also proved to be a stable currency externally, both in Germany and in the euro area as a whole.
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Corona and inflation in Germany
Due to the Corona pandemic, the inflation rate in Germany in 2020, measured by the consumer price index (CPI) compared to 2020, was already 3.1%. In the course of 2021, inflation contin-ued to accelerate and in December 2021 was already +5.3% compared to the same month of the previous year.
Now (as of September 2022) after the continuation of the war in Ukraine and a stop to Russian oil and gas supplies to Europe, sharply rising energy prices have fuelled inflation even further, pushing it up to 10% in Germany. All figures that are miles away from the ECB’s price stability target of 2%. The ECB responded in the summer of 2022 with two big rate hikes of 50 and 75 basis points to a total of 1.25%. Even more hefty interest rate steps are expected in the current year, so that the reference interest rate could exceed 3% in Q1 2023. The ECB is therefore in-creasingly caught in a dilemma between safeguarding price stability on the one hand and providing the economy with a cheap supply of money on the other in order to avoid a deep economic recession in winter. This is likely to be a litmus test for the ECB and the euro system in the coming months.
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