Going Weimar

Back when I was giving more talks on global tactical asset allocation I would hand out some hyper-inflated currencies as a reward for guessing the correct answer to a few questions during the talk.  You can buy them on eBay for not much more than shipping (obviously, they’re worthless), and it serves as a good reminder of what sort of rare, crazy events that can occur in markets.

Below is a recent piece from one of my favorite writers, James Montier at GMO on hyper-inflations…

Below are a few charts before the download:


“In the largest false memory study to date, 5,269 participants were asked about their memories for three true and one of five fabricated political events. Each fabricated event was accompanied by a photographic image purportedly depicting that event. Approximately half the participants falsely remembered that the false event happened … Political orientation appeared to influence the formation of false memories, with conservatives more likely to falsely remember seeing Barack Obama shaking hands with the president of Iran, and liberals more likely to remember George W. Bush vacationing with a baseball celebrity during the Hurricane Katrina disaster.”
“It seems to me as if the standard view of hyperinflations is akin to a false memory. We have all heard that “central banks printing money leads to hyperinflations” so often that it must just be true. It is a simple, short narrative – exactly the kind that produces false memories.”


To say that the printing of money by central banks to finance government deficits creates hyperinflations is far toosimplistic (bordering on the simple-minded). Hyperinflation is not purely a monetary phenomenon. To claim that is to miss the root causes that underlie these extraordinary periods. It takes something much worse than simply printing money. To create the situations that give rise to hyperinflations, history teaches us that a massive supply shock, often coupled with external debts denominated in a foreign currency, is required, and that social unrest and distributive conflict help to transmit the shock more broadly.
On the basis of these preconditions, I would argue that those forecasting hyperinflation in nations such as the US, the UK, or Japan are suffering from hyperinflation hysteria. If one were to worry about hyperinflation anywhere, I believe it would have to be with respect to the break-up of the eurozone. Such an event could create the preconditions for hyperinflation (an outcome often ignored by those discussing the costs of a break-up). Indeed, the past warns of this potential outcome: the collapse of the Austro-Hungarian Empire, Yugoslavia, and the Soviet Union all led to the emergence of hyperinflation!


Download the content here:

Hyperinflations, Hysteria, and False Memories (you may have to register for free to download the PDF)