Myth Of Money: The Inflation Boogeyman

Welcome to this week’s edition of the Myth of Money, a weekly newsletter on all things money, economics and technology read by 10,000+ investors, curated by Tatiana Koffman.

Disclaimer: The following is not intended as investment advice. Do your own research.

As the Fed continues to support a sustained inflation target of 2%, consumers and small businesses are reporting price increases as high as 5-7% for everyday goods and supplies. The fear of inflation is setting in.

In a popular book “When Money Dies,” Adam Fergusson describes a period of hyper inflation in post-WWI Germany that is starting to sound all too familiar. The government funded the costs of war by unpegging the mark from the dollar and printing additional funds excessively. After the war, to continue to fund regular government operations and a recovery, Germany again turned to the printing press. This is a similar tactic that the U.S. is employing both during and post Covid.

The more inflation increased in Austria and Germany, the more difficult it became to collect any sort of taxes paid in arrears. German businesses managed to cope with the situation in various ways, such as dealing in other currencies. Unions demanded regular and automatic inflation adjustments which, until the fall of 1922, kept blue-collar wages at an acceptable level relative to prices. Anyone with any cash invested in stocks to hold on to some of the value of their funds. Renters benefited from rent control based on pre-inflation rents; borrowers saw the real cost of their debt vanish. Clever speculators might even feel they could profit from the situation. And the frenzy with which everyone spent, to get rid of their cash for items of value meant that, ironically, there was little unemployment in the country, however weak the purchasing power may have been.

Gambling on the stock exchange had become the fashion — the only way to avoid losing all one's money and perhaps to add to it. Many new bankers were giving people advice, the flight from the krone governing all transactions.

Speculation on the stock exchange has spread to all ranks of the population and shares rise like air balloons to limitless heights … My banker congratulates me on every new rise, but he does not dispel the secret uneasiness which my growing wealth arouses in me … it already amounts to millions.

Sound familiar? Keep reading…

On December 15 1919, Frau Eisenmenger recorded that, whereas the downward movement of the krone in Zurich had gone on, 'the value of my industrial investments is rising to an extent which seems to be incomprehensible and almost makes me uneasy …" Her daughter was able to make two dollars a day at the American Mission, which could be exchanged for 400 krone, only 100 krone less than the monthly pension of a retired privy councillor.

Recovery of the mark could not be achieved without immediate repercussions in terms of bankruptcies, redundancies, short-time working, unemployment, strikes, hunger, demonstrations, Communist agitation, violence, the collapse of civil order and revolution itself. And as employment levels boomed, there never seemed to be a good time to take this task on. The conflicting objectives of avoiding unemployment and avoiding insolvency ceased at last to conflict when Germany had both.

Ferguson continues:

Spring saw no alleviation of the troubles of those with no political leverage to bargain with. Not only Austrian peasants and profiteers took advantage of their helplessness. Furniture, fittings, pianos and carpets were being bought up wholesale by what were known as the 'gold-currency' people — the occupying Italians, the British, the Americans. The last valuables of countless houses flowed on to the market, no one warning their owners not to part with goods whose intrinsic value remained unimpaired.

To conceptualize how bad inflation got:

Commissioner, explained that at the end of the Great War one could in theory have bought 500,000,000,000 eggs for the same price as that for which, five years later, only a single egg was procurable. When stability returned, the sum of paper marks needed to buy a gold mark was precisely equal to the quantity of square millimetres in a square kilometre. It is far from certain that such calculations helped anyone to understand what was going on; so let the unmathematical reader take heart.

Are we likely to see a similar level of inflation in the U.S.?

We are witnessing trillions of dollars in quantitative easing and zero interest rate environment. Valuations are sky-rocketing. And Chairman Powell explicitly stated that the Federal Reserve won’t act on rising inflation until it is consistently running higher than their historical target. Investors believe inflation is coming and it is coming faster and in larger quantities than previously experienced.

Food prices, lumber prices, real estate and stocks are all rising at a significant rate. And so is Bitcoin, the best performing asset of the last decade.

This Week By the Numbers 📈

The Dow and S&P snapped a two-week winning streak, while the Nasdaq has dropped four weeks out of the last five. Bitcoin continues to hold strong.

Top Stories  🗞 

Fed Chair Jerome Powell says central bank-backed digital currencies must coexist alongside cash and other forms of money

A recent report from the Bank for International Settlements and a group of seven central banks, which includes the Fed, assessed the feasibility of central bank digital currencies (CBDCs) in helping central banks deliver their public policy objectives. One of the three key principles highlighted in the report is that a CBDC needs to coexist with cash and other types of money in a flexible and innovative payment system." Read Full Story.

Fed to End Covid-19 Capital Break It Gave Wall Street Banks

The Federal Reserve will let a significant capital break for big banks expire at month’s end, denying frenzied requests from Wall Street. In response to the pandemic, the Fed had let lenders load up on Treasuries and deposits without setting aside capital to protect against losses. That relief will lapse March 31 as planned. Though the regulator concluded the threat that Covid-19 poses to the economy isn’t nearly as severe as a year ago, the Fed also said it will soon propose new changes to the so-called supplementary leverage ratio, or SLR. The goal is to address the spike in bank reserves triggered by the government’s stimulus programs. Read Full Story.

Goldman Analysts Work Too Hard

Junior investment bankers at Goldman Sachs are suffering burnout from 100-hour work weeks and demanding bosses during a SPAC-fueled boom in deals, according to an internal survey done by a group of first-year analysts. The surge in activity has taken a serious toll on analysts’ mental and physical health since at least the start of the year, according to slides released to social media and authenticated by people with knowledge of the matter. Read Full Story.

SEC Publishes VanEck’s Bitcoin ETF Application, Kicking Off Decision Clock

The U.S. Securities and Exchange Commission (SEC) acknowledged VanEck’s 19b-4 Form for its bitcoin exchange-traded fund (ETF) application on Monday, formally kicking off its 45-day window to make an initial decision on the proposal. If approved, the ETF would be the first open bitcoin exchange-traded product in the U.S., though there has long been demand for such a product from the crypto community. Historically, the SEC has rejected every bitcoin ETF application, including VanEck’s past efforts, citing the potential for market manipulation and a host of other concerns. Read Full Story.

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Thank you for reading this week’s edition of the Myth of Money.🚀

Until next week,

Tatiana Koffman

By Tatiana Koffman

Hi there and thanks for reading. If you stumble upon my newsletter, you will notice that I write about money, economics and technology. I hold a JD/MBA and spent my career in Capital Markets working across Mergers & Acquisitions, Derivatives, Venture Capital and Cryptocurrencies. I believe in empowerment through closing the financial education gap and creating equality of opportunity for the next generation. Check out my articles in Forbes here.

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