War, Debt, and Inflation from the Past to the Future

The World of Tomorrow
January 17, 2008

The World of Yesterday

Austrian novelist, playwright, journalist and biographer Stefan Zweig witnessed first-hand the summer of 1914. “It was the war of an unsuspicious generation,” Zweig wrote, “and the greatest peril was the inexhaustible faith of nations in the single sided justice of their cause.”

The proud Venetians surrendered their Austrian Crown, circulated in bright gold pieces, and their beloved Burg Theater… They traded their warm, comfortable existence for the blood-soaked trenches, breastworks and fortifications along the Western Front.

Vienna, the city that produced the Blue Danube…the city that nurtured the music of Mozart, Beethoven, Schubert, Brahmas and Strauss…now laid in ruins.

“The War to End All Wars” claimed the lives of more than 40 million unsuspecting souls.

However, Zweig found that the horrors of war also lay in the aftermath, not just senseless, meat-grinding slaughter itself.

War debt replaced gold. Consequently, the government quickly turned on the printing press. Every village and every town began to print it’s own worthless fiat money. Inflation soared. Famine ensued. Tiny bits of copper and nickel had more value than Austrian paper.

The people, who no less than five years earlier obtained one of the highest cultural and productive societies the world had ever seen, were suddenly reduced to primitive barter. They demanded substance for substance… In the time-span of one presidential term, one of the most progressive societies on Earth had been reduced to a cave-dweller’s squalor.

Retrospectively, Zweig writes that before the war: “Marvelous was this tonic wave of power which beat against our hearts from all the shores of Europe. But there was danger too in the very thing that brought joy, although we did not perceive it. The storm of pride and confidence which rushed over Europe was followed by clouds; perhaps the rise had come too quickly, the States and cities had become powerful too hastily. The sense of power always leads men as well as States to use or to abuse it. France was puffed up with wealth; it wanted yet more, wanted a colony even though there was no superfluous population for the old ones; it almost went to war over Morocco. Italy wanted Cyrenaica, Austria annexed Bosnia, Serbia and Bulgaria pushed toward Turkey, and Germany, still excluded for the time being, raised its paw for an angry blow.”

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The World of Today

The world of yesterday seems strikingly familiar to the world of today…

The storm of pride and confidence which rushed over the American landscape was followed by clouds; perhaps America’s 20th century rise to power came too quickly, the central government teamed with the central bank had become too powerful too hastily. The sense of power always leads men as well as States to use or to abuse it.

America was puffed up with wealth; it wanted yet more, wanted exclusive access to foreign oil and cheap labor; it spent more on defense than the next seventeen countries combined. President Bush pushed for missile defense systems in Eastern Europe. Russia, for fear of being outmatched, laid claim to the North Pole and all its Christmas goodies which, just happen to include 10 billion tons of gas and oil deposits…not to mention the significant sources of diamonds, gold, tin, manganese, nickel, lead and platinum peacefully resting on top of the world. To punctuate their resolve, they threatened to turn off the lights in Europe.

China, for their part, passively eases their desire to absorb American IOUs. Japan dips their toes in waters remilitarization. Venezuela throws its proverbial hat in the ring by ousting foreign oil while Iran consistently defies the international community by mischievously playing with yellowcake.

Oil and food prices surge… M3, the fullest measure of U.S. money supply, continues growing at a 12% annual clip. Entitlement programs goad us deeper and deeper in the red. Politicians promise more. Meanwhile, the Iraq war tab keeps churning along at a rather brisk $400 billion dollar a month pace; or, if you prefer, $100,000 per minute. Throw in the Afghanistan on the running meter and we add another $18,000 every 60 seconds.

The average American worker brings home $39,795 per year — or $19.13 per hour. So excluding overtime, John Q. Public must now clock three years to pay for sixty seconds. So dismiss the fact that his interest-only house payment is set to expire. Forget the fact his credit card bills bear a $15 thousand dollar balance. It’s only interest. Washington plays this way…why can’t he?

It gets better. The world now wrestles with a multi-trillion dollar international credit crunch. Markets around the globe shiver.

Where do we go from there?

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The World of Tomorrow

It’s 2008. We’ve been at war for nearly five years. There’s no end in site. No way to determine the true long-term costs.

Meanwhile, our debts continue to grow. But we keep printing. The U.S. money supply continues to surge three to four times faster than the GDP itself.

Mr. Bernanke sets to assuage investors into believing inflation is under control. Excluding food and energy, he says, the cost of living isn’t going up too much.

Well, as it turned out, the Labor Department reports that inflation at the wholesale level rose to 26-year highs in 2007. While the producer price index managed a tiny 0.1% fall in December, the government reported this morning that total 2007 producer inflation rose to 6.3%, a level not achieved since 1981.

Thankfully, it’s an election year. And as we’ve opined before, that’s where Hillary, Mitt, Barack and Mike come in.

Politicians who push populist economic agendas take the stage. They yearn for more government intervention atop more cheap credit. What could be better?

So which well wisher promises the most? We’re not sure. But it seems to us that he or she will write more government checks backed with dollars…and that’s the heart of the problem.

Every imaginable rescue mission for the overly indebted American consumer, not to mention the overly indebted American government, leads to increasing quantities of dollars and credit, which can only mean one thing:

Inflation will only get worse.

“Inflation,” according to Congressman Ron Paul, “is immoral.”

“It’s immoral in the sense because it steals, it steals value. If you double the money supply and your prices go up twice as much, it’s an invisible hidden tax. But the real immorality here is that some people pay higher prices than others. So if you’re in a middle class or especially in low middle income, your prices might be going up 15% a year...and somebody on Wall Street might be working leverage buyouts and making billions of dollars and they don’t have to worry about the rising costs of living.”

“This to me is an immoral act that is prohibited by the constitution and the outcome is always tragic.”

Dear Mr. Paul, we concur.

Your editors believe all prosperity begins and ends with a sound money system. History has proven this fact time and time again.

Too bad Congress can’t subpoena Stefan Zweig.

Well, at least they got Roger Clemens…

Keep spending (it will only be worth less tomorrow),
Christopher Hancock

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