what happens next, page-2

Lets draw on the lessons of history to see what happens

I have taken an excerpt from a great tome " The dying of Money" by Jens Parrsson (1974) An interesting readoutlining what happens to money in inflationary times. This piece is from the chapter called "Gains and Losses" so are you a winner or loser?

I have drawn my own conclusions -what's yours?



‘When the inflation was over, everyone who had owed
marks suddenly and magically owed nothing. This came about
because every contract or debt that called for payment in a fixed number of marks was paid off with that many marks, but they were worth next to nothing compared with what they had
been worth when they had been borrowed or earned. Germany’s
total prewar mortgage indebtedness alone, for example, equal
to 40 billion marks or one-sixth of the total German wealth,
was worth less than one American cent after the inflation.

On the other side, of course, everyone who had owned mark or
mark wealth such as bank accounts, savings, insurance, bonds, notes, or any sort of contractual right to money suddenly and magically owned nothing

The largest gainer by far, because it was the largest debtor, was the Reich government The inflation relieved it of its entire crushing debt which represented the cost of the war, reconstruction, reparations, and is deficit-financed boom. Others who were debtors emerged lie the government with large winnings Until the last moment of the inflation borrowers continued to make huge profits simply by borrowing money and buying assets, because lenders never stopped underestimating the inflation.

The good fortune of the debtors demonstrated the prudence of following the governments lead: one must beware of being a creditor whenever the government was a huge debtor. Farmers in particular were the classic case of invulnerability
to inflation, because they always had food, their farms
were constant values, and the many who had mortgages on
their farms were forgiven their debt outright.
The debtors gain was the creditors loss. Foreign holders of
marks were huge losers. Germany was estimated to have made a profit of about 15 billion gold marks, or 40 percent of its annual national product. on sales of its paper marks to foreigners, even after deducting reparation payments. The wealthy in germany suffered heavily but unevenly; the more nimble perceived early enough the need to invest in something other than mark wealth, while those who were not nimble lost everything. Trustees were forbidden by law until the very end to invest in but fixed obligations and consequently lost all the value of their trusts. The endowments of great charitable institutions, similarly invested, were wiped out.

Financial institutions such as banks and insurance companies, which were both debtors and creditors in marks, were generally weakened though not destroyed in the inflation because of their inability to see clearly what was happening. Speculators tended to believe in their own game until too late and emerged as net losers. Sound businesses escaped weaker and intact; their debts were relieved but their boom business was gone. Inflation-born businesses disappeared.

Industrial stocks, the darling of the inflationary speculation, had a peculiar history. A the height of the boom, stock prices had been bid up to astronomical price-earning ratios while dividends went out of style. Stock prices increased more than fourfold during the great boom from Feb 1920 to Nov 1921. Then, however, shortly after the first upturn of price inflation and long before the inflationary engine faltered and began to weaken, a stock market crash occurred. This was the black Thursday of Dec 1, 1921.
Stock prices fell by about 25% in a short time and hovered for about 6 months while all other prices were soaring. The real value of stocks declined steadily because their prices lagged far behind the prices of tangible goods. Investors were extremely slow to grasp that stocks were poles apart from the fixed obligations like bonds, quite wrongly thinking that if bonds were worthless stocks must be too. Nearer the end in 1923, relative prices of stocks skyrocketed again as investors returned to them for their underlying real value. Stocks in general were not a very effective hedge against inflation at any given moment while inflation continued; but when it was all over, stocks of sound businesses turned out to have kept all but their peak boom values notably well. Stocks of inflation born businesses, of course, were as worthless as bonds.
The mass of workers who lived mostly on their current wages, and who had no savings to lose, suffered only temporarily with privation and unemployment in the very last throes of the inflation; but these problems passed and left them where they had been or not much behind. To them, the agony of the inflation was largely someone elses, just as the boom had been.
At the bottom, it was the unsuspecting middle class who were germany’s savers, pensioners, purchasers of life insurance, including everyone from workers who saved to the modestly well off, who not only suffered the worst of the agony while the inflation lasted but also were left after it was over twith the most staggering permanent loss in relation to their whole substance.

This class paid the piper for all of germany. Great numbers of pensioners were left totally impoverished and forced back into work gangs to end their days. The encouragement of thrift, an old German weakness, turned out to have been a complete swindle.

Despite obliteration of the wealth of millions of individual Germans, the inflation was merely a transfer of their wealth, like any tax, and not in any sense a destruction of wealth. For every German’s total loss, there was the equivalent gain to some other German debtor or to Germany as a whole, through the discharge of their debts