Thinking Analogously: The German Mark of the Weimar Republic Vs The Present-day Dollar

Previously, I explained why it may be inappropriate to liken the dollar to the paper mark of the Weimar Republic. It recently occurred to me that I could explain this in a simpler fashion via the tool of analogous thinking.


Imagine that Bernanke (and the rest of us of that matter) firmly believed that the Fed should print dollars to buy – say – 1000 ounces of gold every day. Those gold ounces would be distributed to the public at the end of every day. Furthermore, suppose that we also believed that every time the price of gold rose by $1, we should buy 1 ounce extra every day.


Do you see how this would quickly spiral out of control? Every morning, the Fed would print dollars (increase its liabilities) and every evening it would be no richer than the previous day (its assets would remain the same). Thus, in order for there to be a profit-motive in owning dollars, the dollar price of gold (and other things) would have to rise. However, because of our foolish idea, this would bring about even larger daily purchases of gold with printed dollars. The result would be a disastrous hyperinflation that would cease only when the idea behind it was rejected.


The hypothetical scenario above resembles the debauched practices involved in the paper mark’s demise. Can we really liken this to the present-day dollar?


I contend that  - right now – we cannot. Today, the ideas that enable balance sheet expansions (‘money printing’) are more benign (although still misguided). The false premises of today hold that balance sheet expansions are necessary to counteract the tendency towards the collapse of (insolvent) socially systemic institutions.


The analogy I use for today’s ‘money printing’ is that the Fed is like a naughty child who moves the goal-posts after a shot at goal has already been taken.




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Posted Mar 9, 2011