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The Stabilization of the Mark

How did the German hyperinflation end ? I think the best but totally biased source of information is The Stabilization of the Mark by Hjalmar Horace Greeley Schacht
(just look at the price !?! to understand how German’s felt). The book could be entitled “How I Did It” but the point is that he did do it. My book report after the jump.

How to end a hyperinflation.

In a hyperinflation people learn about the price level. Basically one flexible price is used as a daily index. For some reason this is always the dollar exchange rate. It becomes a valid price index because everyone indexes to it. This means that the Central Bank can end inflation by intervening in the foreign exchange market (this caused a temporary stabilization in early 1923).

Step 1: introduce a parallel currency whose value is indexed to the dollar (it always is the dollar I don’t know why) so it exchanges with the Mark based on the market dollar/Mark exchange rate. This was called the Rentenmark based on the claim that it would be supported with a tax on capital (not capital income – capital). Importantly do *not* declare that this currency is legal tender. The point is that to buy dollars from the central bank, economic agents must pay in Marks not Rentenmarks. Rentenmarks can be exchanged only for marks. This is a universal feature of stabilizations (also in the USSR).

Step 2; declare an exchange rate peg. The Reichsbank promised to sell dollars for 4 billion marks each (I forget this might mean trillion with the old million milliard billion numbering). Notice I didn’t say peg the exchange rate. The Reichsbank didn’t actually do this. There was excess demand for dollars at that price and it made people wait up to 2 weeks.

Those people were mostly speculators who had borrowed marks. Since the stabilization wasn’t absolutely believed, the nominal interest rate was 20% per day. Making people wait a few days for their promised dollars is a way to bankrupt them. Bankrupting all the people betting against the stabilization is a way to make it work.

If the Rentenmark had been legal tender, speculators could have bet against the Mark by showing they had Rentenmarks which they could hold for months without going broke.

The peg was basically fraudulent. It was *not* true that you could get a dollar for $ billion marks. But it worked anyway, because what mattered was the exchange rate published in newspapers not actual exchange of actual currencies.

Hjalmar Schacht became president of the Reichsbank in November 1923. By December 1923 the hyperinflation was finished.

Of course Schacht was very lucky in his predecessor in office (about at the Obama level). The previous president Rudolf Havenstein had just published a pamphlet entitled (translated) “There Has Been No Inflation in Germany”.

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Fo/u/r/ive Notes

For Mother’s Day, as it were, xkcd presents The Lawrence H. Summers Memorial History of Math and Science.

Buce at Underbelly does this, probably saving me the trouble of a post. (Consider this a SlothBear moment.)

The problem I want Drek the Uninteresting—or anyone else who knows the research—to address: if we assume that mercury in the vaccine wasn’t the cause of the rise in autism, what are the causes that have been identified?

Maligning Tony Kushner by the Trustees of CUNY while he is on the cover of the current issue of his alma mater’s alumni magazine probably was not a good idea.

Update: The one I left out earlier: the Second Quarter Kauffman Economic Bloggers Survey is out (warning: PDF). I’m especially thrilled by Mark Thoma’s victory (p. 12), though surprised that the margin was so small. Suggestions that the 35% who voted for the second-best option were desperately attempting to deny incompetence are, of course, beyond the pale.

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Four Graphs Looking at Real Economic Growth

by Mike Kimel

Four Graphs Looking at Real Economic Growth

This post contains four graphs looking at real economic growth, three of which also contain some tax information.

The first graph shows the five year annualized growth in real GDP for every five year period beginning the one ending in 1934. (I begin then simply because data on real GDP is only available from the BEA beginning in 1929.)

Figure 1.

I took the liberty of adding in two lines free-style. The first is my attempt to trace the high points over time, leaving out WW2. The second traces the low points, assuming the collapse from 1929 to 1932 and the post-WW2 drop are special cases. (That huge dip from 1945 to 1950, economic shrinkage and all, is what libertarian professors like David R. Henderson keep referring to inexplicably as a post-war miracle.) Those ad hoc lines seem to indicate that any “Great Moderation” in the economy – whether it began in the 1980s or earlier – is more due to a slowing down of the rapid periods of growth than to a reduction in the severity of downturns. Put another way… the Great Moderation = the Great Suckening (for readers who aren’t economists, that’s a technical term like “sterilizing monetary policy” or heteroscedasticity).

Figure 2 is similar to Figure 1, but it strips out the two ad hoc lines and adds in the five year average top marginal individual income tax rate.

Figure 2.

As Figure 2 shows, there doesn’t seem to be much of a relationship between the average top marginal tax rate in any five year period and the annualized growth in real GDP over that same period, and certainly there’s no sign from this graph that higher tax rates discourage economic growth. The fact that the correlation between the two series is positive indicates that if anything, in general real economic growth rates have tended to be higher when tax rates were higher.

Figure 3 is a scatter-plot version of the data in Figure 2.

Figure 3.

Notice that it kind of looks like you can put a quadratic curve to these points – at “low” tax rates, increasing tax rates are associated with faster economic growth. Only at very “high” tax rates – somewhere north of 70% or 80% – does it appear that reducing tax rates are associated with faster economic growth. Reminiscent of this graph, dontcha think? Another thing that’s noticeable… the greater variability in growth that accompanies higher tax rates, which was also visible from Figure 2.

Finally, Figure 4 is the same as Figure 3, but rescaled to leave out 1942-1945, which only makes the lack of a lower taxes = faster economic growth relationship more obvious.

Figure 4.

As always, if you want a copy of the spreadsheet where these graphs were produced, drop me a line. I’m at mike period my last name (that is “kimel” – one m only!) at gmail period com.

Cross posted at the Presimetrics blog.

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What? Greece has to raise capital in 2012 and meet a 7.5% deficit target this year?

Over the last couple of months, a string of events made policy makers and investors alike say, what? Greece must raise capital next year and meet a 7.5% deficit target this year? Yes, they do, unless circumstances change. It’s near impossible to bet successfully on what Euro area policy makers are going to do, so let’s just review the facts here.

Greece missed its 2010 budget deficit target by near 1%, 9.6% of GDP projected (see .pdf page 45) vs. 10.5% actual (see Eurostat release, .pdf). The 2011 target is 7.5% of GDP.

Greece needs to raise roughly 30 bn euro in the private market next year – see .pdf page 50 here, where the IMF projects that Greece will finance 40.3bn in 2012, up from the 11 bn required in 2011. Furthermore, they’ll need to issue debt with longer maturity than the 3-month bills they’ve been marketing this year. At 1200 basis points over German bunds on a 10yr note, Greece cannot ‘afford’ this and is very unlikely to be tapping markets for term loans anytime next year.

Greece’s privatisation plan – selling state-owned assets – is probably too aggressive, amounting to roughly 4% of GDP per year through 2015 (10 bn euro average per year, see .pdf of presentation here, as a percentage of average GDP spanning 2010-2012).

But here’s something that is really important, and another reason why I do not believe that Greece would voluntarily default until at least next year: they’re expected to run a primary surplus in 2012. I take note that one can challenge the IMF’s forecast, but it’s the best information that I have at this time.

The chart illustrates the IMF’s 2011 and 2012 primary balance forecast across the Euro area (16) from the April 2011 World Economic Outlook. Those countries above the zero axis are expected to run 2012 primary surpluses – Greece, Germany, and Italy.

The primary balance is general government net lending (borrowing) excluding net interest expense. Better put: if the government runs a primary surplus, tax revenues are sufficient to pay all the government’s bills except the interest payments on the outstanding debt. Restructuring when an economy is in primary surplus makes much more sense.

If Greece runs a primary surplus in 2012, it will have a strategic ‘default card’ to play. This year it doesn’t, or Greece still needs the EFSF/EU/IMF to finance its spending. Next year, Greece can say “hey, we don’t need your money anymore.”

What to expect

Barring an immediate secession, I anticipate that Greece’s ‘circumstances’ will change in one of two ways over the near term: (1) Greece terms out its loans – a very soft restructuring – in the amount of 30 bn euro (or roughly thereabouts), or (2) the EFSF raises another 30 bn – that’s what it’s for.

On default, there’s a body of literature that attempts to quantify the costs of sovereign default – see the Economist article for a short literature review. Broadly speaking, the true economic impact could be ‘short-lived’ but is difficult to measure (see specifically this IMF paper).

It all comes down to this: I’m Greece, and I’ve put through structural reform that gets me a primary surplus next year – why subject the economy to further depressionary austerity measures rather than haircut my creditors and start from scratch? It’s been done before (see Table 2 of this paper). Or, I’m Germany (or France), do I want to write a check to Greece? Or recapitalize my banks outright.

Rebecca Wilder

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EMPLOYMENT REPORT

The headline number of payroll jobs was strong and the markets are reacting strongly to the report that 224,000 jobs were created last month. Moreover, the job gains were widespread with the only secctors to show an employment drop were temporary jobs and government.
Private payroll employment rose 268,000, the largest increase this cycle.


But the household survey reported an employment drop of some 190,000. The unemployment rate is based on the household survey so the unemployment rate ticked back up to 9.0%.

On balance, this employment report showed essentially the same news as the last several reports of weak employment gains that are well below historic norms. However, by the standards of the recent jobless recoveries this cycle continues to underperform the 1990s cycle and show stronger growth than the 2000s cycle.


The workweek was unchanged so that despite the large increase in private payrolls aggregate hours worked only rose 0.2 from 100.5 to 100.7. This is about the same that we have seen for the past several months.

Average hourly earnings rose rose from $19.32 to $19.37, or 0.2%. The year over year gain in average hourly earnings remains at 1.9%, where it has been for several months. Moreover, average weekly earnings growth at 2.5% continues to moderate. But with yesterdays plunge in oil prices real earnings might actually rise this month. But the wage data shows absolutely no signs of inflationary pressure.

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The Answer

At Balloon Juice, Doug Harlan J wrote

I’ve seen posters around for Kaplan test prep where it lists a bunch of answers and says “if you think you have to know the question to know the answer, you need to visit Kaplan”.

That is the correct answer. The question is after the jump.

The question is why aren’t our leaders reality based ? Why don’t they care about facts. Why are they so cynical ? Why do they worship savviness ? The explanation of the answer is that Kaplan teaches people how to make it into the elite and teaches them to be cynical.

My comment.

ou’ve nailed it ! “if you think you have to know the question to know the answer, you need to visit Kaplan” is the greatest catch ever. Of course it should go on “if you know you don’t need to know the question to know the answer, you might be qualified to write for the opinion pages for our Newspaper subsidiary.”

For every X, the correct answer is “opinions on X differ. Both sides have a point.” If one gets distracted by X and related facts, one can’t write a properly ballanced column.

Seriously, I think that the fact that Kaplan keeps the Post afloat and the Post makes it impossible to eliminate the Kaplan U boondoggle is just a coincidence. But I really don’t think it is a coincidence that the elite has ceased to be reality based when Kaplan figured out how to game the test which is used to decide who to admit to the universities which select the elite.

I’ve never tried to choose the answer without knowing the question. I have the following guesses as to how to do it. First, there are two similar answers and one is correct. The idea is n clearly wrong answers so that medium apt test takers can tell they are wrong, then two from which only highly apt test takers can chose.

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