Those who refuse to learn from history are doomed to repeat it, said George Santayana, the philosopher. But this familiar maxim is being ignored this week by President Barack Obama and his fellow Democrats on Capitol Hill this week as they complete action on the chief executive’s proposed 2010 federal budget. With its unprecedented deficit approaching $2 trillion, this budget proposal is a certain prescription for hyper-inflation. So every senator and representative who votes for this monster $3.6 trillion budget will be endorsing actions that will turn America into the next Weimar Republic. For those too young to remember, that was the period in Germany in the years between the two world wars when people needed wheelbarrows full of money to buy a loaf of bread.
In a 1993 interview, Harvard law professor Friedrich Kessler described what living with Weimar hyperinflation was like: “It was horrible. Horrible! Like lightning it struck. No one was prepared….The shelves in the grocery store were empty. You could buy nothing with your paper money.” Thanks to the expanding profligacy on Capitol Hill, a version of such economic hell will likely happen here, according to two prominent economists. Johns Hopkins Professor Steve Hanke notes that the Federal Reserve’s balance sheet “has more than doubled in size since August…Unless the Fed shrinks its balance sheet,” he warns, “…inflation will roar back with a vengeance.”
The printing presses have already been running non-stop since Congress approved the Toxic Assets Recovery Program (TARP) and the $787 billion bailout of insolvent firms who got that way by abusing “easy credit.” Yet with interest rates now close to zero, Hanke points out, the Fed is merely “prescribing more of the same.” In their groundbreaking “Monetary History of the United States” Anna Schwartz and the late Nobel Prize winner Milton Friedman found that then (as now) a huge influx of foreign capital accompanied the early stages of Weimar hyperinflation. Schwartz, who today believes the “systemic risk” cited as justification to recapitalize failed financial institutions was just an excuse to save bankers’ hides, agrees that massive inflation is “unavoidable.”
There have been other, more recent hyperinflations, too. After years of deficits, the former Yugoslavia tried to print its way out of a similar predicament, then tried to counter the inevitable 15 to 25 percent annual inflation rate with price controls. Economic collapse quickly followed the worst hyperinflation in history. On Nov. 12, 1993, one million dinars could be traded for one German deutsche mark; by Jan. 4, 1994, the exchange rate was 6 trillion to 1. With Obama’s reckless 2010 budget – which was passed without a single Republican vote – Democrats are playing with inflationary fire.