Wednesday, 3 November 2010

Is America The New Weimar?

I am currently reading Keynes' "Essays In Persuasion". I have read the first section, which is about the question of Germany's reparations after World War I. The victorious Allies, in the Treaty of Versailles, saddled the new German Republic with an enormous war reparation, which far exceeded the ability of the German economy to stand the repayments. 

We all know the story of how that led, indirectly, to the great Weimar inflation, the destruction of middle class savings, and the rise of Hitler. What is less well known is the pattern of inter-Allied debt, and how the insistance upon strict settlement of those debts made both a German default and the rise of Hitler almost inevitable. If there ever was a case of 'penny wise and pound foolish', then this was it.

As I read about Keynes' view on this, I couldn't help but make the comparison between Weimar Germany and contemporary America. Both superpowers of their day, both suffering from an aggressive and war like foreign policy, both in hock to a set of foreign creditors. Germany had recently lost a war, and one could argue that America is currently in the process of losing one.

Following the analogy, that would imply that the US will face a crisis in servicing its debt on the near future. I believe this to be the case. One can suspect that the US will be unable to repay the debt that it is incurring. If so, then are we just around the corner from a large bout of inflation? The hyper-inflation of the 1920s wiped out most of the Weimar debt. Will the same occur for the US in this decade?

© The European Futures Observatory 2010

Essays in Persuasion (Palgrave Insights in Psychology)

Essays in Persuasion

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