‘Ominous Parallels’

January 29, 2007 – It seems clear to me that the US is following a monetary path that is leading to ever-growing rates of inflation that will over time culminate with exceptionally high rates of inflation, if not hyperinflation. To test this point of view, I have been reading about Weimar Germany to study its infamous inflationary episode and just as importantly, the economic and political consequences of its aftermath.

Germany’s inflation began even before Weimar’s creation at the end of World War I and then continued to a hyperinflationary collapse in November 1923. Ten years later the Weimar Republic disappeared with the rise of Hitler.

One historical account I can recommend is Economics & Politics in the Weimar Republic by Theo Balderston. But there is another more important book that I would like to focus on here. It is Ominous Parallels, which is an exceptionally thought provoking book by Leonard Peikoff that first appeared in 1980 and has been in continuous print since then.

I read Ominous Parallels shortly after it first appeared, and remembered well its main theme, which focused more on politics than economics. Namely, the US was on a path similar to that followed by Weimar Germany in the 1920’s, and it is a path that ends with a dictatorship.

That conclusion seemed harsh back when I first read it, but much less so today. Having now re-read Peikoff and having the benefit of witnessing events and trends in the intervening twenty-five years, Peikoff is quite prescient.

For example, in comparing communist to fascist dictatorships Peikoff writes: “In America, the idea of public ownership of the means of production is a dead issue. Our intellectual and political leaders are content to retain the forms of private property, with public control over its use and disposal.” No one can possibly deny that reality given the shocking Supreme Court decision in Kelo v. City of New London in 2005, but what is even more shocking is Peikoff’s conclusion in his next sentence: “This means: in regard to economic issues, the country’s leadership is working to achieve not the communist version of dictatorship, but the Nazi version.”

This conclusion is the crucial ominous parallel upon which Peikoff focuses, and is the one I best remembered from my first reading of his book. But there are others, and the economic parallels are now of particular interest.

Peikoff writes that after the inflationary debacle of the early 1920s: “the [Weimar] Republic had seemed to return to normal, enjoying its so-called “period of prosperity”. It was a shaky, foredoomed prosperity built on credit and quicksands.”

Does that sound familiar? Do those words describe an ominous parallel to the American economy today after its inflationary episode of the 1970s and early 1980s? If you are uncertain about the answer to those questions, consider the following observation by Peikoff about the Weimar economy.

“In essence, Germany’s [“period of prosperity”] was the result of a massive inflow of foreign – primarily American – capital, in the form of huge loans along with the purchases of German securities. America was experiencing the artificial boom of the [1920’s], a pyramid of highly speculative investments and wild spending made possible by a variety of government actions – most notably, the action of the Federal Reserve Board in generating a cheap-money policy in the banks. The influx of this capital into Germany, which also lacked the free-market restraints on inordinate speculation and spending, helped to fuel a similar artificial boom.

In particular, the various levels of government in Germany, which had learned nothing and forgotten everything from the inflationary crisis, were once again pouring out money and piling up debts; they were endowing lavish public works, starting a program of unemployment benefits, enlarging the bureaucracy, raising its salaries, and the like. This time, however, the governments were not counting on the printing press to finance their activities, but on the Americans. “I must ask you always to remember,” said Gustav Stresseman to his countrymen, “that during the past years we have been living on borrowed money. If a crisis were to arise and the Americans were to call in their short-term loans we should be faced with bankruptcy.” He said it to deaf ears, in 1928.“

Now please go back and read those last two paragraphs again, but with a couple of changes. Substitute “US” for Germany, “China” for America, and the “Chinese Central Bank” for the Federal Reserve. After re-reading these two paragraphs, ask yourself, aren’t the parallels to today obvious? Also, and perhaps more importantly, aren’t the parallels ominous?

Like Weimar Germany, the US is spending more than it is earning. It is borrowing more than it is saving.

Weimar Germany was burdened with a huge external debt, arising in large part from the war reparations imposed on it. The huge and growing US external debt is largely self-imposed, though other countries willing to exchange goods for US debt are complicit in promoting a scheme that has enabled the US to live far beyond its means – just like Weimar Germany did. The path the US is pursuing is going to end badly, just like it did in Weimar Germany, which explains why I am so pessimistic about the dollar, and conversely, view gold to be an essential asset for everyone.

The economic consequences of the path the US is following are indeed scary. But the really frightening question relates not to the ominous economic and monetary parallels to Weimar Germany. Rather, it is whether the US is also following the ominous political parallels described by Peikoff?

Both Balderston and Peikoff make clear that economics and politics are intertwined in countries with fascist governments. Therefore, one cannot investigate Weimar without reading about both fields of study. Nor can one look at the monetary and economic situation in the US today without thinking about both. I’ll leave the last word to Peikoff:

“If [a dictatorship] happens here, the primary responsibility will not belong to the people, who still reject such a mentality and are groping for a better kind of answer. The responsibility will belong to those who banished from the schools all knowledge of the original American system, and who would have finally convinced the nation that men’s only choice is a choice of dictatorships.

No one can predict the form or timing of the catastrophe that will befall this country if our direction is not changed. No one can know what concatenation of crises, in what progression of steps and across what interval of years, would finally break the nation’s spirit and system of government…

What one can know is only this much: the end result of the country’s present course is some kind of dictatorship; and the cultural-political signs for some years now have been pointing increasingly to one kind in particular. The signs have been pointing to an American form of Nazism.“