Gold News

Lest We Forget

The consequences of failing to learn from past disasters...

TODAY is Remembrance Day. Lest we forget, writes Greg Canavan in the Daily Reckoning Australia.

The Great War was a disaster for Europe and the rest of the world. Following decades of relative peace and economic stability, fighting broke out in August 1914 and didn't cease until 11am on 11 November 1918...93 years ago today.

The continent is still feeling the aftershocks of the Great War. The peace was badly managed. The allies gave Germany a huge reparations bill but took away her ability to pay.

Germany printed the money instead. This resulted in a hyperinflation that tore its society apart. Farmers had plenty of food but they wouldn't take the worthless paper currency as payment…so the townspeople half-starved.

"The proclamation of September 19 (1923) threatening a month in goal and unlimited fines to anyone who hoarded food or money, or prevented the paying of taxes, or impeded the distribution of food or fodder, though signed by the Chancellor, the minister of the Interior and the President himself, was a useless act of desperation: everyone, ministers included, was hoarding all he could; no one made any effort to pay taxes; and the only impediment to the distribution of food was the lack of a negotiable currency to pay for it."

Adam Ferguson – When Money Dies

Just a few weeks later a British diplomat, Joseph Addison, wrote home to a friend: 'The population is ripe to accept any system of firmness or for any man who appears to know what he wants and issues commands in a loud, bold voice'

In Munich at the time little Adolf Hitler was speaking in a very loud and bold voice. The hyperinflation changed Germany's history irrevocably.

World War II was just a continuation – albeit a much larger and more destructive one – of The Great War.

The Eurozone and its currency, the Euro, were conceived to tie European nations together economically so they would no longer be tempted to tear each other apart.

Good idea. Poor design.

The Eurozone is now breaking up. Instead of converging like the designers thought they would, each country has continued on its historical path. The theory and hope of convergence masked the fact that each Eurozone member continued to go about their business.

Perhaps if there were more remembering, not just on this day but every day, the world wouldn't be lurching from one crisis to the next.

Unfortunately, China – and seemingly all who analyze the country's economic fortunes – have developed amnesia about how economics actually works.

If they cast their mind back just a few years, they would remember the US's experience following their credit bubble bust – the subprime crisis and its aftermath.

Data out this week has reassured China watchers. House prices are beginning to fall and inflation is coming down. That's good news because it shows China's central planners are cooling the economy as expected.

And it's good news because authorities will soon be able to ease monetary policy and stimulate the economy again. Apparently that's how an economy works. A bit of tinkering here and there and voila, you get the outcome you were after.

But as much as we try, we can't remember a country that had lasting success with the fine-tuning tool. Something – usually human behavior – occurred to upset the bureaucrats' plans.

Given today is all about remembering, consider the US experience of 2007 as a template for what is happening in China now. Remember how the subprime crisis was 'contained'. Remember how the Fed would sort it out by cutting interest rates? Remember how none of this came to pass?

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Greg Canavan is editorial director of Fat Tail Investment Research and has been a regular guest on CNBC, ABC and BoardRoomRadio, as well as a contributor to publications as diverse as and the Sydney Morning Herald.

See the full archive of Greg Canavan.

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