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The World’s Most Famous Case of Hyperinflation (Pt. 2)

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The World's Most Famous Case of Hyperinflation (Part 2 of 2)

The World’s Most Famous Case of Hyperinflation (Part 2)

The Money Project is an ongoing collaboration between Visual Capitalist and Texas Precious Metals that seeks to use intuitive visualizations to explore the origins, nature, and use of money.

For the first infographic in this series, which summarizes the circumstances leading up to hyperinflation in Germany in 1921-1924, it can be found here: Hyperinflation (Part 1 of 2)

Slippery Slope

“Inflation took the basic law-and-order principles of loyalty and trust to the extreme.” Martin Geyer, Historian.

“As things stand, the only way to finance the cost of fighting the war is to shift the burden into the future through loans.” Karl Helfferich, an economist in 1915.

“There is a point at which printing money affects purchasing power by causing inflation.” Eduard Bernstein, socialist in 1918.

In the two years past World War I, the German government added to the monetary base of the Papiermark by printing money. Economic historian Carl-Ludwig Holtfrerich said that the “lubricant of inflation” helped breathe new life into the private sector.

The mark was trading for a low value against the dollar, sterling and the French franc and this helped to boost exports. Industrial output increased by 20% a year, unemployment fell to below 1 percent in 1922, and real wages rose significantly.

Then, suddenly this “lubricant” turned into a slippery slope: at its most severe, the monthly rate of inflation reached 3.25 billion percent, equivalent to prices doubling every 49 hours.

When did the “lubricant” of inflation turn into a toxic hyperinflationary spiral?

The ultimate trigger for German hyperinflation was the loss of trust in the government’s policy and debt. Foreign markets refused to buy German debt or Papiermarks, the exchange rate depreciated, and the rate of inflation accelerated.

The Effects

Hyperinflation in Germany left millions of hard-working savers with nothing left.

Over the course of months, what was enough money to start a stable retirement fund was no longer enough to buy even a loaf of bread.

Who was affected?

  • The middle class – or Mittelstand – saw the value of their cash savings wiped out before their eyes.
  • Wealth was transferred from general public to the government, which issued the money.
  • Borrowers gained at the expense of lenders.
  • Renters gained at the expense of property owners (In Germany’s case, rent ceilings did not keep pace with general price levels)
  • The efficiency of the economy suffered, as people preferred to barter.
  • People preferred to hold onto hard assets (commodities, gold, land) rather than paper money, which continually lost value.

Stories of Hyperinflation

During the peak of hyperinflation, workers were often paid twice a day. Workers would shop at midday to make sure their money didn’t lose more value. People burned paper bills in the stove, as they were cheaper than wood or other fuel.

Here some of the stories of ordinary Germans during the world’s most famous case of hyperinflation.

  • “The price of tram rides and beef, theater tickets and school, newspapers and haircuts, sugar and bacon, is going up every week,” Eugeni Xammar, a journalist, wrote in February 1923. “As a result no one knows how long their money will last, and people are living in constant fear, thinking of nothing but eating and drinking, buying and selling.”
  • A man who drank two cups of coffee at 5,000 marks each was presented with a bill for 14,000 marks. When he asked about the large bill, he was told he should have ordered the coffees at the same time because the price had gone up in between cups.
  • A young couple took a few hundred million marks to the theater box office hoping to see a show, but discovered it wasn’t nearly enough. Tickets were now a billion marks each.
  • Historian Golo Mann wrote: “The effect of the devaluation of the German currency was like that of a second revolution, the first being the war and its immediate aftermath,” he concluded. Mann said deep-seated faith was being destroyed and replaced by fear and cynicism. “What was there to trust, who could you rely on if such were even possible?” he asked.

Even Worse Cases of Hyperinflation

While the German hyperinflation from 1921-1924 is the most known – it was not the worst episode in history.

In mid-1946, prices in Hungary doubled every fifteen hours, giving an inflation rate of 41.9 quintillion percent. By July 1946, the 1931 gold pengõ was worth 130 trillion paper pengõs.

Peak Inflation Rates:
Germany (1923): 3.5 billion percent
Zimbabwe (2008): 79.6 billion percent
Hungary (1946): 41.9 quintillion percent

Hyperinflation has been surprisingly common in the 20th century, happening many dozens of times throughout the world. It continues to happen even today in countries such as Venezuela.

What would become of Germany after its bout of hyperinflation?

A young man named Adolf Hitler began to grow angry that innocent Germans were starving…

“We are opposed to swarms of Americans and other foreigners raising prices throughout Germany while millions of Germans are starving because of the increased prices. We are equally opposed to German profiteers and we are demanding that all be imprisoned.” – Adolf Hitler, 1923, Chicago Tribune

About the Money Project

The Money Project aims to use intuitive visualizations to explore ideas around the very concept of money itself. Founded in 2015 by Visual Capitalist and Texas Precious Metals, the Money Project will look at the evolving nature of money, and will try to answer the difficult questions that prevent us from truly understanding the role that money plays in finance, investments, and accumulating wealth.

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The 7 Major Flaws of the Global Financial System

Since the invention of banking, the global financial system has increasingly become more centralized. Here are the big flaws it has, as a result.

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The 7 Major Flaws of the Global Financial System

Since the invention of banking, the global financial system has become increasingly centralized.

In the modern system, central banks now control everything from interest rates to the issuance of currency, while government regulators, corporations, and intergovernmental organizations wield unparalleled influence at the top of this crucial food chain.

There is no doubt that this centralization has led to the creation of massive amounts of wealth, especially to those properly connected to the financial system. However, the same centralization has also arguably contributed to many global challenges and risks we face today.

Flaws of the Global Financial System

Today’s infographic comes to us from investment app Abra, and it highlights the seven major flaws of the global financial system, ranging from the lack of basic access to financial services to growing inequality.

1. Billions of people globally remain unbanked
To participate in the global financial sector, whether it is to make a digital payment or manage one’s wealth, one must have access to a bank account. However, 1.7 billion adults worldwide remain unbanked, having zero access to an account with a financial institution or a mobile money provider.

2. Global financial literacy remains low
For people to successfully use financial services and markets, they must have some degree of financial literacy. According to a recent global survey, just 1-in-3 people show an understanding of basic financial concepts, with most of these people living in high income economies.

Without an understanding of key concepts in finance, it makes it difficult for the majority of the population to make the right decisions – and to build wealth.

3. High intermediary costs and slow transactions
Once a person has access to financial services, sending and storing money should be inexpensive and fast.

However, just the opposite is true. Around the globe, the average cost of a remittance is 7.01% in fees per transaction – and when using banks, that rises to 10.53%. Even worse, these transactions can take days at a time, which seems quite unnecessary in today’s digital era.

4. Low trust in financial institutions and governments
The financial sector is the least trusted business sector globally, with only a 57% level of trust according to Edelman. Meanwhile, trust in governments is even lower, with only 40% trusting the U.S. government, and the global country average sitting at 47%.

5. Rising global inequality
In a centralized system, financial markets tend to be dominated by those who are best connected to them.

These are people who have:

  • Access to many financial opportunities and asset classes
  • Capital to deploy
  • Informational advantages
  • Access to financial expertise

In fact, according to recent data on global wealth concentration, the top 1% own 47% of all household wealth, while the top 10% hold roughly 85%.

On the other end of the spectrum, the vast majority of people have little to no financial assets to even start building wealth. Not only are many people living paycheck to paycheck – but they also don’t have access to assets that can create wealth, like stocks, bonds, mutual funds, or ETFs.

6. Currency manipulation and censorship
In a centralized system, countries have the power to manipulate and devalue fiat currencies, and this can have a devastating effect on markets and the lives of citizens.

In Venezuela, for example, the government has continually devalued its currency, creating runaway hyperinflation as a result. The last major currency manipulation in 2018 increased the price of a cup of coffee by over 772,400% in six months.

Further, centralized power also gives governments and financial institutions the ability to financially censor citizens, by taking actions such as freezing accounts, denying access to payment systems, removing funds from accounts, and denying the retrieval of funds during bank runs.

7. The build-up of systemic risk
Finally, centralization creates one final and important drawback.

With financial power concentrated with just a select few institutions, such as central banks and “too big too fail” companies, it means that one abject failure can decimate an entire system.

This happened in 2008 as U.S. subprime mortgages turned out to be an Achilles Heel for bank balance sheets, creating a ripple effect throughout the globe. Centralization means all eggs in one basket – and if that basket breaks it can possibly lead to the destruction of wealth on a large scale.

The Future of the Global Financial System?

The risks and drawbacks of centralization to the global financial system are well known, however there has never been much of a real alternative – until now.

With the proliferation of mobile phones and internet access, as well as the development of decentralization technologies like the blockchain, it may be possible to build an entirely new financial system.

But is the world ready?

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How Every Asset Class, Currency, and Sector Performed in 2018

Investors saw a sea of red in 2018 – here’s a visual recap of how markets performed, including the big winners and losers from a volatile year.

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We’re only a few days into 2019, but it appears markets have picked up exactly where they left off.

There is growing uncertainty and volatility almost everywhere, and individual events are starting to become catalysts for sell-offs or rallies. Whether it’s Apple’s recent profit warning or Fed chair Jerome Powell saying that he is “listening closely” to the markets, investors are taking cues from current events to figure out where the herd is grazing.

It’s hard to say where markets will head in 2019 – but before we get into the nitty-gritty of a new year, it’s worth taking one final look back at 2018 to see how it impacted investors.

How Markets Did in 2018

We’ll start with broad asset classes, including stocks, bonds, commodities, and cash:

Asset Classes in 2018
Note: Figures for equity markets are not including dividends

As you can see, it’s mostly a sea of red.

Cash turned out to be best option for the year, and several asset classes were crushed over the course of 2018, including crude oil and nearly all stocks. Despite this, large cap U.S. stocks (S&P 500) had no issues in outperforming equity alternatives, like smallcap stocks, foreign stocks, or emerging markets.

S&P 500 Sectors in 2018

Breaking down the S&P 500 further into its sectors, it’s clear that nearly every industry struggled simultaneously.

Energy (-20.5%) and Materials (-16.4%) sectors were the hardest hit, and even the Technology sector eventually capitulated by the end of the year. Amazingly, Apple was considered a $1 trillion company in August, but today the tech giant’s market capitalization has already dropped down to a measly $700 billion.

The one exception to the general trend in S&P 500 stocks was Healthcare, which posted 4.7% returns over the course of 2018. Companies like Merck, Eli Lilly, and Pfizer all saw their stocks grow by double-digits, and it’s possible the sector could stay strong in 2019 as the world continues to age.

Currencies in 2018

Lastly, here’s how major currency markets fared.

The U.S. dollar was the strongest major currency, and the Japanese yen had an impressive year as well. The Aussie dollar was routed, and now sits at 10-year lows.

Winners and Losers

Lastly, here’s an ad hoc list of some of the biggest winners and losers in 2018 – it includes some of the stocks and assets that saw notable gains or declines over the course of the year:

Winners and Losers in 2018

Interestingly, it was the finer things in life that outperformed most major asset classes. Both fine wine and fine art gained close to 10%, leaving most other indices behind in the dust.

AMD had a roller coaster year, finishing up nearly 80% as the biggest winner on the S&P 500. That said, owners of AMD stock may see things differently: the stock had actually tripled by September, and has fallen precipitously ever since.

Given the above recap, what are you investing in for 2019?

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