Exploring the Evolution of Currency Backing and Government Debt

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Dr. Ingo Sauer of Goethe University Frankfurt joins Forward Guidance to share findings from his 360 paper on Hyperinflation in 1923 and its connection to central bank insolvency. Sauer argues that severe impairment of central bank assets, and not the printing of vast amounts of central bank liabilities (money), was the primary cause of extreme inflation witnessed 101 years ago in Germany, Austria, Hungary and Poland. Sauer inverts the causal line of exchange rate depreciation, money supply increase, and inflation, and he also shares his concern about the current state of the balance sheet of the European Central Bank (ECB). Filmed on March 5, 2024.

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Ingo Sauer’s YouTube channel: https://www.youtube.com/@wissenhatkeineneigentumeri9889

Ingo Sauer’s 360 page paper, “The Lessons from 1923 for the Euro Area: Enlightening the Dark Side of (In-) Solvent Central Banks’ Balance Sheets”: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4620462

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Timestamps:

(00:00) Introduction

(00:56) Overview Of Dr. Sauer's Theory On The Ultimate Cause of Hyperinflation: Central Bank Insolvency

(07:05) Dr. Sauer's Concerns About The Euro

(11:22) Setting The Stage For German Hyperinflation in 1923

(14:33) The German Mark During World War I

(21:40) The Assets Of The Reichsbank Increasingly Became Dominated By German Government Obligations (Not Commercial Bills / Collateral Advances / Gold)

(30:03) Central Bank Insolvency (Not Money Supply Increase) Caused Hyperinflation in 1923

(34:53) VanEck Ad

(36:48) Failed Attempts To Stabilize German Mark And Inflation, 1919-1922

(41:44) Reichsbank's Holdings Of German Treasury Bills Highly Correlated To (In)Solvency Factor

(45:01) Explaining Sauer's "Solvency Factor"

(47:29) The Mark's Short-Lived Rally In 1920

(51:10) Marker

(57:09) The Mechanics Of Central Bank Insolvency

(59:40) Reichsmark Insolvency Led To Depreciation Of The Mark, Which Led To Hyperinflation

(01:02:34) Money Supply Did Not Cause Hyperinflation, Argues Sauer

(01:15:09) The Explosion In Reichsbank's Money Supply Was Mostly Paper Cash, Not Bank Reserves

(01:23:03) Reparations' Impact On German Solvency

(01:27:22) The Rentenmark And The Halting Of German HyperInflation

(01:30:47) Central Bank Profits and Yield Curve Dynamics

(01:34:58) European Debt Crisis (2009-2015)

(01:36:45) Fed As Dealer Of Last Resort, European Central Bank (ECB) As Market Maker Of Last Resort

(01:38:06) ECB Is Less A Central Bank And More Of A "Headquarters" For Domestic Euro Central Banks (such as Bank of France, for example)

(01:40:23) Origin Of Fed, And Clearinghouse Loan Certificates As National Currency Before The Fed

(01:44:18) Why Has ECB Balance Sheet Expansion Post 2008 Coincided With Disinflation (Or Deflation), And Not Hyperinflation?

(01:47:44) Sauer's Fears About The ECB And The Euro

(02:00:46) The Mechanics Of Monetary Financing

(02:18:32) Interest Rate Risk Is Not A Systemic Concern

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Disclaimer: Nothing discussed on Forward Guidance should be considered as investment advice. Please always do your own research & speak to a financial advisor before thinking about, thinking about putting your money into these crazy markets.