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Dr. Ingo Sauer

lines on the record: 162
first: 2024-03-18
most recent: 2024-03-18
sittings or episodes: 1
sources: podcast

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“Okay, well, probably first AD, oh, since it's an old presentation, it's not updated, but more or less the central bank, the consolidated balance sheet, the combined balance sheet of all central banks which issue the euro looks like that. So first of all, the ECB is not a central bank, right? It's more like the headquarter where the presidents of the national central banks meet and they take decisions and the executive board from the ecb also has some voting power, more or less 25%. But in general, when I explain it to my students, I put it very such that they really get this differentiation between the ECB and we are a system of central banks and the ecb is just the headquarter in the middle. So I tell them it's the building where we meet to make decisions.”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“You interviewed him. Oh, nice. So I took some MOOC lectures from Parry because he's one of the few guys who really explains the institutional evolution of central banks and so forth. And I like the wording for the Fed's intervention back then of the Fed being the dealer of last resort for the mortgage-backed securities, right? But that was also as in Europe for government bonds it was also the Fed was used as a market maker to stabilize prices. And here we used the euro system as a market maker to stabilize bond prices, but every time, like now they are loaded up these national European central banks with all these government bonds. And my concern is if those government bonds Devalue, we will On slide 81”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“Which are longer term to bring the seal curve down. But it wasn't enough. So the central banks themselves, the European Central Banks, started to buy crisis countries government bonds. The first program, the S&P program, only crisis countries government bonds. And then after some German Supreme Court decisions now they are buying from all countries government bonds which participate in the euro. But still, in order to buy crisis countries government bonds, in order to stabilize prices and they go for different maturities to bring these interest rates for those countries down. And now we are in the US you had also like the Federal Reserve being a market maker but your problem Was more the mortgage backed security. So the Fed became Not a lender of last resort. I like the wording from, I don't know if you know Perry Merling.”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“And in Europe, they did it. Probably that's a nice, we can switch to come to the euro system. So what we did in Europe at first when the European debt crisis started in 2009, there were problems already with Greek government bonds, but in May 2010, we had the first rescue facility to rescue Greece. And what the central banks did at the same time was first not giving credit to commercial banks only for a few weeks. It was before the financial crisis of 2007-2008. No, they were giving credit long-term for three years such that these commercial banks maybe buy the Greek government bonds and the Portuguese government bonds.”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“Right, right. Thank you for that. You're absolutely right that in a classical central banks don't operate at the long end of the yield curve, but under yield curve control or quantitative easing, they do. And so we.”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“Insolvent in a certain sense, and you debase the currency. And therefore, central banking usually means all banking is a swap of IOUs, but anyway, they, in order to issue money, they give short-term credit or they buy short-term government bills. And leaving the risky long-term yield transformation to the private sector.”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“Okay, one more with a yield curve. So normally, central banks manage the yield curve only in the short side. Why? Because they don't, they're not willing to take all their liquidity risk, right? So that's a task for the financial markets. Let's private banks take that liquidity risk is boring short, lending long, and make this maturity transformation. But why should the central bank do it? No, they manage the yield curve at the very short end because they don't want to touch any risk at all. That is a normal central bank policy. And why historically, institutionally? Because it's more or less very clear that if you risk, if you take too many risky assets in your balance sheet and the end, you can become vulnerable.”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“So, what you're referring to, I'm not actually mistaken, it's not actually senior. Senior edge is that it costs a lot less than $100 to print on $100 bill. You're referring to the fact that a central bank can issue currency that yields zero to buy assets that yield something greater. And when you have a normally slope, upward-sloping yield curve, you know, it's going to pay short-term assets and it's going to earn more on longer-term assets. Interestingly, the Federal Reserve is actually losing money right now because of we have an inverted yield curve. That's neither here nor there.”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“Exactly. And well, you can check for the Federal Reserve, for example, its income statement. And these profits are distributed to the stock owners, but like now for the European countries, they're completely distributed, or not completely, but if not put into the equity position, they are distributed to the states. And the states in Austria and Hungary, they sold Most of this right to get profits from the senior rich, from the central bank to private investors, that's also a possibility to recapitalize a central bank, but it's very limited. It's not as much as you may think, because it's a few percentage every year only. So senior rich is not the profit from issuing money. If they issue 1 billion dollars, no, it's only the few percent you earn by issuing this $1 billion.”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“Which was not necessary in Austria and Hungary. And very interestingly, in Austria and Hungary, they also sold stocks from their central banks. In Poland as well, because the central bank has the monopoly of the note issue and therefore it will have profits in the near future. These profits”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“First, they wanted to use 300, but then they used 200 only. And the rest was used for this bridging, like the bridging loan to pay your government employees for the first two or three months. I simplified, but that's more or less what happened. And the people who were forced to pay those mortgages became later on, stockholders from the Gentenbank, let's put it like this. But at first, so they suffered. If nobody wants to give you credit, you cannot issue any bond. You cannot raising taxes and all of that, you have to wait for your budget to balance. And therefore, you have to impose some kind of enforced mortgage or something like that.”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“An imposed law, right? And with that loan, with that forced mortgage, all these companies being obliged in the next 20 years, even longer, to pay back this forced mortgage, that is an asset for the Reich or for the Renten bank with that asset, with that created capital. It represents only future payments, but anyway you can capitalize it now and today with that asset, the rent bank could issue this renton marks, which were backed by that asset, and it gave 1,200 million gold marks of credit in This newly introduced currency rent mark to the Reich. And the Reich used 200 billion.”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“First, to recapitalize the sample bank, second to pay for your public employees until the budgetary reforms work. The austerity programs and raising taxes and until you have a balanced budget and you don't need the printing press to pay your public employees. So in Germany there was no help from foreign countries and therefore they had to arrange and people were not willing to give any credit to the German government impossible. They tried right a gold denominated bond or let's say a dollar denominated bond it was, but it failed badly. And therefore you had to impose a forced mortgage on landed properties of commerce, banking and so forth. Essentially all German companies and you had to create this loan by yourself.”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“They founded like a second central bank, which was called the Rampton Bank, not a real central bank, because the only legal tender remained to be the German mark and the Reichsbank the only real central bank. But in order to recapitalize the Reichsbank, you need some kind of a credit, right? And in order to stop monetary financing, you have to not only to cut the budget, to raise taxes and so forth because that works after two or three months. But for the first two or three months, when you still have to pay for your public employees, you need some kind of credit, right? And in Austria and Hungary, with the assistance of the League of Nations and this international community, they could issue bonds on international markets and therefore they receive this preaching credit or this preaching.”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“Difficult, but probably by imposing all these necessary taxes probably possible. But obviously like the situation was difficult and Germany is not the only example. Other countries faced similar problems. Poland not because it came into existence after World War I, but Hungary and Austria were also burdened with some reparation payments and territorial losses and therefore it's not a single political mistake, but all these countries suffered from hyperinflation. But in Germany, they did a lot of additional mistakes.”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“1990 20. As I understand from the literature, it was possible to pay for these food imports in dollars in international reserves, even without sacrificing the gold from the rice bank, but by imposing severe taxes or some kind of enforced payment on the general public or on commerce and banking and so forth, then the other gold losses which contributed in 1923, they were completely stupid because they used up this gold to stabilize the exchange rate for two and a half months. That was a huge mistake. And the reparation payments”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“People, and if you really, and there was opportunities to pay the reparation payments without forcing the central bank to finance, to monetary finance the government at the same time was possible, but obviously politically completely unpopular, right? So under the political circumstances, probably correct that at least strong inflation could not be avoided in Germany. But several times, I think they choose completely the wrong path and they could have much less inflation if they appreciate from the very beginning to keep the Reichbank as solvent as possible in such a situation. I'm not sure about the one winter I showed you in”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, so but Kant's argument, if I remember well, was also that that will cause also other consequences like political consequences and probably even like the later on what happened in 33 is somewhere already in Keynes' writings. The German right the right-wing parties, which were, and there were some popular economists at the time, one of the leaders of that right-wing party, bringing that argument all the time that Marx had to devalue, there was no other way than to use Marx to buy up dollars and to pay for the reparation payments and there is no guilt whatsoever for the German Reissman. I don't think it's the case. And several times when it was still possible, it was, if you really take”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“Let's return to the issue of the huge foreign debt from reparations. I think an argument made very popular by economist John Maynard Keynes in consequences of the peace was that the size of the reparations was so unwieldy that it basically doomed the German economy and that hyperinflation or depression was somewhat inevitable. Obviously I'm paraphrasing my limited understanding of his argument. Do you agree with this? In other words, if you had the best monetary minds that central bank geniuses and macro savants all in a room and they were trying to run the German Reichsbank from 1920 to 1924, was it anything possible other than this hyperinflation? Because, I mean, how do you try and pay over 100 billion gold marks when that's, I don't know how large that is to the GDP at the time, but it must have must have been huge, right?”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“Market value. So from all central bank money, from all nodes outstanding, how much of these nodes the central bank can redeem with its assets denominated in the domestic currency and divided by net international reserves. The formula is simply all nodes in circulation plus the deposits 10%, but all central bank money, how much money you can redeem with your assets in domestic currency and the rest has to be redeemed if you want to defend an exchange rate with your remaining international reserves and dollars or your net international reserves in dollars. And that should be more or less a good approximation for the defendant. Exchange rate for the exchange rate, the central bank really could defend it's highly created or correlated with the real exchange rate.”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“Because it's all the deposits and they had sub accounts and therefore I had to index them again and sum them up. But this is central bank money and then comes net private sector claims, mostly advances and bills, but also the sum of all other assets from the private sector minus the liabilities. The central bank has from time to time. This is the net private sector claims. which I don't devalue. I take these numbers as given and also the central bank never central banks never suffered losses for those claims against the private sector but then come the claims against the government and those claims are devalued by the solvency factor and therefore deflating the balance sheet to its”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“And the money supply, which I showed you represents notes in circulation because that's the typical measure everybody uses. When I calculated the backing of money, I added those 10 or 20% of deposits because they also represent central bank money. If you see probably you want to go to how I calculated the solvency or the insolvency of the respective central bank, you can go to slide 65. And there I over my head. No, but the sums are only because they're in real balance sheet data you have like subpositions. But if you look at the first animal over there, mt, like there was only, that's one we talked about, your blue line. So this is really no sincere physical money, but actually central bank money, it's a little bit more.”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“For the 1920s, because we live in a less electronic world, for the 1920s, it's mostly, let's say, 80%. It's mostly nodes in circulation, real paper money, and let's say 10 to 20 percent additionally, but relatively stable all the time, deposits from a commercial bank at the central bank. And they exist for the reason I try to explain that different transfers can be settled not physically in notes, but can be settled more effectively one bank transferring accounts its deposit at the central bank, but this is equal to central bank, it's equal to paper money in its electronic version to another bank. Back in the 1920s, it's all about the, let's say, 80, 90%, it's all about the notes in circulation.”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“Dr. Sauer. So, when you talk about M0 base money, there are two components, and forgive me for an American perspective. We have in the blue line, we have currency and circulation. So those are dollars, which are the liability of the Federal Reserve. And those are paper currency. So this was the chart that went parabolic in 1922 in Germany. What we have in the red is the settlement layer, bank reserves, which are the asset, excuse me, the assets of commercial banks and the liabilities of the central bank, the federal reserve. Those are used to settle, which is what you just referred to. But was it the paper, what caused the explosion in the money supply? Was it mostly paper money, the blue line, or was it bank reserves, the settlement type of money in the red line? In Germany.”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“Banks change their accounts at the central bank, he receives that central, his bank receives the money on the next day. There is a settlement in between and there are many transactions going back and forth, but final settlement usually could be also that there is no final settlement because there is credit building up between those two banks. At the end, the settlement usually takes place. So what we have as bank money, what we call money, it's not central bank money and you are not able to buy with that claims you have against your bank. You're not able to buy dollars except your bank or the branch of banks it belongs to but let's say your bank is able to pay in dollars right”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“Like the euro dollar market, the dollar market outside the US, but also in the final stage in central bank money. This bank money, it's very confusing because people mix it up together. Bank money on our bank account. It's a completely different type of money. Actually, what it is. It's only a claim I have against the commercial bank, right? And if I pay by a check or a transaction, this claim I do have against my commercial bank is transferred to the account from the guy who sold me a product to his bank account and his bank the next day receives in central bank money because those”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“But in the end, obviously, a forward or a future or whatsoever. But at the end, it's traded from your whoever bank money. Electronically, because there is one party which does have, it could even have an account at the ECB denominated in dollars. when they do a currency swap, which they in 2012, I think it was, once did in order to give liquidity in dollars to European commercial banks. So there were several currency swaps between the Fed and the ECB. And then the ECB can give in central bank money credit to those European banks, which before borrowed at the LIBOR market.”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“For the official exchange rate, you exchange it in an exchange office or with some guy in the street in the main shopping street in Buenos Aires called Florida, you exchange central bank money. Well, you can buy forwards and so forth, but at the end it settled in central bank money. Foreign exchange markets mean a settlement in central bank money.”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“Banks, then obviously it doesn't make sense to exchange physical notes. And there is one transporter going from one building to the next, when there is a transaction on the interbanking market in central bank money, in real currency, in M0, then obviously that happens electronically from one account to the other. But that is central bank money, and I only talk about central bank money. That's the only one I'm interested, not other like bank money and M1 and so forth because central bank money is traded on foreign exchange market. We can easily, again, imagine those illegal foreign exchange markets, like in the last 10 years, if you went to Bundes and you go with dollars, you go with cash dollars or cash euros, and then you exchange, and for sometimes you got double the price than exchange.”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“Only JP Okay, very good point. So if I speak about money, I always mean central bank money, which is notes in circulation. And additionally, probably we go a balance sheet, a simplified balance sheet on slide 64. And additionally deposits at the central bank. So this is a little bit confusing for all folks who never had this different monetary aggregates M0, M1 and so forth. I always mean M0 or in Milton Friedman's word high-powered money or central banked money. We can imagine all the central bank money as notes in circulation, but there is an electronic version of notes in circulation because private banks do have a central bank account and do have a deposit at the central bank because when they transfer in between the big bank”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“Lot of people thought that would be inflationary. We now know those are somewhat inert bank reserves. Like you and I cannot touch a ECB bank reserve. I cannot touch a federal reserve. Exactly. Bankers are only JP Morgan Ken. And the impact on that on the real economy is somewhat muted. So you talked about the thin air on the asset side of the Reichsbank, but when you talk about the money supply exploding higher, was it mostly paper currency? And then how did that go to weaken the FX? Because I imagine if it's just paper currency, you know, go to the shop and buy bread, that would cause the P prices to go up before FX. However, if it's mostly merchants using Reichsmarks to buy coal from France or some other place, then that would cause depreciation. And also let's introduce the elephant in the room, which is $138, $150 billion. You tell me German gold mark reparations, which was a huge, huge negative asset just thrown upon Germany, which kind of required all this money printing and that you had to print a lot of M in order to meet that.”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“The Orthodox way of thinking this in economics is more money causes prices to go up, which causes devaluation of the currency. You say, no, no, no, it actually is more money causes the exchange rate to depreciate, which itself causes prices to rise. Professor, I imagine a lot of this depends upon what when we talk about the money supply going up, what are we talking about them literally pranking out paper bills of 20 mark note, 50 mark notes? Are we talking about bank deposits? Are we talking about the Reichsbank, as in the case of Reserve, increasing bank reserves, quantitative easing or something like that? And then the German private banks are then printing bank deposits and sort of, you know, passing that along to the customer. For example, in the United States and in Europe, the bank balance sheets exploded in 2008 and 2009 via quantitative easing. At the time, you know, before my time, but at the time.”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“Such that the central bank is not vulnerable, such that it can stabilize the exchange rate. If so, we don't have to care. There is no threat of any inflation.”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“The only way to end a hyperinflation, as you see on the next slide, they also noticed, obviously, the money supply increase after the exchange rate and the price level had been stabilized, but there was no concern whatsoever. I quote, in fact, while maintaining the external value of the crone by the free sale of foreign exchange at a stable rate in relation to pound sterling, the bank also kept internal prices reasonable sterile to the Node issuing policy, even so, that's the quote from before, the money supply increased here with a factor of three, I think. They were completely aware that the money supply itself, it's not the problem, it's the backing of money, it's the two relations together. How much money is in circulation? And if that money is backed or not by valuable assets.”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“Paper, you find very, very strong arguments for this chain of causality. And actually all hyperinflations, we talked only about the German case so far, but all hyperinflations ended exactly in the same manner. They recapitalized the central bank such that they could, as demonstrated over here, fix the exchange rate to the US dollar in most countries, but in Hungary, they fix the exchange rate to the pound sterling. And the league of nations, which later became the United Nations, the League of Nations assist in this financial reforms necessary to recapitalize the central bank and thereby to stabilize the exchange rate. And they completely understood that that is the”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“And since for everybody or completely obvious like now in Argentina or the last 10 years in Argentina, everybody as a reference point, they look at the black market exchange rate in Argentina that's called dollar blue. Once the black market exchange rate, which the government cannot control, there is no type of regulation which works to control this exchange rate. Once the mark, or let's say the Argentine pedos becomes worthless, devalues, all suppliers react and increase their prices. And if you check econometrically, which order of events, which is more likely by this co-integration checks, which time series are correlated or co-integrated and which are not, you find very strong arguments and obviously we did a very simplified version over here, but for everybody who wants to read my”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“That why I call it the dark side of the central bank, if we bring the central bank into the equation, we come to the next slide, 30, and we realize, yeah, actually the central bank became insolvent, and now we look at the three variables again going to the next slide, how we can probably combine these three variables together such that they moved or they correlated, as I mentioned before. Probably it was the increase in money supply. And the effect was not primarily on goods markets. Money has to chase goods in the famous phrase from Milton Friedman. No, probably money chased dollars because the central bank became insolvent. People are not willing to hold this money again as a store of value. They want a different money, a stable money. They exchange their marks back in the 20s.”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“Very reasonable causality going from the closed economy. It happens inside the country, money supply goes up, and then it loses its value in terms of goods, the relation between money and goods, like this idea of the quantity theory of money is very old, scarcity and so forth, neutrality of money to mention some strong paradigms. Then the exchange rate. If you think second time and if you look at the central bank, which might be important, and here I put the asset side of the central bank, which was never analyzed. With a few exceptions, all mentioned in my paper, but in mainstream economics, this was, or even in general in economics, the central bank asset side was never analyzed.”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“Not demanded, and we demand more foreign goods, and then you have different demand for the currencies, and therefore the currency devalues. But historically, it comes from that idea money being worthless inside the country. It has to be worthless outside the country. For all hyperinflations, all of these three variables changed more or less together, not exactly as we have seen right now, but more or less together. So the money supply increased by a factor of one trillion in Germany, the prices as well in a similar magnitude, and the mark was worse only one to a trillion in US dollars. But next slide, 29. What is the causality? And economists established a very reasonable or at first”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“And PPP, historically, it comes from the idea, well, if that money lost its value internally because I cannot buy goods anymore, it should be that I cannot buy foreign goods. And therefore, it has to devalue against the same currency. In economics, this relation is called the law of one price. In economics, we had this chain, right? First domestic sphere from money supply increases to domestic price increases. So first money loses its internal value and then since this money cannot buy goods anymore, it also cannot buy foreign goods and therefore they establish pepp, which is a little bit more difficult to understand because we're losing competitiveness with the price domestic price increases and therefore our goods.”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“Not only the money supply increases but also the losses or the recapitalization on its asset side if we bring a vulnerable central bank into the equation we can explain what really took place. So in very simplified terms, but that is mainstream economics. And even in the specialized textbooks,”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“1923 November 1923, you may get a coint integration with a significance level of 10%. But as I showed you, the money supply keeps increasing, prices are stable, and therefore these curves don't co-integrate or don't are not correlated anymore. So as I used more bigger time span, then the money supply is not at all not even at a 10% significant level co-integrated or correlated with the price level. So there is no evidence that the money supply itself and its multiplication during the hyperinflation caused the price increases, caused inflation. And I think we can, if we bring the central bank, which represents”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“Exchange rate and insolvent central bank means a devaluation of the exchange rate because it became vulnerable. And now we can also show that this exchange rate is correlated or co-integrated to the price level because the next step in this hypothesis is well once the mark devalued on foreign exchange markets the suppliers demand more of these devalued currency for their products and therefore the prices increase right and if you now look for the typical or for the misleading or the leading theory in economics they claim that the money supply determined the price level but they're not even correlated or co-integrated yeah there are different studies so if you stop”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“And then the real exchange rate adjusted. And this we can see here in this time series comparison or this contegation analysis. So I did that here, for example, for the relation between the measure I calculated for the central bank solvency insolvency under capitalization and the exchange rate because in my view, in my theory, a vulnerable central bank leads to a devaluated currency leads later on to price increases. If you go to slide 77 and let's take the last example again from Germany, again you see like this three stars representing cointegration or a correlation now between the exchange rate and the price level. First I showed that the solvency measure from the central bank is related to the exchange.”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“Without being compensated. And also the Reich becoming insolvent, the central bank became insolvent during these, if you remember the first, which we have seen at the slide, the first devaluation in November 1920, in February 1920, there it was not the German bonds losing their value. There it really was the gold losses, or mainly the gold losses, which made the central bank vulnerable. I have a measure right now where I combine all this information from the balance sheet. The central bank is vulnerable. It cannot defend the exchange rate. I calculated the exchange rate which the central bank, with its remaining assets, Can defend?”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“Either Marx. But look, it's all these, obviously the government, when it wants to can always pay back devalued marks and print as much as they want to. But if they completely devalue their currency until it's completely worthless, that's not obvious. Probably as they did at some point, they stabilized the exchange rate. And still obviously a German bond denominated in Marx doesn't have the same value as in this case it was a Romanian bond because Romania was much more solvent, much more likely to pay back. And also for German bonds being traded in long, in this case Pound Sterling, completely lost their value. So the central bank by losses of its twice, it lost half of its international reserve.”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“No, in this case, when I measured the respected repayment probability from the Raish, I used bonds from Germany versus bonds from another country, which are denominated in the same market traded at the same stock exchange and so forth. So we don't have to care about this exchange rate effect.”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“Other words, yeah, it's the other way around. So the central bank losing assets, right, either the gold losses or the market value from its claims against the government.”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“Are correlated or actually co integrated because that was unit root processes over here, no matter what the word correlation is fine to us. If you do the econometrics, then as we can see for example in slide 78, so stars means cointegration or correlation, let's say. And here you see that this measure, the solvency exchange rate likely determined the exchange rate, that is my hypothesis. If you go to the table, to the last entry for Germany, you see this three stars, meaning that the P value here is below 1%, so we can be quite sure that there was a real correlation or cointation between this measure. Which shows the solvency of the central bank and the actual exchange rate and the money supply or the exchange rate is not correlated.”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“1920, the mark first severely devaluated for an exchange market, the price level severely increased. And that was preceded by now in blue this measure. I combined the complete information from the balance sheet of the Reichsbank. And here the gold losses enter the equation. And later on, if you see all these curves stabilize after the stabilization in November 1923, the central bank again becoming insolvent, as we have seen with the representation of its balance sheet. And the money supply keeps increasing. This was this 15-fold increase we have seen before. And if you do the economics, if you check for which of these curves”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT