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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
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“It makes sense, right? That the mark devalued so strongly. Probably you can go to slide because it's somehow easier to see to slide 73. Those are exactly the same lines, but here I start earlier. These are is the complete time series I could gather with the available data. And as we have seen before, now it's indexed a little bit different because I indexed all four curves at the stabilization of the exchange rate in November 1923 and therefore the money supply seems to be different but we look about percentage changes right so there is no harsh increase in the money supply it's a gradual increase at that time when in November 1920 in the February”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“Yes, but the first strong devaluation I mentioned before was until February 1920. And there you see that the exchange rate now in blue really devalues. Again, going up means a devaluation by a factor of 10. And the price level follows suit, but this was preceded by the black line, and that's the measure I calculated for the Reisbank's insolvency, right? Because it takes into account the gold losses. It takes into account that the claims from the rice bank against the government also lost in value. And therefore, if you take into account this huge gold losses for the winter of from 1990 to 1920, then actually”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“Down for two or three months such that the passive resistance from the population, which had to do with the occupation of the Ruhr area, could be maintained. But you can temporarily, if you don't recapitalize the central bank and so forth, temporarily by using up your reserves, you can stabilize the price level via stabilizing the exchange rate. But at the end the huge devaluation which happened afterwards, you are much worse off. Here you see it like this measure in black, which I calculated, which shows the solvency or the insolvency of the Reichsbank. And as I mentioned before, like the first increase, again, it's a logarithmic scale. So the first real devaluation of the mark, now the exchange rate being the blue line.”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“Using this code as collateral to get pounds sterling in order to stabilize the exchange rate. So people by marks and the Reisbank handed out pound sterling or dollars. But using up all its gold reserves. So a few months later, when this collateralized gold was lost for this two, three months stabilization, the Reichsbank became even more insolvent. So it lost half of its remaining gold reserves in a matter of two or three months in order to stabilize the exchange rate because at that point in time, politicians in Germany already understood that the only way to end inflation is to stabilize the exchange rate. And Havenstein, president of the Reismann at that time, later said, yeah, obviously we knew that's not going to work out for a long time. He was surprised that it worked out for two and a half months. But anyway, he was forced, let's say, by the German government to at least bring inflation.”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“Lost half of its gold holdings, had to pay it out to the Reich, get no compensation. And then the next green circle between February 23 and April 23, the Reisbank stabilized the exchange rate against all the stable foreign currencies. Actually, if you stabilize the exchange rate, let's say £2 sterling, you stabilize it against all stable foreign currencies here is the exchange rate in relation to the dollar. The price level also stabilizes. Like we had even a small appreciation of the mark and the price level follow suit by more or less actually the same magnitude, but the money supply keeps increasing because monetary financing was still going on. How could they stabilize the exchange rate? They ship gold to London, right?”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“Was the time of the Spegger reforms we talked about, and it appreciated by 100%, right? So this is an indexed measure here, an indexed slide, but if I remember well the number, so we came down from 70 marks per dollar, something like that of 80 marks per dollar to 40 marks per dollar, right? It appreciated in between now it also enforces my argument quite a bit the second time, if you can go back to the slide, the second time that the Reispank lost half of its gold holdings, they reduced for the first time in February 1920 when the red line first peaks. Why that happened? Because the Reichsbank became vulnerable on foreign exchange market.”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“An increased means price increase from this wholesale price index, and you have the money supply. And I indexed all of these curves in order to show their relative percentage increases to the end of World War I in November 1918. And the first devaluation which we see I mentioned already, that is the mark lost 90% of its dollar value, it depreciated it was worth only one tenth or less than one-tenth of the dollar compared to the end of the war. And the price level increases and the money supply does not really react. But then what I want to mention right now, and therefore with the forward markets and with interest rates, it's more confusing that you think because then the mark gains value.”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“But interest rates obviously with inflation increased slightly always later, like reacting to this inflationary phases and some very important story which I have to tell you if you go to slide 44. So for interest rates and for the forward markets, the mark being traded against pound sterling and so forth, Germany is also a very interesting case because it wasn't a continuous devaluation of the mark. So here you see the red line, that's the exchange rate index, New York and Berlin. So obviously I took the New York market because it cannot be controlled by the German government. It's not a fake exchange rate. It's a real market exchange rate. So this is marks per dollar and an increase means a devaluation. And then you have wholesale prices.”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“So also, a German bond traded in London became worthless. So this bledged coup payments in pound sterling became worthless. So I'm pretty sure that at the end the Reichsbank the Reich was insolvent, measured long-term German bonds compared to the same currency and so forth on the same market to a different, more solvent country and also the German bonds trader lost its complete value, almost its complete value. Now interest rate. So the Risebank did raise the discount rate, which at the time was like the main interest rate for the central bank, very late. So we already suffered very strong inflations, but they never adjusted the interest rate for discounting at the Reichspan.”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“Macro 101 financial markets might say that the forward market would be priced not that this concept was necessarily developed at the time, but the forward market would be pricing in rapid Reichsmarks devaluation against the dollar or other currencies or gold. So that would imply maybe that interest rates would have to be spectacularly high. What were interest rates doing in Germany at this time? I mean, if inflation is a billion percent is the interest rate at a billion percent where, you know, is there a maximum on that? What was going on with interest rates?”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“This measure, the blue line I used to deflate the claims from the central bank against the government. And the government can always pay. And if you take the same denomination, the same currency, same coup payment, and similar maturity, still the German bonds traded at the long-term bonds traded at a much lower value as the foreign bonds being denominated in the same currency.”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“International funding markets, that is a really difficult task. And I think we need some research about this recapitalization. We have to establish some recapitalization research for central banks in order to be prepared because in a similar manner like it's more or less the case right now in Argentina, it could happen in the euro system as well. comparable to the hyperinflations obviously but these hyperinflations because the contour lines are easier to understand because there you can really easily see that actually central banks became insolvent and had to be recapitalized and also we can learn it was for different recapitalizations right the situation was quite different in austria and hungary yeah we have to understand these mechanics in order to don't get into this situation of a central bank in so And also, in order to be prepared.”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“Disappear. So the rice bunk can stabilize the price of these treasury bills by buying up them all, which they did. They were discounted at the central bank, at the Reisman. And also my measures, which measures the repayment probability of the rice with different bond markets, which were still traded, like approached zero. So the Rice was completely completely insolvent. Therefore, the central bank was completely insolvent. At the point of stabilization, like these treasury bills were not worth a penny. The Reichsbank was completely insolvent, not able to defend the exchange rate whatsoever. And then they decided to recapitalize the central bank, but in such a situation when you lack access to”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“Exactly. April 21. Yeah, the Germans expected that probably they give us more time to pay and hopefully we don't have to pay the complete reparations. And it did not turn out. So that was very bad fiscal news, actually. And then the worst of it all, there was no such thing like an international rescue facility for Germany. And finally, that was decided here from bankers, mainly JP Morgan, to not give credit to Germany. Restore its finances, right? And then like Germany did not pay all tranches, the French and the Belgium occupied the Ruhr region, which was our industrial heartland at the time. And then the willingness of the market to hold those treasury bills.”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“Hold this short term treasury bills and the market price or the expected repayment probability from longer German government bonds, the blue line, they after the reparation commission announced the payment shadow.”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, exactly. So this anecdote also shows why it's so difficult at that point in time to reform the state finances in order not being dependent on the printing press from the central bank because if you are in such a situation like Erzberger was already at that time, the reforms you need in order to stabilize public finances and therefore at the end the currency, the reforms are very severe. So at the end, when we stabilize the exchange rate, they fire 25% of public servants, right? And additionally, you have to raise taxes. And additionally, they had to impose a forced mortgage. Like it's right now in Argentina. That's the story of Millet trying to at the end also to recapitalize the central bank. The two measures, the willingness of the market to”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“Share of the private markets still being willing to hold these treasury bills. And as you see at the end in 1923, nobody holds these treasury bills.”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“Did this mistake of explaining the German hyperinflation by the quantity of money, also some expectations. But anyway, it's like the version of the quantitative view. And I treat it in more than in the literature review, in more than, I don't know, eight, nine pages for everybody who wants to read it. But then we had several events. So the terms of the Dai Treaty became public, which was not very yeah. Then we had some effort, some finance reforms, which he labeled already. And I took that label good fiscal news. So the Ertzberger finance reform, if you look at the my measure, it becomes slightly better. And at the same time, I put the percentage of treasury bills held by the public. And that's also an important share. It's the percentage.”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“This measure before the outbreak of World War I, it's not in here right now. It was close to one. So Germany compared to a very solvent country, they're both kind of equal and therefore obviously Germany was solvent. And also my measure, which I call the solvent's effector, the factor which I need to deflate the central bank claims against the government to their expected market value. Here, that's from the beginning of 1918, so more or less before the end of the war. We are down to like 70%, right? So actually all these claims from the Central Banks against the government measured by market expectations, they're only worth more or less like 70%. And then we had several events. I'm referring here to a famous paper from Webb who also”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“Its approximate market value. I checked for other bonds which were traded on markets, compared them to bonds from very solvent countries with the same coupon payment, same denominated in the same currency and so forth. And then you can see what the market expectations for the probability that”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“First, go to slide 61 to get the balance sheets. Like the typical positions from the 1920s, actually it was much more complicated for some countries with up to 15%. But anyway, so marked here with a different color are advances to the government because at the end, those positions were complicated, right? Giving the government credit in one form or the other in the case of the Reichsbank discounting treasury bills, they still, like they do right now in Argentina, they put some historical or nominal value. But obviously that's a fake value if you're only a party who's holding those bills and giving that nominal value to these bills. So in reality, what I calculated in order to deflate the asset side from the central bank to”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“Pounds, whatever, and treasury bills, which you show is quite small. So Treasury bills would be the sovereign bonds or bills of the German government, the Reichsbank being the central bank of Germany, the German government being the German government, the fiscal, not the monetary. And so now we have that switch where Treasury bills German government bills became swelled and became a swollen outsized share of the assets on the Reichsparks balance sheet. So my question is, what's going on with the Treasury bills? How come Treasury bills became so worthless? And likewise, if the assets of the Reichsbank are German government treasury bills denominated in Reichsmarks and the liabilities are German paper and currency, also known as Reichsmarks, wouldn't they devalue at the same time?”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“Solvency of the central bank, so you can explain better than the mere money supply, which is more like a company symptom. You can explain much better the hyperinflations themselves, but you also can explain the recapitalizations because as you see, the money supply increased 15-fold in Germany after the end of the hyperinflation.”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“Money supply, which could be in one form or another a liability if it's sold at foreign exchange markets. It's not a legal liability, but anyway, if the central bank wants to stabilize the exchange rate, it needs valuable assets. And they tried it during the hyperinflations all the time, as they did in Argentina in the last 10 years. The vulnerability, the undercapitalization together with the outstanding money supply, this combined information explains the hyperinflation for all four countries much better. So I constructed a time series which combines the complete balance sheet of the central bank and brings all this information together. And that time series represents the solvency or the in.”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“Monetary financing has two effects money supply increases and that once observed and therefore we had the simple misleading theory okay more money more inflation yeah like monetarism but at the same time if you do monetary financing you give that money away to a broken government so the central bank loses its financial strength What I showed that because there are more effects, like there are additional central bank losses, there are these recapitalizations. So at the end, it's really the change. Combined change, therefore I use the word solvency because it's really combining the balance sheet from the central bank. It's the combined change in”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“And obviously all these wheelbarrows, like here in the slide, all these wheelbarrows, everybody, or it's the intuition. And that happened, unfortunately, even in economics. The intuition is, okay, it was the quantity of money which cost the inflation, then the money supply stabilized. It did not, it increased 15-fold. But you don't see like the change at the institutional side of money, like the institution behind the central bank assets changed dramatically, as I showed. And it's not the same mark note. It's a different mark because it's backed again. And unfortunately, we did not notice this effect of the change in central bank assets, not for the hyperinflations themselves.”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“Right, so before it was different magnitudes and so forth, but in all countries, and I'm also citing some paper from Thomas Sargent from 82, and he also realized in all these countries, Austria, Hungary and so forth, the money supply tripled or increased sixfold after the exchange rate was stabilized and after the hyperinflation was over and the price level was stable. In Germany, it was actually a 15-fold increase because usually they or he used the monthly data, but I did it a little bit more precise using the weekly data. But that money was, why could it increase so much? Because it was again accepted. People are willing to hold that money. It's a stable currency from one day to the next. So physically it did not.”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“You're saying that the money supply exploded higher during the hyperinflation and maybe before it, but after the hyperinflation ended after order was restored with the rent in mark and the Reichsbank was restored and inflation went down, you're saying that the money supply still went higher.”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“Days from a non-backed, completely worthless currency, not accepted by the public, again to a hard currency. As you see, like the assets increase massively because also the money supply increased in Germany 15-fold after we stabilized the 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
“Funding markets, right? So for that, they had to impose a mortgage on landed properties in Germany. But not only the central bank has to be recapitalized, then obviously monetary financing has come to an end, which means that the central bank again becomes a non-vulnerable institution and all these attacks on the mark failed. But the mark itself physically, well, it had different denominations, but physically it never changed. And the main mistake in economics, but also like in our intuition, is that we think that this Mark note was the same in 1914, was the same in 1920, and was the same after November 1923. No, it was not. It changed in this case, which we just saw, in a matter of”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“President exactly at that point in time as he explained later on, this speculation had to fail because there is no additional mark which you can short sell on these foreign exchange markets. So all the speculators who speculate the mark is going to devalue against the dollar and they sell it on the forward markets. In a month from now, they have to show up with all these marks. But everybody else needed those marks to pay back their debt at the Reisbank. And therefore, Schacht himself wasn't concerned about this speculation. He knew that it's going to fail because the Reichsbank was first recapitalized, which is very difficult, mostly because you have to do it at a point in time when you still, the government still lacks access to international funding.”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“But defending the value of the old mark, no currency reform at foreign exchange markets at that very moment in time, this mark became again an accepted hard currency. Why? Because we replaced those worthless claims against the government by invaluable asset here the rent mark and additionally the Reisbank started to issue again exclusively against very stable and valuable assets, repayment obligations and commercial bills. This means that from that point in time it was impossible to speculate against the Reichsbank which some speculators tried but as Schacht like the main person in charge who be like a president of the Reichsbank who became president”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“No, not at all. And that's a big miss. It happened at the same time in all other countries there was no such thing like a currency reform. The currency reforms happened later in some countries, Hungary two and a half years after they recapitalized their central bank and after they stabilized the exchange rate. And in Germany, the confusion comes from that second currency being like part of the it could be used as a means of payment, but it was not the legal tender and it was not defended on foreign exchange markets. So the stabilization was defending the value of the mark at 2.5 trillion marks per dollar.”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“It wasn't a real legal tender, this rent in marks, but it was accepted by the public because also the rent bank was very resolvent. They had as their main asset the claims on a forced mortgage, on lended properties, for commerce, banking and so forth.”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“1923 because we recapitalized the rice ban. So what we did, that's the assets of the central bank or the most important ones, what you see, the treasury bills here in red, they represented at the very moment when we stabilized the exchange rate in order to end inflation. They represented more than 90% of the Reichsbank balance sheet. Those treasury bills, as I mentioned, had no market value, so the Reichsbank could not defend the value of the mark on foreign exchange market. At that point in time, they decided to replace this worselless claims against the government by some valuable asset, the rent mark or the rent bank notes, like they via a forced mortgage on landed properties. That the different bank”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“Like gold during 1990-20, and again, half of its gold holdings in 1923. And all these treasure rebuilds became completely worthless. And then the Reifsbank was insolvent. There was no backing whatsoever of the money supply, only worthless treasury bills, which had no market price at the time because the Reichsbank was the only party willing to, they bought them up all you can stabilize prices if you buy them up all, but if nobody else wants private markets are not willing to hold these bills, then they're worthless. Then we had to recapitalize the Reichsbank. So we had no currency reform in Germany, no real currency reform. And this mark again became backed by valuable assets in November.”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“The position of treasury bills became bigger, bigger, bigger, increased. And at very first, so we talked about after World War I, these treasury bills still had a market value. So they still represent repayment obligations, right? As long as the government is able to finance or to repay its debt as long as markets believe, like there must be some kind of a market check, as long as markets believe that the government more or less, I calculated the expected repayment probability with different bond prices, which are different on different markets and so forth. But as long as these assets more or less have some value, the central bank is not really vulnerable. And what's happened then when they lost other assets?”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“That the issuer still has control over all that money supply and is able to redeem it, right? So having all these commercial bills and advances on collateral, that simply means that all that money issued and being used by the public has to be repaid. So a strong currency is based on the assets of the central bank and to make it to bring it to this example. It's based on repayment obligations. So each note in circulation issued because commercial bills had been discounted at the bank means like each node has to be paid back to the issuer. And that makes the central bank non-vulnerable. Nobody can speculate against such a currency.”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“Which became which I call insolvent. Again, it's not a legal insolvency, but it's a de facto insolvency on foreign exchange markets. And therefore, money was actually debased and lost its value externally on foreign exchange markets, but then obviously also internally, because at the end what gives this note or gave this note value is institutional side of money, I call it, like the financial strengths from the issuer. What I want to emphasize is that there is some backing of the currency. And actually, that's not a strange theory. It was like the main theory back then in the late or mid late 19th century called banking school. and being accepted by the public is simply”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“I don't think it's going to happen in the near future in Europe, but in a different manner, you know, like let's think about the next winter and energy imports here in Europe. And in a different manner, obviously they can use the financial strength, the financing power of the central bank in order to import energy to Europe in such a scenario. And therefore those hyperinflations are very eye-opening because the effects are clear, right? You can like these central bank losses. Obviously, they don't happen most of the time, but in the 1920s, after the First World War, with Germany facing such reparation payments, there you can really see, oh my goodness, it was the institution behind that money supply.”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“No, so before 1920, the first inflationary was strong inflationary phase in Germany. They just lost the asset. It was not like it usually is, obviously, that it's either a balance sheet expansion when the central bank issues money or it's a reduction of the complete balance sheet when money is redeemed. In that case, the Reichsbank had to give away half of its gold reserves to Zarch, to the German government, such that they could import foodstuffs complicated winter after the war of 1920. So it lost an asset, an important asset without any compensation.”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“You, Dr. Sauer. So we said you said commercial bills earlier that is private notes issued by merchants and stuff. So private sector. And then we see foreign companies, of course, you mean currencies, also known as refer to it as FX. So that's fascinating that during World War I, inflation and Reichsmark's depreciation was bad, but it wasn't that bad. It really started in after the war ended from 1918 to 1919. When you say that they lost the gold reserves, was that just because foreign holders of Reichsmarks, which were backed by gold, were saying, hey, this Reichsmarks, it's not what it used to be worth. I'm going to go to the Reichsbank and redeem it or have someone do that for me. And so when you say they lost the gold reserves, the Reichsparks lost the gold reserves. If someone redeems, if I have a Reichspark note and I go to the Rex Bank to redeem it, yes, the bank has lost its gold reserve as an asset, but it's also lost a liability, right? So.”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“And therefore, we suffered the first wave of severe inflation in Germany. That's one simple example. So for enormous central bank losses, it had to do with the winter of 1990, 1920, and we had to import foodstuffs and the government was not willing to get these foreign currency from other resources and therefore reduced the gold from the rice bank. So it lost half of its international reserves, which at the time were huge. The rice bank became vulnerable on foreign exchange market. And that was the first hard inflationary phase for Germany.”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“The outbreak of World War I, but later on it was a gradual normal increase, but at the same time between 1980 and 1920 we see a devaluation from the mark in the order of a factor of 10. And the price level increased by similar magnitudes and therefore if you really, and that's just a simple example, but I really analyzed the balance sheet, the asset side of the balance sheet, the financial strength, the assets from the central bank in more detail, but what happened actually, the Reisbank lost from one day to the next, let's say, half of its gold reserves, which at the time were huge. Without any compensation, it lost half of its gold reserves. And therefore, the institution which begs that money, the backing of the mark deteriorates.”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“The reserves are still there. And actually, during the war, these gold reserves increased slightly, right? But with war financing, the Reichsbank giving credit to the German government and the government were financing me and the government just tells, well, after we win the war, we will pay it back that credit, there was no inflationary effect. So we had a little bit of inflation until the end of the war and also the mark slightly devalued against the dollar, the US stayed in the gold standard. But then from 1918, November 1918, end of the World War I until February 1920, the Mac devalued by a factor of over 10, right? This devaluation cannot be explained by money supply increase. So the money supply increase”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“On the institution behind it, the financial strengths from the central bank. So now let's start with Germany, not in the 1920s, but in 1914 before the outbreak of World War I. And I tried to explain it very simply with a simple mark note from actually from January 1940 before the outbreak of World War I. And at that point in time, the mark was backed by gold once, sir. The gold standard doesn't mean that the complete money supply is backed by gold. It's just some liquidity reserve, the central bank holds, but mostly it goes back two-thirds by very stable, very valuable assets, and those at the time where commercial bills. This marked node. Did not change physically, let's say, in 1920, but it lost at first until February.”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“Some kind of a standard because you think already like you did in the 1920s in US dollars. And then it's just like the currency devalues prices go up, right? Because all suppliers want more of these devalued currency for their product. Well, and that's like it happens in stages and at the very beginning, obviously like it was in Argentina in the last 10 years and it's going to be in the euro area if this happens hopefully it doesn't but if this happens at the beginning all these supplier demand effects on markets probably are abdominant at first like they have been in the last year but we are running the risk of an exchange rate driven of a devaluation driven inflation which then little by little becomes the dominant effect and then there is no there is no limit right so it can go up 100 200 300”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“First, you mentioned we look at the very strong inflations, but also the heavy inflations. Inflation, if it's up to, let's say, 10, 20%, that can happen for other reasons, labor markets, supply demand, demand pool, cost push, demand pull effects. But if we range in like 30, 40, 50 percent and then there is no limit up to billions of percentages in a year, it's usually that the institution behind the central bank becomes vulnerable on foreign exchange markets. The mark in the 1920s in Germany developed and then suppliers simply demand more of these devalued currency, first for tradable goods, but then after some while when the foreign currency or the black market rate of the foreign currency became”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“During World War I, and then in 1922 23, countries are struggling to go back on the gold standard. And then also Dr. Sauer in economics, I think the classical thing is hyperinflation is caused by way too much money. So quantity of money, the Reichsbank, the predecessor to the modern-day Bundesbank, central bank in Germany, is just printing and printing all day. And that is what caused hyperinflation. You know, the central bank Reichsbank's governor, Rudy Havenstein, that is the narrative which economists and monetary enthusiasts are familiar. Where does that fall short and how do you introduce this concept of central bank insolvency that causes hyperinflation? And let's stick with Germany for now. We can go into other countries later.”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT
“You, Dr. Sauer. And yes, I want to say that for most, if not all of this conversation, we are talking about hyperinflation. So 100% inflation, 200, 1,000, 10,000, a million percent inflation, you know, prices doubling overnight. We are not talking about, oh, consumer prices went up 8% in a year. We are talking about very extreme. So Dr. Sauer, as promised, let's now go back 101 years to 1923 and we talk about your very long page paper. The lessons from 1920 for the euro area, enlightening the dark side of insolvent central banks balance sheets. So you're talking, as you said earlier, about Germany, Poland, Austria, and Hungary. So Austria, Hungary, Germany, the losers of World War I, they had a very large reparations payment imposed upon them by the rest of the world, by the Allies. A lot of people were on the gold standard in 1914. Most people went off.”
2024-03-18 · Forward Guidance · Dr. Ingo Sauer on Hyperinflation, Central Bank Insolvency, and The ECB (European Central Bank) · IDENTIFIED FROM THE TRANSCRIPT