The Death of Paper Money
Source: Telegraph, Ambrose Evans-Pritchard (7/25/10)
"Bankers buy rare copies of 1974 book on mechanics of Weimar inflation."
EBay is offering a well-thumbed volume of Dying of Money: Lessons of the Great German and American Inflations at a starting bid of $699 (shipping free. . .thanks a lot).
The crucial passage comes in Chapter 17 entitled, "Velocity." Every big inflation—whether the early 1920s in Germany or the Korean and Vietnam wars in the U.S.—starts with a passive expansion of the quantity money. This sits inert for a surprisingly long time. Asset prices may go up, but latent price inflation is disguised. The effect is much like lighter fuel on a campfire before the match is struck.
People's willingness to hold money can change suddenly for a "psychological and spontaneous reason," causing a spike in the velocity of money. . ."Velocity took an almost right-angle turn upward in the summer of 1922," said Parsson. Reichsbank officials were baffled, unable to fathom why German people started to behave differently almost two years after the bank had boosted the money supply. He contends that public patience snapped abruptly once people lost trust and began to "smell a government rat."
Some might smile at the Bank of England's "surprise" at the recent the jump in inflation. Across the Atlantic, Fed critics say the rise in the U.S. monetary base from $871bn to $2,024bn in just two years is an incendiary pyre that will ignite as soon as U.S. money velocity returns to normal.
Morgan Stanley expects bond carnage as this catches up with the Fed, predicting that yields on U.S. Treasuries will rocket to 5.5%—10-year yields have fallen below 3%, and M2 velocity has remained at historic lows of 1.72.