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Governments never tried to finance their operations through seigniorage, losing control of the currency and requiring ever increasing inflation rates to support their revenue streams in the end.

What happened is exactly what Keynes predicted in The Economic Consequences of the Peace. The treaty was designed by the French to cripple Germany and it did. The reparations were, essentially, unpayable, requiring, as they did, that Germany export over 1/3 of her annual coal production. As Germany had been, at best, self sufficient in coal this shut down at least a third of her manufacturing, and when Germany became sufficiently in arrears, France sought to act as a "debtor in possession" by occupying the Ruhr. This destroyed the rest of the manufacturing, by design, as France's goal was more to hamstring Germany, than to receive reparations. Having huge foreign obligations and nothing to export to obtain foreign currency was the classic cause of the ensuing hyperinflation.

All of this leads me to wonder if the current policy of Germany towards Greece, Ireland and Portugal is an example on an international level of what Freud referred to as "the repetition-compulsion neurosis", which usually involved a perceived need to do unto others what has been done unto oneself. Of course the French denied that hamstringing Germany was their goal, just as Germany denies that the austerity measures on which they insist are designed to push the countries on which these policies are foisted into a debt deflation death spiral. After all, we all want to think well of ourselves, regardless of the mental contortions required, and the easiest and most effective emotional defense is denial.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Jun 19th, 2011 at 05:54:48 PM EST
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