Germany’s obsession with anti-inflation policies, inspired by the hyperinflation of the 1920s, is so misguided that it is now threatening to collapse all of Europe. Former ECB banker Lorenzo Bini Smaghi has now called to rescue the Italian banks with European taxpayers’ money. He is correct in warning that the insistence of Germany on the prohibition of the state funding bailouts could evolve into a threat to the entire European financial system. The ECB is desperately trying to support the euro, but a strong currency only promotes deflation – not recovery.
The German hyperinflation was the result of a collapse in confidence because of the 1918 Communist revolution in Germany. Nobody would lend the government money after they invited the Russian communists to take over Germany. This had NOTHING to do with printing money. That was the result of the collapse in confidence, not the original cause.
This misguided interpretation of the German hyperinflation is causing the exact same response. People are hoarding cash, not investing, and banks are collapsing. Deutsche Bank says it needs 150 billion euros. This is a full-blown sovereign debt crisis that will tear Europe apart. Negative interest rates are accelerating the process.