June 27, 2010

The Myth of German Inflation Fears

By Wolfgang Drechsler

Germany’s stubborn insistence on austerity rather than increased spending to stimulate economic recovery is the worst possible stand to take at the current moment of the global financial crisis; it shows that nothing has been learned from history, that Keynes is still not understood in Berlin and that at the end of the day, Europe, the European Union and the Euro, and even the world economy, may go down in flames because of German stupidity. And why are Germans being so stupid? Just because of the irrational fear of the repetition of history, the German hyperinflation of 1922-1923, an outright mythical event which until today conditions Germany’s (and that means the Germans’) attitude towards spending vs. savings. Politicians from Sarkozy via Barroso to Obama and opinion leaders from Krugman via Dean Baker to Soros agree on that, and you can read it in many of the current G-20 and G-8 statements and comments as well.

Nevertheless, this is complete nonsense. The myth here is not the German hyperinflation at all – the myth is that the German attitude towards austerity vs. demand stimulation is in any way significantly based on that historical event. How much does history really matter in Germany – at least, pre-World War II history? How much does the average German really know about the hyperinflation of yore? Next to nothing, I would say – the majority of Germans has probably never even heard of it, as horrible and disastrous an event as it was. But how much can the past really hold sway over the present? It seems to me that only the burned child shuns the fire and that among today’s German decision-makers, opinion leaders and citizens, almost nobody consciously remembers that time. If we say that in order to halfway understand what the inflation meant, you had to be 16 years old when it happened (otherwise this is too abstract a topic, rather than say a war), that means you had to be born by 1907 at the latest. In this case, you would be at least 103 today – which my philosophical teacher Hans-Georg Gadamer in fact was when he died in 2002, and he had remained a public intellectual until the end, but he is still a rare exception. Sure, the hyperinflation is used as an image, as a reference point, as an illustration, but not more – which is also my experience from Germany, where I am right now as well, and one side of my family even did suffer heavily during the hyperinflation. Hyperinflation references in the German media are usually to foreign statements, not to the event itself. Historical events that people don’t remember are not “real” – unless propaganda and/or family lore renarrate them again and again in such a way that they become immediate and relevant again, and the hyperinflation, as I mentioned, seems somehow too abstract and complex for that. In any case, whatever the reason, the hyperinflation is not “immediate”, as Gadamer would have said, in today’s Germany at all.

In order to understand the German attitude right now, therefore, especially if one is concerned about it and if one thinks it stands in the way of crisis-appropriate policy, it is important to discard this faith in the myth and to try to find out what the real reason for this harsh anti-inflation stand is. My answer is that Germany’s strict opposition to inflation is perfectly rational, the opposite of being myth-based, and that there is indeed a connex between spending policies and inflation. Many Germans, if not most (and certainly most of a key segment of the population, the large middle class which is the foundation of the political system), have their assets in currency-based investments and are not in debt, or at lest perceive themselves that way either for now or for the immediate future, and any inflation is a net loss for them, and they have paid into a (currently) very well-working social and medical insurance system that likewise appears to hinge on a stable currency. As their life quality and future rest on this, and as they were always and unequivocally promised again and again by all politicians, experts and bankers that the currency will remain stable, it’s hardly surprising that they would mind, and indeed mind very much indeed, if this were not the case anymore. I basically agree with Adolph Wagner of course that all private property is state-created rather than natural, indeed that it is a function of the state, but it’s hardly surprising that people want to at least keep what they have if they have been assured again and again that they may keep it.

Add to this that a positive overall effect of inflation on the German, and indeed European and global, economy can be claimed but not proven within our ruling episteme, i.e. the system that conditions what we take for true or false: Insisting on a low inflation might bring the entire system to a collapse, so that in the end, Germany would have to pay anyway, but it only might – some, perhaps many (but certainly not all) economists may claim that it does, but how does that add to any likelihood of it being true in the eyes of a well-informed German citizen? Thus, being totally opposed to inflation and to policies that are conducive to or even based on it, is entirely rational for a German citizen. This is also the systemically correct and even ethical position because democracy is based at least to some extent, and even to a necessary one, on voters voting their genuine interests as perceived.

But how can one call the rational pursuit of economic self-interest ethical? Well, one can if one is a Smithian in any case, but the key aspect to realize in this context is that if one claims that Germany should take up its responsibility for the welfare of Europe and the European Union and its fellow Europeans, one ignores that there is no European identity – yet – in Germany or elsewhere. Maybe there should be (I myself would certainly like that), but that is not the issue – the issue is that it is not the case. The European project has, to a good extent even purposefully, dodged the creation of a European identity, and it is just absurd to claim now that there should be one, or even that it should come about because of the crisis. So, even if a higher inflation (even a mildly higher one than exists) were desirable on a European level, on the German level, it is not. A vast majority of Germans do not feel pan-European solidarity to the extent that they want to finance other countries, especially if those – especially Greece – are reported again and again to have brought their economic problems largely upon themselves by corruption and leisure orientation, even if that was well-known but calculatedly ignored by the EU and its other member countries.

All this means that Germany’s stand against inflation is not a case of an evil elite imposing wrong economics on a witless and hapless people, but of politicians representing the well-considered self-interest of their electorate (although it would appear anachronistic to most Germans to ascribe any sort of competence and policy design to the Merkel government right now). And this, in return, is, as I stated just a moment ago, close to the very definition of democracy. One may call it populism, but democracy necessarily entails a popular element.

One may not like any of this, but the problem then is elsewhere. It is in the missing European identity in Germany (and elsewhere), the missing willingness to part with one’s money, a lack of empathy, a lack of leadership – but under the current circumstances, the fact that Germans generally don’t want any inflation of what for them is primarily their currency is as normal as it is that the German leadership therefore doesn’t push, or at least consent to, inflation either, or at the very least, hesitates and delays. It has nothing to do with the legacy of the hyperinflation of 1922-1923, which, if anything, is simply used as an illustration among those in the German discourse who are already familiar with the topic. If one minds the German position and thinks it should be revised, one would be wiser to think about arguments addressing the genuine – and rational – German concerns over inflation, rather than whining about the power of a myth that, in the way it is claimed to, does not even exist.

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