Angela Merkel is repeating the errors of the Weimar Republic: causing deflation under the impression that she is being politically responsible and morally upright. Worse still, there is a whiff of Weimar about Mr Cameron’s austerity package, especially his blind refusal to cut taxes. But what’s at stake is not primarily a moral question, it’s a matter of economics.
The world economy has been de-stabilised by the eurozone largely because Germany will not allow the European Central Bank to act as lender of last resort, as all effective central banks must. The German Government believes it is being, not merely responsible, but also taking a high moral stance. Its attitude seems to be partly the result of religious dislike of debt, but more especially because Germans remember the hyper-inflation that followed the Second World War and especially the hyper-inflation of 1923. But this recollection has blinded them to the most important lesson of 20th-century German history, namely that it was not inflation that created the conditions that led to the rise of Adolf Hitler, but deflation.
After the First World War Germany was struggling to raise the taxes to meet wartime reparation payments and resorted to printing money, leading to the disastrous inflation of 1923 that obliterated virtually all savings. However, Germany managed to recover quite quickly by introducing a new currency at the end of 1923. Between 1925 and 1928 its GDP grew about 25 per cent in total. Unfortunately, loans from America had played a major part in reviving the economy and they dried up following the stock market crash in October 1929. Between 1929 and 1932 German GDP fell over 30 per cent and unemployment rose from 9 per cent to 30 per cent, peaking at 5.5 million.
Then, at the height of the recession in July 1931, the Weimar Government led by Chancellor Bruning adopted an austerity package. It maintained tight money and began a series of cuts in unemployment benefit as well as wage cuts. All the main parties supported the disastrous approach. In truth they deepened the hardships of the German people, and when elections were held in 1933 the Nazis gained enough votes to take over the Government.
Sadly, the British Government shares some of the Weimar approach. It has convinced itself that there is virtue in austerity.
A nation with a large national debt like Britain must strain every nerve to encourage economic growth. Securing genuine economic growth depends on productivity, which in turn depends on investment, and the best way to encourage investment is to cut taxes, which increases consumer demand and puts additional funds into private hands to start new businesses or expand existing firms.
From my November 15 post-
With so many job cuts and higher taxation, does UK Prime Minister David Cameron fulfill the passage in Daniel -
Then shall stand up in his estate a raiser of taxes in the glory of the kingdom: but within few days he shall be destroyed, neither in anger, nor in battle.
Remember what comes next...
And in his estate shall stand up a vile person, to whom they shall not give the honour of the kingdom: but he shall come in peaceably, and obtain the kingdom by flatteries.
Vile - morally despicable, intellectually dishonest.