The Weimar inflation experience
The Weimar Republic – the German government between 1918 and 1933 – remains the standard comparison for any situation where the combination of inflation, economic and political instability and extremism mix together in a toxic brew. There is no doubt that hyperinflation resulting from Germany’s war debts and attempts to fund resistance to the French occupation of the Saarland resulted in the impoverishment of entire swathes of the professional class, who saw their savings disappear in a situation where prices doubled on average every three days. But inflation in Weimar tended to benefit two distinct groups of people: those workers in heavily unionised industries who could use collective bargaining to leverage their wages higher to keep up with price growth (hence all those pictures of employees carrying home their wages in massive picnic hampers and wheelbarrows); and those companies and individuals who could purchase assets, including shares, using borrowed money (lent at a fixed rate) that quickly lost its value.
According to contemporary reports in the Frankfurter Zeitung, as described at the time in the New York Times, the GERMAN stock market, in those days based in Berlin, saw huge growth as a result: "The combined value of twenty-five stocks on the [Berlin stock exchange] was 5,424 in September 1919, rising to 7,792 at the beginning of January... and to 15,362 at the end of 1920.” That threefold increase represented investors with spare capital placing everything in the stock market as a hyperinflation hedge. There were solid reasons for doing this as the market’s key companies, such as the industrial giant IG Farben, or Krupp, were also handed advantages by the onset of runaway price growth – at least at first.
According to Adam Fergusson’s seminal book, When Money Dies, which became a surprise sleeper hit in 2010 as inflation edged towards 6 per cent, German companies’ reaction to hyperinflation was, paradoxically, to hugely increase their capital investment. Stock renewed with borrowed money whose value was inflating away meant that only a tiny fraction of future revenues was needed to pay back the debts once they fell due. There was also the added problem, or incentive, that companies were not legally allowed to build up a liquidity reserve by converting Reichsmarks to foreign currency and holding them abroad.
Therefore, the only option in a situation where goods are worth consistently more than cash is to convert the depreciating cash into appreciating capital assets, such as a tractor. This further helped to drive share price valuations as the net asset value of individual companies increased at an exponential rate, creating a 'virtuous' (if you can call it that) upward cycle for the stock market. The underlying point is that, if you borrowed money at a fixed rate to invest, the real value of the loan was inflated away long before payment was due. Indeed, there is a family story of my great-grandfather investing heavily in capital stock for his business with a loan from a friendly bank, and then paying it all back with the proceeds from selling a few bags of potatoes.
The modern equivalent
While hyperinflation remains an improbable outcome for developed economies, elevated price growth means there is the possibility of a parallel emerging when it comes to companies' contemporary responses. There are predictions that business investment in capital assets will now pick up once the impact of higher inflation starts to work its way through the balance sheet, making liquid assets less attractive when net asset value can be more easily maintained by investing capital. Even the UK's perennially low-spending business arena, in which capital spending had long been flatlining prior to falling off a cliff at the start of the pandemic, saw a surprise rebound in the second quarter. That was partly seasonal, as construction activity after the winter picked up again. On the other hand, government investment fell by nearly 10 per cent during the same period, according to the Office for National Statistics, which suggests the increase is as a result of moves to redeploy capital at a local level. It will only be when the next set of statistics is released that we can assess whether this was a blip, or a sign of things to come. It could be that current share price falls fail to reflect a sizeable growth in tangible business assets.
