The First World War ended in late 1918 with the surrender of the German Empire. Afterwards, the victorious Allies1 drew up new borders and terms for post-war Europe at the Treaty of Versailles. Key to those discussions was how to prevent Germany from inciting war in the future. In attempt to neuter Germany, the Allies stripped Germany of key economic areas, restricted Germany’s military, and imposed harsh debts (reparations due) on Germany to the Allies. This new, weak, smaller German state was the democratic Weimar Republic.

The humiliations of Versailles immediately festered as a nationalist movement. Weimar was a powder keg from day one. The right wanted to restore the autocratic German Empire, while the left sought to establish a communist state. Both viciously blamed each other for loss of the war. Weimar Germany was not for centrists, and the government was uniformly despised. It would be taken over by the Nazi Party in 1933, after a short and miserable life of perpetual assault by militias instigating coups.

Crucially, the Weimar Republic did not fall to polarization alone. It was pushed over the edge by unparalleled economic hardship. Germany was overwhelmed by the reparations it had to pay. These debts crippled Germany’s abilities to access credit and to rebuild economically. The only way out was for Germany to print more of its currency. Predictably, this resulted in hyperinflation, and the economy was laid to waste. The Allies then recognized they had put Germany in an impossible position. They eased the reparations, and the US extended a large credit line in 1925. Armed with capital, Germany made progress for a few years, but once the Great Depression hit in 1929, the credit line was pulled, and Germany was once more facing economic devastation. Millions lost their jobs, and combined with a decade-plus of political discontent, the Nazi Party was elected into parliament. All they needed was a 19% popular vote to get a seat at the table. The rest is history.

Obviously, there is not an exact analogy between the US in 2020 and Weimar Germany.2 But some parallels come close enough for to deserve our attention. In both cases, polarization eroded the political center, and the Overton windows shifted dramatically. In our case, moderates are leaving the public discourse in droves, and those who continue to partake become inevitably more polarized. Polarization is one of those one-way streets that is difficult to reverse course on. I don’t see much in the way of a viable, constructive path back to normality, especially in light of the upcoming presidential election, which will almost certainly be inflammatory, regardless of who wins. What if the political climate of 2020 is no aberration, but becomes the new normal?

Beyond polarization, the other great haunt of the Weimar Republic was economic turmoil. The US also has severe debts, and the national deficit explodes year-after-year. Crucially, the US controls the global reserve currency, and there’s no single counterparty that can forcibly call in those debts. As such, the US can print dollars at will, and the cost of that inflation is socialized mostly among its creditors, i.e. the rest of the world. This is a marvelous game to play3 so long as your counterparties believe that what they’re buying will hold value, but eventually they figure out they’re getting diluted year after year. Then what? Inflation is a game that always ends in tears.

Unfortunately, I expect that in the US, we’re going to be hitting the money printers often in the coming years. When COVID-19 began clobbering the economy, the Federal Reserve reacted swiftly and aggressively, doing everything it could do prop up the markets (short of directly buying up equities). In my view, the Fed acted correctly in this situation, but it raises grave concern nonetheless: we’ve become a one-trick-pony. The US government struggles to respond quickly and impactfully with policy or large-scale organizational efforts. Instead, we pump the markets to paper over the underlying destruction.

Countries like South Korea or Taiwan rapidly organized themselves and overcame COVID-19 with relatively little disruption. European countries were not quite as effective, but the US response has been a disaster: confusion, blame-games, disobedience and irrationality all throughout the stack. We have wound up with both economic havoc and a staggering number of deaths, wasting our lockdowns while the rest of the world gets back to business. This episode has exposed us as a systemic house of cards – we have no state capacity at all to stop cascading failures,4 and no ability to organize effectively to meet emergencies. We have only one tool in our toolbox that actually works – monetary policy.

“Our country is so financialized that if Aliens landed on planet earth, we would respond by lowering interest rates” – Anon5

There are two major issues with monetary policy as our only tool: it is powerless when a non-financial, real-world response is needed, and it debases the USD every time we use it. The COVID episode has shown that we will likely use this tool again in future crises. That’s a one-way-street. As we move further down that street, US creditholders will eventually realize that their USD holdings are, and will for many years continue to be, diluted in value. It will be a rude awakening for them, and in turn, for us.

Fortunately, that scenario is a long way out. Our economic position is still very strong. But 2020 has made clear that there is a clear path to Weimar-style economic problems. There is also a similarly clear path toward Weimar-like political polarization – we just have to continue on our current track. What particularly worries me is that we’re on these tracks already, and under 2020/COVID pressures, there’s no easy way to turn back. Weimar ultimately fell to an exogenous shock – the economic torpedo of the Great Depression. As COVID has shown us, we’re systemically fragile, and not well-equipped to handle exogenous shocks. One or two more of these, and the consequences will be ugly indeed.

The final, and perhaps most important parallel, lies in leadership. Paul von Hindenburg, president of Weimar Germany, was an ancient autocrat, generally uninterested in newfangled democratic notions. While he nominally served the constitution, he cared about being King and dealing with other Kings. In a time of great unrest, he was the wrong pick to unify the population. Hindenburg was not “problematic” in the sense of being dictatorial or a xenophobe – he just didn’t care much about upholding democracy at a critical junction.

When Donald Trump was elected in 2016, many pundits on the left immediately cried wolf about him having dictatorial ambitions or being a xenophobe. In retrospect, those concerns came at the neglect of a very important question: not what Trump does next, but who comes next. The damage that Hindenburg did was less in the course of his term, but as it concluded: as a weak, old, divisive leader with a marginal-at-best interest in democracy, he paved the way for a brash group of power-grabbers who knew how to speak to the everyman. Those were the Nazis. In a similar vein, I’m not worried by accusations of Trump being ill-willed, but rather by him paving the way for more malicious actors in future years. A neglected democracy can neither defend itself, nor display its value proposition, in full force.



  1. Britain, France, Italy, Russia, USA 

  2. There are many key differences, like the American public not having a strong irredentist sentiment – even though the clamoring over immigration comes close as a territorial grievance. Current militia movements in the US, even given the current conflicts in Portland, pale against those of the 1920s, where there were tens of thousands of militiamen shedding blood in the streets. 

  3. Incidentally, this is why I’ve been long S&P since late 2016 – it was clear to me that Trump would do anything in his power to prop up the markets. 

  4. One of the things that’s so fascinating about our response to COVID is that it laid bare all the ways in which our system has fragile inter-dependencies: for example, since there is effectively no public healthcare (it is employer-based), people have to go to work, otherwise they would get fired and lose their healthcare. The workplace, of course, is a prime spot to spread disease. There are no easy fixes when safety valves, stopgaps, and fallbacks are lacking throughout the entire system. 

  5. I can’t find the exact source for this statement insofar as I recall it, but this tweet comes close.