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The
credit boom is built on the sands of banknotes and deposits. It must
collapse… If the credit expansion is not stopped in time, the boom
turns into the crack-up boom; the flight into real values begins, and the
whole monetary system founders.
Ludwig von Mises, Human Action, 1949
I
first attended the Canton Trade Fair in October 1976. All Chinese men and
women were dressed in blue shirts and blue pants, bicycles were China’s
main mode of transportation, Chairman Mao had just died and China’s
mantra, “We will continue to support the policies of Chairman Mao Tse-Tung and criticize the policies of Deng
Xiao-Ping”, was heard everywhere.
But
three years later when I received White House invitations to attend the
Washington DC reception for the Vice-Premier of the Peoples’ Republic
of China, it was Deng Xiao-Ping who arrived; not a hard-line
inheritor of Chairman Mao’s revolutionary precepts.
In
1977, Deng Xiao-Ping wrested power from China’s conservative communist
ideologues and in 1978, opened China’s socialist economy to private
ownership. By 2005, China’s private sector had expanded to 70 % of its
economy and China became an economic power in only 25 years.
While
Mao Tse-Tung had successfully steered China away
from Western suzerainty, it was Deng Xiao-Ping who put China on the path to
financial and geopolitical power; a path that would be as rapid as it would
be unsustainable—for China’s explosive growth was founded in
large part on excessive credit creation in the West.
http://upload.wikimedia.org/wikipedia/commons/b/b3/Prc1952-2005gdp.gif
The
remarkable rise in China’s GDP reflects the just as remarkable rise of
the Dow during the same period
The
correlation between the rise of China’s GDP and the rise of the Dow is
unmistakable. It’s also the reason why China’s growth is
unsustainable. China’s rapid growth was fueled by the unprecedented
expansion of the US money supply—an expansion directly responsible for
America’s exploding appetite for consumer goods from China and the US
dot.com stock market bubble in the 1990s.
http://www.goldmoney.com/gold-research/alasdair-macleod/money-supply-explosion-will-lead-to-accelerating-inflation.html
Appointed
Fed chairman in 1987, Alan Greenspan presided over the greatest credit and
monetary expansion in US history, an expansion which led to America’s
three largest speculative bubbles; the 1992-2000 dot.com bubble, the
1991-2006 consumer bubble and the 2002-2006 real estate bubble; three bubbles
whose cumulative collapse would derail the world economy and set in motion
Ludwig von Mises’ crack-up boom.
THE CRACK-UP BOOM
As
von Mises wrote in Human Action in 1949 …
If the credit expansion is not stopped in time, the boom turns into the
crack-up boom; the flight into real values begins, and the whole monetary
system founders…
Von
Mises’ crack-up boom, or more correctly
Greenspan’s crack-up boom, had its origins in the 1980s when the US
greatly increased spending yet cut taxes and initiated unprecedented levels
of borrowing to make up for lost revenues, consequently flooding America with
excess liquidity which would set in motion America’s largest stock
market bubble since the 1920s.
Although
Alan Greenspan had the intellect of an über-economist,
he lacked the courage to stand up to Washington DC and Wall Street. In the
1990s, when the Dow began rising far out of proportion to economic growth,
Greenspan moved to stop the developing bubble in stocks by raising Fed
interest rates:
I think we partially broke the back of
an emerging speculation in equities. - Alan Greenspan, February 1994
But
Greenspan’s rate increase didn’t stop the bubble. Share prices
continued higher so Greenspan continued raising rates. After seven
consecutive increases between February 1994 and February 1995 and another
increase in March 1996, Wall Street demanded Washington DC stop Greenspan
from further Fed tightening.
Greenspan
capitulated.
…it was not the policy of the Fed
to prick bubbles by monetary means. - Alan Greenspan, March 1997
In
1998, Greenspan lowered Fed interest rates three times allowing the dot.com
bubble to continue its dizzying liquidity-driven ascent. Finally, in 1999,
the Fed was forced to prick the dangerously large stock market bubble which
Greenspan now denies recognizing.
My
video, Dollars & Sense show
#11, titled The Fix Is In, explains
Greenspan’s flawed tenure at the Fed, see http://youtu.be/65CnOUhEFIk; and, while there are reasons to
explain Greenspan’s shortcomings, none can reverse the damage he has
done.
Because
of his inability to just say no, Greenspan left a legacy of three historic
credit bubbles whose catastrophic collapse would trigger Ludwig von Mises’ crack-up boom and send America and the world
into the greatest economic meltdown since the Great Depression.
THE GOAT RODEO OF CREDIT DISTORTED
DEMAND
The
bankers’ artificial injection of credit into free markets ultimately
overwhelms supply and demand fundamentals. This distortion, conveniently
overlooked during expansions, becomes painfully apparent during contractions
when demand disappears leaving behind excess capacity, defaulting debts and
high levels of unemployment.
Capitalism’s
foundation of debt-based money was destabilized by America’s expansion
of its monetary base after 1980; resulting in the eventual overcapacity of
supply in the East, e.g. China. Japan, Korea, whose economies had expanded to
satisfy the artificially inflated demands of the West, e.g. the US, the UK,
Europe.
Capitalism,
an always uneasy imbalance between credit and debt, is now trying to regain
its balance. It can’t. The present crisis, created by decades of excess
credit, is being treated with even more credit; a dangerous palliative that
will exacerbate, not solve, what is happening
Credit expansion is the
government’s foremost tool…to contrive everlasting booms, and to
make everybody prosperous. – Ludwig von Mises,
1949
Today,
China’s late run at capitalism’s table is fueling the very
collapse von Mises predicted; for if
Greenspan’s credit expansion was excessive—and it was—China
has set in motion an even larger expansion.
To
offset the global collapse in demand, China expanded its money supply in 2008
by an extraordinary 150 %, an increase driven by China’s need to
maintain economic growth or risk losing political control.
 
Modern
monetary debauchery is no longer a Western phenomenon. China has now joined
the party and in a very big way.
2012,
GREAT WAVES AND THE COMING COLLAPSE
The
ending of the Mayan calendar in 2012 is as misunderstood as the interplay
between credit and debt and supply and demand; but the coincident collapse of
the current economic paradigm and an arcane indicator of change should not be
dismissed.
Professor
David Hackett Fisher in The Great Wave,
Price Revolutions and the Rhythm of History writes that for the last
eight hundred years, periods of economic and social stability have been
intermittently interrupted by waves of rising prices.
Each
of these great waves according to
Professor Fisher culminated in the economic and societal collapse of the
existing order, bringing to an end the Middle Ages, the Renaissance, the Age
of Enlightenment, etc.
During each great wave: …Food and
fuel led the upward movement. Manufactured goods and services lagged behind.
These patterns indicated that the prime mover was excess aggregate demand,
generated by an acceleration of population growth,
or by rising living standards, or both.
… Prices went higher, and became increasingly unstable. They began to
surge and decline in movements of increasing volatility. Severe price-shocks
were felt in commodity movements. The money supply was alternately expanded
and contracted.
Financial markets
became unstable. Government spending grew faster than revenue, and public
debt increased at a rapid rate…Wages, which had at first kept up with
prices, now lagged behind.
Returns to labor
declined while returns to land and capital increased. The rich grew richer.
Inequalities of wealth and income increased. So did hunger, homelessness,
crime, violence, drink, drugs, and family disruption.
..Finally, the great
wave crested and broke with shattering force in a cultural crisis that
included demographic contraction, economic collapse, political revolution,
international war and social violence
pp. 237-238, David Hackett Fisher, The Great Wave: Price Revolutions and the
Rhythm of History, Oxford University Press, 1996
Great
waves take 80 to160 years before they end in the eventual decline and
collapse of existing epochs. Today, another great wave is about to crest and break; and the changes could be
even more extreme as the amplitude of change is greater than in any previous
wave.
The current great wave began in 1896. That it could crest and break in 2012
could be a coincidence. Or, it may not.
GOLD
AND THE CRACK-UP BOOM
…[during] the crackup boom...the flight into real values begins, and the whole
monetary system founders. - von Mises
Von
Mises’ predicted flight into real
values—gold—is now underway despite the best efforts of
today’s kreditmeisters to diminish the allure of the only
safe haven left to those fleeing paper money’s now burning mansion.
One
of the foremost proponents of the flight to gold is famed stock market
analyst, Richard Russell. According to the Hulbert Financial Digest, Russell’s The Dow Theory Letter is tied for top place as a market timer on
a risk adjusted basis since 1980.
A
leading financial analyst with a stellar reputation timing stock market
trends, Russell’s comments regarding today’s stock markets and
gold should be seriously considered and, if appropriate, then acted upon.
On
December 17, 2011, Richard Russell wrote:
…The talkers on Bloomberg are
discussing stocks to buy. They are unswerving bullish. It never occurs to
them that hard times lie ahead and that this is not the time to buy
stocks…My advice -- sell any stocks you still own -- sell into all
rallies, or stay out of stocks completely.
I continue to like gold in all its
forms, but I'm afraid that gold mining stocks will tend to go with the
general market. Personally, I'm staying with my gold mining stocks until the
bitter end. I continue to believe that we'll see a final hysterical blow-off
in gold (the metal) that will carry the mining stocks with it.
On
December 31, Russell noted 11 consecutive years of gold closing higher
confirms that gold is in a record bull market headed towards an even more
explosive high:
This year's close for gold marks the
11th year for higher year end gold closing. To my knowledge this is the
longest bull market of any kind in history in which each year's close was
above the previous year. This fabulous bull market will not end with a
whisper and a fizzle. I continue to believe that the upside gold crescendo of
this bull market lies ahead. We are watching market history.
The
crackup boom will end as von Mises predicts in monetary
disarray, i.e. the debasement of currencies and possible hyperinflation where
paper money loses all value. Today, money is no longer a store of value.
It’s a trap for the unsuspecting that has already been sprung.
The
300 year viral spread of the banker’s fraudulent paper money is best
explained by Gresham’s Law wherein bad
money drives out good. But the global success of the banker’s
debt-based money has led to its own undoing; for when there’s no good
money left, only bad remains.
In
1971, after which gold no longer backed the bankers’ now fiat money,
the growth of credit and debt became exponential. Today, they are reaching
their limits. Tomorrow, those
limits will be exceeded.
Yes, Dr. Keynes, Dr. Friedman, Dr.
Greenspan, Dr. Bernanke, et. al. while there are no
limits to economic hubris, there are limits to monetary imbalances.
Throughout
history, time and time again monetary chaos has led to the explosive rise in
the price of precious metals. It’s happening again today.
MIDNIGHT
AT THE CASINO
If
you haven’t yet cashed in your chips, you should. It’s almost
midnight and the casino owners are worried. A run on the cashier’s
window would show them to be bankrupt; the casino’s only assets being
customer IOUs and banks upon banks of increasingly worn chip-making machines.
The
management’s recent offer of unlimited chips to the money changers
still on the floor was done in the desperate hope it would convince the
remaining gamblers of the house’s solvency.
It
won’t work. It’s too late. It’s 2012.
Buy
gold, buy silver, have faith.
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