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Is the Crack-up Boom Here?

December 28, 2021

Is the Crack-up Boom Here?

Bloomberg News recently solicited advice from Argentinians who lived through that country’s high inflation on how Americans should cope with rising inflation. The Argentinians suggested Americans spend their paychecks as fast as possible to avoid future price increases. They also suggested taking out loans that can be paid back later in devalued currency.

These strategies may make sense for individuals. However, encouraging debt and discouraging savings is disastrous for the country. Relying on debt and spending one’s paycheck immediately encourages people to seek instant gratification instead of planning for the future. This depletes both economic and moral capital.

November’s 9.6 percent increase in the producer price index, combined with the consumer price index’s increase to levels not seen since the early 1980s, shows why fears of inflation have become the public’s number one concern. Even the Federal Reserve has acknowledged that inflation is not just “transitory.”

The Fed recently announced it is accelerating the timetable to reduce its monthly purchases of Treasury and mortgage-backed securities. The Fed also announced it is planning three interest rate increases next year. However, the Fed plans to increase rates by no more than one percent. So even if the Fed does follow through on its promise to hike rates, it will do little if anything to combat rising prices. If the Fed allowed interest rates to rise to anything approaching market levels, it would make the federal government’s debt servicing costs unsustainable. This puts tremendous pressure on the Fed to maintain low rates.

The biggest victims of the Federal Reserve’s erosion of the dollar are lower- and middle-class Americans whose paychecks do not keep pace with the Fed-caused price increases. Yet many progressives still cling to the fallacy that average workers somehow benefit from continued dollar devaluation.

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The Elites Are Already Prepared for the Coming Collapse of the Dollar Bubble

April 13, 2020

The Elites Are Already Prepared for the Coming Collapse of the Dollar Bubble

elite prepared for collapse
Photo by Wikimedia.org| CC BY | Photoshopped

Today, stock market investors are hoping desperately for Weimar-style hyperinflation to boost equities prices to dizzying heights in what some call a “crack-up boom”. In terms of money creation, we are not there yet, but such levels of fiat printing could happen within the next year. Unfortunately for investors, this “boom” in stocks may not happen again. In fact, it already happened over the course of the past several years, and now the party is over. In the past few months, the U.S. dollar has entered a massive liquidity crisis, and despite all expectations, the Fed’s attempts to compensate with stimulus measures have done little to boost markets back to their previous glory.

In Weimar Germany, stocks did get an epic rally, until it all came crashing down in 1924 and then again in 1927. The notion of the endless fiat-driven bull market is a lie perpetuated by central bankers and their cheerleaders.

As I warned in past articles, when the Fed finally decided to step in to “stall the crash”, it was after it was far too late. The Fed has no intention of stopping the crash, they WANT a crash; they created all the conditions necessary for the collapse of the Everything Bubble to happen. Their goal now is only to make it appear as though they “did everything they could” to save the economy while staging the collapse of the final bubble: the U.S. dollar and its global reserve currency status.

…click on the above link to read the rest of the article…

Hyperinflation, Money Demand, and the Crack-up Boom

December 15, 2019

Hyperinflation, Money Demand, and the Crack-up Boom

In the early 1920s, Ludwig von Mises became a witness to hyperinflation in Austria and Germany — monetary developments that caused irreparable and (in the German case) cataclysmic damage to civilization.

Mises’s policy advice was instrumental in helping to stop hyperinflation in Austria in 1922. In his Memoirs, however, he expressed the view that his instruction — halting the printing press — was heeded too late:

Austria’s currency did not collapse — as did Germany’s in 1923. The crack up boom did not occur. Nevertheless, the country had to bear the destructive consequences of continuing inflation for many years. Its banking, credit, and insurance systems had suffered wounds that could no longer heal, and no halt could be put to the consumption of capital.1

As Mises noted, hyperinflation in Germany was not stopped before the complete destruction of the reichsmark. To illustrate the monetary catastrophe, one may take a look at the exchange rate of the reichsmark against the US dollar. Before the start of World War I in 1914, around 4.2 marks would buy 1 US dollar. As soon as war action began, the convertibility of the mark was suspended and paper marks (papiermark) were issued, largely for financing war-related outlays. In 1918, after the end of World War I, 8.4marks bought 1 US dollar.2 In December 1919, the mark had depreciated to 46.8 per US dollar, and in December 1920 to 73.4 per dollar.

In July 1922, the US dollar cost 670 marks. When French and Belgian troops occupied the Rhineland at the beginning of 1923, however, the exchange rate of the mark plummeted to 49,000 marks per US dollar. On November 15, 1923, when hyperinflation reached its peak, the currency reform effectively made 1 trillion (1,000,000,000,000) papiermarkequal to 1 rentenmark, and as 4.2 trillion papiermark exchanged for 1 US dollar at that time, 4.2 rentenmark would equal 1 US dollar.3

Increases in the Money Supply

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Central Banks Cave, Usher In The Crack-Up Boom

March 11, 2019

Central Banks Cave, Usher In The Crack-Up Boom

This was going to be the year when the other big central banks joined the Fed in “normalizing” interest rates and reversing the past decade’s QE experiment. Instead, the other central banks blinked and went back to aggressive ease, and the Fed is following them. This is a very big deal. 

Let’s consider some before-and-after stories: 

In September 2018, the European Central Bank began tightening: 

European Central Bank to take next step in tapering stimulus

(AP) – The European Central Bank is expected to ratchet back its stimulus efforts again on Thursday as it gingerly phases out extraordinary support for the economy left over from the Great Recession and the euro currency union’s debt crisis.

The bank’s 25-member governing council is expected to cut its monthly bond-purchase stimulus to 15 billion euros ($17.4 billion) a month from 30 billion a month, on the way to ending the purchases at the end of the year.

Reinhard Cluse, chief European economist for UBS, said that after the June meeting “the ECB is now essentially on autopilot.” Cluse said that the ECB can phase out the bond purchases and then decide the exact timing of next year’s first rate increase in the summer or fall.

But before any actual tightening took place, the EU economy slowed and turmoil flared in Italy and France. This week: 

European Central Bank announces major policy reversal

(WSWS) – The European Central Bank has reversed its policy of slight monetary tightening and announced a new stimulus package in the face of data which show a sharp downturn in growth in the euro zone. The unanimous decision was taken at the meeting of the ECB’s governing council held in Frankfurt yesterday.

 …click on the above link to read the rest of the article…

Are You Ready for a Crack-Up Boom?

February 12, 2016

Are You Ready for a Crack-Up Boom? 

Crack Up!

BALTIMORE – The Dow rose on Wednesday morning… after Janet Yellen made soothing remarks about a “gradual” return to normal interest rates. Then investors must have realized that returning to normal is not on the Fed’s agenda. The Dow finished the day down 99 points.

We haven’t seen normal central bank policy since the Nixon years. Normal is a currency backed by gold, not by PhD economists. Only briefly and episodically, over the last 2000 years, has the world flirted with pure paper or “fiat” money. Every time, the affair was over in a short time… and regretted for a long time.

1-Fate_of_CurrenciesThe result of the usurpation of money by government

Under a gold standard, credit comes from savings. Thus limited, interest rates typically stand somewhere in the 3% to 6% range. They do not roll around on the barroom floor with the spilt beer, drunks, and sawdust.

Real credit comes from money that is saved… taken out of the consumer economy so that it can be used for emergencies and capital investments. When it is paid back – usually out of increased output – the world is a richer place.

But try to trick the economy with phony credit – money that was never earned and never saved – and you are just asking for trouble. Said Jörg Guido Hülsmann, a senior fellow at the Mises Institute:

“In no period of human history has paper money spontaneously emerged on the free market. In all known historical cases, paper money has come into existence through government-sponsored breach of contract and other violations of private property rights.” 

Guido_Huelsmann2Jörg-Guido Hülsmann – a staunch proponent of a free market in money (you can read his book “The Ethics of Money Production” for free here, pdf)  Photo via mises.de

Giving out more money always gives the economy a temporary lift. People think they are richer.

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Brain-Drained

August 9, 2015

Brain-Drained

Venezuela: Real Wages Collapse amid Continuing Crack-Up Boom

While the crack-up boom in Venezuela continues, real wages in the country have have utterly collapsed. The bolivar is still trading close to 700 to the US dollar on the black market, and the Caracas stock index keeps making new all time highs in nominal terms almost every day. Ironically, Venezuela’s currency is called the “bolivar fuerte” (VEF), i.e. “the strong bolivar” ever since it has been “reverse split” 1 for 1,000 in January 2008.

 

brain-drainImage via designlimbo.com

 

As an aside, the stock market has likewise been subject to a reverse split of 1 for 1,000 about a year ago – pre-split the index would now be trading at a cool 15.5 million points.

BolivarThe black market rate of the “strong” bolivar (VEF) – 1 USD now buys nearly 700 VEF – click to enlarge.

 

Meanwhile, Venezuela has the highest sovereign CDS spreads in the world. Below is a chart of Venezuela’s annual default probabilities based on 5 yr. CDS spreads at a 40% recovery assumption:

 

VENZ default probability-AVenezuela: annual sovereign default probability from 5 year CDS spreads at an assumed recovery rate of 40% (which may prove to be a generous assumption) – click to enlarge.

 

Venezuela’s Economy Loses its Best People

The great successes of socialism in Venezuela aren’t confined to increasing shortages of basic goods, a collapsing currency and extremely high sovereign CDS spreads.

Businesses are confronted with a mixture of sharply rising input costs and price controls and as a result are unable to pay their employees wages that can even remotely balance the sharp losses in the bolivar’s purchasing power. As Reuters reports, skilled workers have been hit the worst:

…click on the above link to read the rest of the article…

 

 

Pop Goes The Alpha ( Natural Resources)

August 4, 2015

Pop Goes The Alpha ( Natural Resources)

If you want a cogent metaphor for the central bank enabled crack-up boom now underway on a global basis, look no further than today’s scheduled chapter 11 filling of met coal supplier Alpha Natural Resources (ANRZ). After becoming a public company in 2005, its market cap soared from practically nothing to $11 billion exactly four years ago. Now it’s back at the zero bound.
ANRZ Market Cap Chart

ANRZ Market Cap data by YCharts

Yes, bankruptcies happen, and this is most surely a case of horrendous mismanagement. But the mismanagement at issue is that of the world’s central bank cartel.

The latter have insured that there will be thousands of such filings in the years ahead because since the mid-1990s the central banks has engulfed the global economy in an unsustainable credit based spending boom, while utterly disabling and falsifying the financial system that is supposed to price assets honestly, allocate capital efficiently and keep risk and greed in check.

Accordingly, the ANRZ stock bubble depicted above does not merely show that the boys, girls and robo-traders in the casino got way too rambunctious chasing the “BRICs will grow to the sky” tommyrot fed to them by Goldman Sachs. What was actually happening is that the central banks were feeding the world economy with so much phony liquidity and dirt cheap capital that for a time the physical economy seemed to be doing a veritable jack-and-the-beanstalk number.

In fact, the central banks generated a double-pumped boom——first in the form of a credit-fueled consumption spree in the DM economies that energized the great export machine of China and its satellite suppliers; and then after the DM consumption boom crashed in 2008-2009 and threatened to bring the export-mercantilism of China’s red capitalism crashing down on Beijing’s rulers, the PBOC unleashed an even more fantastic investment and infrastructure boom in China and the rest of the EM.

 

…click on the above link to read the rest of the article…

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