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The threat of hyperinflation has haunted fiat money economies throughout history. Although past empires crumbled under the weight of unrestrained money printing, modern bankers at the Federal Reserve assure us that today’s financial system is immune to such a fate. Austrian business cycle theory, however, reveals that current economic stimulation may be propelling us toward a crisis of catastrophic proportions: a crack-up boom that marks the dramatic end of this boom-and-bust cycle. When a central bank expands the money supply to reinflate bubbles, it destroys the currency’s purchasing power. This endgame, in which the monetary system crumbles beneath a weak economy, represents the ultimate failure of interventionism. Once the public expects prices to keep rising, hyperinflation becomes a self-fulfilling prophecy.

The Expanding Boom-and-Bust Cycle Ends in a Crack-Up Boom

To comprehend the precarious state of America’s monetary system, we must first review the boom-and-bust cycle as formulated by Ludwig von Mises and the Austrian school. The Austrians observed that the artificial suppression of interest rates by a central bank initiates an unsustainable economic boom by promoting malinvestment. Pushing rates below natural market levels sends a distorted signal to businesses that long-term capital investment is more profitable than the economy can actually support. In the euphoric boom phase, jobs multiply and GDP grows with investment. But the investments lack economic merit, so the house of cards eventually collapses.

With the liquidation of malinvestments, the bust phase emerges: unemployment soars, output contracts, and a recession begins. Since the investments were built on quicksand, they must unwind. Each failed business further curtails consumer spending, rippling the bust through the economy. But rather than letting liquidation and market corrections occur, policymakers add stimulus, setting up a larger bubble and more painful bust down the line.

…click on the above link to read the rest…

When Does This Travesty of a Mockery of a Sham Finally End?

September 21, 2018

When Does This Travesty of a Mockery of a Sham Finally End?

Credit bubbles are not engines of sustainable employment, they are only engines of malinvestment and wealth destruction on a grand scale.

We all know the Status Quo’s response to the global financial meltdown of 2008 has been a travesty of a mockery of a sham–smoke and mirrors, flimsy facades of “recovery,” simulacrum “reforms,” serial bubble-blowing and politically expedient can-kicking, all based on borrowing and printing trillions of dollars, yen, euros and yuan, quatloos, etc.

So when will the travesty of a mockery of a sham finally come to an end? Probably around 2022-25, with a few global crises and “saves” along the way to break up the monotony of devolution. The foundation of this forecast is this chart I prepared back in 2008 (below).

This is of course only a selection of cycles; many more may be active but these four give us a flavor of the confluence of crises ahead.

Cycles are not laws of Nature, of course; they are only records of previous periods of growth/excess/depletion/collapse, not predictions per se. Nonetheless their repetition reflects the systemic dynamic of growth, crisis and collapse, and so the study of cycles is instructive even though we stipulate they are not predictive.

What is predictable is the way systems tend to follow an S-curve of rapid growth with then tops out in excess, stagnates in depletion and then devolves or implodes. We can see all sorts of things topping out and entering depletion/collapse: financialization, the Savior State, Chinese credit expansion, oil production, student loan debt and so on.

Since each mechanism that burns out or implodes tends to be replaced with some other mechanism, this creates the recurring cycle of expansion / excess / depletion / collapse.

I plotted four long-wave cycles in the first chart:

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

Things Work Until They Don’t

April 27, 2018

Things Work Until They Don’t

As the world begins its next adventure in financial chaos and rolls over to expose its soft underbelly of lies and deceit that have been perpetrated on the public, those that see the truth have been warning the people once again. You can give people the truth but you cannot make them believe it. That is for them to come to grips with.

Trade wars are usually bad for all parties in the end but between the beginning and the end there can be some surprising developments. Human actions and delusions on the part of the public can produce strange results at times. All of our systems are based on trust. When that trust is lost, everything will come crashing down. Until then, things will go on.

If trade tariffs with China have the short term effect of creating American jobs, that could have a wealth effect by creating more disposable income in American pockets. That in turn can have a positive effect on the stock market and consumer confidence. Also, commodities are set to soar in price soon and this could carry the stock market up with it for a while.

Richard Russell once said he believed we would have a third leg in the current bull market before the bears take charge. He was right in the past and could be right again, only time will tell. This situation can not last long due to the enormous mal-investment built up in the system over many decades. A house of cards will eventually fall and the taller the house the longer and harder the fall will be.

One thing that could destroy the temporary high could be the destruction of the financial system due to loss of the reserve currency status and the replacement of the petrodollar system. If and when that happens things will not be looking good for America for a very long time.

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

Ron Paul: We Are Reaching A Point Of No Return

November 6, 2017

Ron Paul: We Are Reaching A Point Of No Return

When the system will break no matter what the Fed tries

Dr. Ron Paul has long been a leading voice for limited constitutional government, low taxes, free markets, sound money, civil liberty, and non-interventionist foreign policies.

Dr. Paul served as the US Representative for Texas’s 27^th Congressional District from 1976 to 1985. He then represented the 14^th district from 1977 to 2013. He ran for the office of US President, three times, most recently in the 2012 Republican primaries. Dr. Paul also had a long career as an OBGYN over which he delivered more than 4,000 babies.

The recent author of the book, The Revolution At Ten Years, Dr. Paul looks ahead at the future of the movement he helped launch — tackling central planning, the military empire, cultural Marxism, the surveillance state, the deep state, and the real threats from these institutions to our civil liberties.

As a multi-term member of Congress, Dr. Paul knows the players and policies responsible for the growing unfairness and inequality now rampant in society. He does not expect the offenders will reform willingly. Instead, he predicts the system will collapse under its own unsustainability — offering a rare and valuable chance then for more sound and fair solutions to prevail:

Wealth doesn’t come from the creation of money, especially a fiat system. With too much fiat money and all this credit, eventually the economy becomes exhausted and engulfed with debt and mal-investments. The treatment for this is a correction; you have to allow the debt to be liquidated. You have to get rid of the mal-investment and you have and to allow real economic growth to start all over again. But that wasn’t permitted in ’08 and ’09, which is why there’s been stagnation.

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

Automating Ourselves To Unemployment

April 28, 2016

Tatiana Shepeleva/Shutterstock

Automating Ourselves To Unemployment

How shortsighted policies are creating a long-term crisis

Students of Austrian business cycle theory are familiar with the term malinvestment. A malinvestment is any poor use of resources or capital, commonly made in response to bad policy (usually artificially low interest rates and/or unsustainable increases in the monetary supply). The dot-com bubble that popped in 2001? The housing bubble that similarly burst in 2008? Those were classic examples of malinvestment.

With this article, I’d like to introduce a related term: malincentive. While not part of the official economic lexicon, I consider a ‘malincentive’ a useful word to describe any promise of short-term gain whose long-term costs outweigh any immediate benefits enjoyed. The temptation to urinate in one’s pants on a cold winter day to get warm is a (perhaps unnecessarily) graphic example of malincentive. Yes, a momentary relief from the cold can be achieved; but moments later, you’ll have a much larger problem than you did at the outset.

Malincetives and malinvestment go hand-in-hand. In my opinion, the former causes the latter. As humans, we respond remarkably well to incentives. And dumb incentives encourage us to make dumb investments.

In this current era of central planning, malincentives abound. We raced to frack as fast as we could for the quick money, while leaving behind a wake of environmental destruction and creating a supply glut that has killed the economics of shale oil. Our stock exchanges sell unfairly-fast price feeds for great sums to elite Wall Street high-frequency-trading firms, and as a result have destroyed investor trust in our financial markets. The Federal Reserve keeps interest rates historically low to encourage banks to lend money out, yet instead the banks simply lever up to buy Treasurys thereby pocketing vast amounts of riskless free profit. The list goes on and on.

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

US Money Supply Growth Finally Begins to Crack

November 24, 2015

US Money Supply Growth Finally Begins to Crack

Breaking Below the Shelf

In our recent missive on junk bonds, we inter alia discussed the fact that the growth rate of the narrow money supply aggregate M1 had declined rather noticeably from its peak in 2011. Here is a link to the chart.

As we wrote:

“We also have confirmation of a tightening monetary backdrop from the narrow money supply aggregate M1, the annualized growth rate of which has been immersed in a relentless downtrend since peaking at nearly 25% in 2011. We expect that this trend will turn out to be a a leading indicator for the recently stagnant (but still high at around 8.3% y/y) growth rate in the broad true money supply TMS-2.”

BN-GO061_WAJ_Mo_J_20150121165559

Photo credit: Bari Goodman

In the meantime the data for TMS-2 have been updated to the end of October, and low and behold, its year-on-year growth rate has declined to the lowest level since November of 2008. At the time Bernankenstein had just begun to print like crazy, via all sorts of acronym-decorated programs (they could have just as well called them “print 1, print 2, print 3”, etc.). So we’re now back to the broad true money supply growth rate recorded at “echo bubble take-off time”.

Annual growth rate of US money TMS-2, breaking below the lower end of the range it has inhabited since late 2013 – click to enlarge.

This is the final piece of the puzzle if it keeps up (and why wouldn’t it keep up?). Stock market internals have become ever more atrocious in the course of this year, which we have regarded as a sign that not enough new money was being printed to keep all the pieces of the bubble in the air at once. Now there is even less support.

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

Faith in Central Banks Dwindles

October 7, 2015

Faith in Central Banks Dwindles

Even Bloomberg Notices that Something is Amiss

As anyone who hasn’t been in a coma knows, assorted central bank interventions have failed to achieve their stated goals over the past several years. A recent article at Bloomberg focuses on their failure to reach their “inflation” targets.

Of course, this particular failure is actually reason to celebrate, as it means that consumers have at least been spared an even sharper decline in their real incomes than has been underway in spite of relatively tepid increases in consumer prices (whereby it should always be kept in mind that whether or not such price increases are considered “tepid” depends on on the composition of the basket of goods and services relevant to each individual).

Market-based inflation expectations in the major currency areas have crashed again – click to enlarge.

Of course central banks have succeeded in blowing up the money supply at truly astonishing rates since 2008, so prices in the economy have certainly been vastly distorted. The devastating effects of such price distortions are currently being visited on the oil patch, where credit-financed malinvestment on a stunning scale has occurred as a result of an erroneous appraisal of future oil prices. A slowdown in money supply growth in the US and China between 2011 and 2014 was all it took to take the wind out of the sails of this particular collective hallucination.

US-winds-down-quantitativ-012 Inflating the euro alone wasn’t enough to keep oil prices afloat …
Illustration by David Simonds

To the delight of the financial industry, asset prices have been the main beneficiaries of money supply inflation, but deep down many market participants are presumably aware that the “wealth” ostensibly created by artificially pushing the prices of titles to capital to the stratosphere is just as ephemeral – it is ultimately nothing but phantom wealth. If everybody tried to cash in, it would disappear in a flash.

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

The problem isn’t overproduction; it’s malinvestment

May 7, 2015

The problem isn’t overproduction; it’s malinvestment

Mr. Max Ehrendfreund, writing in the Washington Post’s Wonkblog, believes that he has discovered something new: that the world is producing too much and doesn’t know what to do with it. His solution, of course, is to confiscate the overproduced products, such as oil and cotton, from its rightful owners and give it to the people who need it. This phony problem and its statist solution goes back at least as far at the 1930’s socialist calls for “production for use” vs. the hated capitalist concept of “production for profit“.

Mr. Ehrenfreund commiserates that a “surplus…challenges some basic principles of conventional economics…”. Ah, now we see why Mr. Ehrenfreund has a problem; he understands only “conventional economics”. Austrians have no such problem understanding why many commodities are currently in surplus. Our understanding of Austrian business cycle theory tells us that years of interest rate suppression by monetary authorities worldwide has disrupted the time structure of production; i.e., that artificially low interest rates have led entrepreneurs and their business partners to believe that sufficient resources exist for the profitable completion of longer term projects, such as increasing investment in oil and cotton production. Austrians do not contend that there cannot be a surplus of some goods. Of course, there can! But we know that a surplus of some goods means that there is a scarcity of others. Resources were “malinvested” in some projects instead of those more urgently desired by the public.

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

China Is A Monumental Economic Trainwreck—–The Evidence Is Mounting Rapidly

March 13, 2015

China Is A Monumental Economic Trainwreck—–The Evidence Is Mounting Rapidly

How Fast is China Growing?

Analyst estimates of Chinese growth keep getting lower and lower. Yet, those declining estimates have all been from a lofty level: From 10% to 9%, to 8% to 7.5%.

China’s growth target for 2015 is 7.0%.

Many question those growth estimates. I certainly do. Chinese growth is not consistent with energy demand, raw materials, or personal consumption. Worse yet, growth does not factor in pollution or malinvestments in vacant housing, vacant malls, vacant airports, etc.

Malinvestments, pollution, and State-Owned-Entreprise (SOE) boondoggles (fraud is actually a better word) should all subtract from current GDP. Instead, fraud, pollution, and malinvestments have been buried and will remain buried until it’s impossible to hide them.

I assumed China was growing slowly. After all, 7% is one hell of a lie. However, I now wonder if China is growing at all.

What caused my double take was a fascinating presentation by Anne Stevenson-Yang, Co-Founder of JCap and author of China Alone: The Emergence from, and Potential Return to Isolation.

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

China “Ghost Town Index” – Here Are China’s 10 “Ghastliest” Cities | Zero Hedge

October 28, 2014

China “Ghost Town Index” – Here Are China’s 10 “Ghastliest” Cities | Zero Hedge.

Who can forget China’s ghost city of Ordos: back in late 2009, when the hollow shell behind China’s torrid growth was first revealed to the world, the city near China’s Mongolia border was cooler talk for weeks. Fast forward five years later, and Ordos is all but forgotten, having been eclipsed by a veritable army of much bigger “ghosts” that make up the “ghost town network” – a list of cities created by the China Investment Network, a business newspaper in Beijing, to determine which cities were the most ghostly.

As Caixin reports, the newspaper devised its index using a government standard that says cities should have 10,000 people per square kilometer. The editors at China Investment Network determined that if a city’s ratio of people to area was 0.5 – that is, it was half full – then it is a ghost town. To take the example a step further, if a city had a ratio of .10, then it had one-tenth the population the government thought it deserved. Based on this approach, at least 50 Chinese cities fit the description of “ghost town.” The large city of Weihai, in the eastern province of Shandong, and the tourist destination of Sanya, in the south’s Hainan Province, were among China’s emptiest.

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

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