The Worldwide Crack Up Boom, According to Ludwig Von Mises
A kiss is still a kiss. A sigh is still a sigh. And a bubble is still a bubble.
When a kiss is over, it's over. When a bubble pops...well...that's all she wrote! All kisses end - even the wettest "French" kisses. And so do all bubbles - even sloppy mega-bubbles of liquidity. This one will be no exception. But of course, it's not the certainties that make life interesting...it's the uncertainties - the known unknowns and the unknown unknowns, as Mr. Rumsfeld says. We are all born of woman and end up where all men born of women end up - dead. But that doesn't mean we can't have some fun between baptism and last rites.
You'll remember we said that this worldwide financial bubble is both worldlier, and more financial than any in history.
And, for the moment, it is very much alive. So much alive that the media can hardly keep up with it. Forbes magazine, for example, tries to estimate the wealth of the world's richest people. But the rich don't typically give out their balance sheets, telephone numbers and home addresses. So, there's a fair amount of guesswork in the calculations.
But when it came to guesstimating the net worth of Stephen Schwarzman, founder of Blackstone, the Forbes crew wandered off into fiction. They put his wealth at about $2 billion. Recent filings in connection with the new Blackstone IPO show he earned that much in a single year!
In this phase of the bubble, it is as if your neighbors were throwing a wild party - and you weren't invited. You detest them... envy them... and want to join them, all at once. A very small part of the population is having a ball; everyone else is getting restless and wondering when the noise will stop.
We wish we knew. And we've given up guessing.
Meanwhile, the experts, commentarists, kibitzers and analysts are saying that there is a whole new phase of the giant bubble about to unfold; things could get a whole lot crazier. Even many of our respected colleagues are pointing to a text by the great Austrian economist, Ludwig von Mises, for a clue. What we have here, they say, is what Mises described as a "Crack-Up Boom."
Before we go on, readers should be aware that the "Austrian school" of economics is probably the best theory about the way the world works. Like The Daily Reckoning, it is suspicious of efforts to control the natural workings of an economy, in general...and suspicious of central banking, in particular. The fact that it was a one-time "Austrian," Alan Greenspan, who became the most celebrated central banker in history, only increases our suspicions. He was able to master central banking, we imagine, because he understood what it really is - a swindle.
What is a "Crack-Up Boom?" Von Mises explains (with thanks to Ty Andros for reminding us):
"'This first stage of the inflationary process may last for many years. While it lasts, the prices of many goods and services are not yet adjusted to the altered money relation. There are still people in the country who have not yet become aware of the fact that they are confronted with a price revolution which will finally result in a considerable rise of all prices, although the extent of this rise will not be the same in the various commodities and services. These people still believe that prices one day will drop. Waiting for this day, they restrict their purchases and concomitantly increase their cash holdings. As long as such ideas are still held by public opinion, it is not yet too late for the government to abandon its inflationary policy.'
"But then, finally, the masses wake up. They become suddenly aware of the fact that inflation is a deliberate policy and will go on endlessly. A breakdown occurs. The crack-up boom appears. Everybody is anxious to swap his money against 'real' goods, no matter whether he needs them or not, no matter how much money he has to pay for them. Within a very short time, within a few weeks or even days, the things which were used as money are no longer used as media of exchange. They become scrap paper. Nobody wants to give away anything against them.
"It was this that happened with the Continental currency in America in 1781, with the French mandats territoriaux in 1796, and with the German mark in 1923. It will happen again whenever the same conditions appear. If a thing has to be used as a medium of exchange, public opinion must not believe that the quantity of this thing will increase beyond all bounds. Inflation is a policy that cannot last."
Mises is describing the lunatic phases of a classic inflationary cycle.
At first, no one can tell the difference between a real dollar - one that is earned, saved, invested or spent - and one that just came off the printing presses. They figure that the new dollar is as good as the old one. And then, prices rise...and people don't know what to make of it. Later, they begin to catch on...and all Hell breaks loose.
You see, if you could really get rich by printing more currency, Zimbabweans would all be as rich as Midas, since the Mugabe government runs the presses night and day.
Von Mises died in 1973 - long before this boom really got going - let alone cracked up. He may never have heard of a hedge fund...or even a derivative, for that matter. A world money system without gold? He probably couldn't have imagined it. People spending millions of dollars for a Warhol? Twenty million for a house in Mayfair? Chinese stocks at 40 times earnings? He would have chuckled in disbelief. He understood how national currency bubbles expand and how they pop, but he probably never would have imagined how insane things could get when you have a whole world monetary system in bubble mode.
He'd have recognised the beginning of this bubble...and he'd have recognised the end, but the middle...or the beginning of the end - that would have dumbfounded him. During his lifetime he saw a Crack Up Boom in Germany in the '20s...and a few more here...but he never saw a worldwide Crack Up Boom.
No one, anywhere, has ever seen a worldwide Crack Up Boom. We're the first, ever. Pretty exciting, huh?
Bill Bonner
The Daily Reckoning Australia
P.S. to get The Daily Reckoning direct to your inbox sign up to our free e-mail newsletter or if you prefer to use RSS, subscribe to the Daily Reckoning RSS feed.
Related Articles:
- None Found
About the Author
Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
Comment by J.R. Lee on 28 June 2007:
I really think it is nigh time for a nice cleansing Polar Shift.
Comment by Tom on 29 June 2007:
Yep it's all a scam and the worldwide crackup boom will be the end of it for good because nothing ever turns out like 'The Omnipotent They' in Bogus Fiat Central Banking Land think it will, and never has in spite of their perennially arrogant, Greenspan-like hubris. Case in point: Iraq. Other case in point: Bernanke The Do-Nothing. After all, they are only human, and though moderately well-educated, they are relatively inbred, relatively weak physically, and simply do not have the genius with which they ascribe to themselves. W is a very small case in point. House of Rothschild is a very large case in point. They will all be swept away in the economic cataclysm, as we simply delete and/or burn the entirety of their fictive paper wealth, never to return.
All they have for proof of substance is numbers on paper and well-paid credent idiots to enforce it, but as you more or less have stated, once the credent idiots are no longer credent, then the phony paper will simply be burned or deleted. The world has needed that for a long, long, time and the reason it is near to happening now is that since 2000 those who do not merit such wealth have lost all common sense, proportion and persepective and are at present hurtling at breakneck speed towards their own social and physical doom. Watch what happens when they attack Iran. A bunch of them will suddenly disappear immediately, and things will quickly go downhill for them from there. Though I own property and would appear to benefit from their present system, I am really looking forward to the coming anti-globalist smackdown, because there would be so much more to my life if they were not in power in this world. Simply put, it has been impossible to compete economically on an equal footing with people who simply print money up and hand it to themselves, and we all know that that is exactly what has been happening with the Fed for over 50 years now. I would really like to see every single living Fed governor since Day One hung for treason, over and out. No passes shall be allowed for such pernicious evil. It is time for a big, big change.
Comment by Robert F. King on 29 June 2007:
Dear Sir Economic Guru, I really enjoy your column.America's economy,monetary system is a proverbial "deck of cards" waiting to fall.Yes Jim,{Morrison}"the future is uncertain and the end is always near". Thanks again, R.F.King
Comment by RA Balke on 29 June 2007:
Wow ! China's
stock market is selling for a PE of 40 !
And every country on the planet is printing money like crazy !
And the US is soo deeply in debt, it can never see a way out butt to default.
And a lot of really funny financing is falling apart,, due to falling equity values in the housing market..
And I have all my money in the stock market..International Index,, and Value mostly.
About 1/2 in Energy.
I suspect the only thing that will hold value when this thing goes plop,, is gold, and I dont see anybody else buying gold, so I sure as hell am not going to buy any...I dont want anyone to think I'm crazy..
Dam ! I'm rambling..
Comment by Michael Campbell on 29 June 2007:
Economic instabilities naturally arise from the separation of payment and billing with respect to each other.
Preventing those instabilities necessarily arises from the combining of payment and billing with respect to time and/or space.
The time for the zero dollar bill is now come.
Comment by Frank Dialogue on 10 August 2007:
The House of Rothschild will not be swept away...they have control of huge amounts of global COMMODITIES, i.e, gold,uranium, other prcious metals, food pruducts, utilities
etc...any viable currency must be backed by some commodity, and
they have positioned themselves
to be the backers of whatever
benchmark currency emerges from
this chaos...in fact, they might
be the driving force behind the
current chaos, as their octopus
arms extend into every aspect of
the global banking system.
Comment by christian on 4 October 2007:
frank i agree about the house of rothschild. i think they have a huge stake in oil, diamonds, gold, and food commodities.
i'm not sure how america could partake in a global crackup boom simply because most are indebt and have no savings, so our markets won't reach the high's that say the japanese or others would. gold and silver and real estate may become a solid store of value, but the bankers are adverse to getting people to see either as a store of wealth (they would prefer investment in intagnibles) and use repos to intermitently attack asset prices in certain sectors. i would invest in food and guns and buying land in a country like iceland which probably won't be as effected by war.
Comment by Zoo on 22 May 2008:
"i'm not sure how america could partake in a global crackup boom simply because most are indebt and have no savings"
Christian, it's the current financial crisis in the USA [read US debt and current Fed response to debt meltdown] that is the CAUSE of this crack-up boom. The world is currently wash with US dollars! You've got petro-dollar nations and China sitting on mountains of US dollars as a result of the US trade deficit. The Fed has decided that the US dollar is going to devalue (inflation is always good for a debtor nation like the USA when it comes time to try to pay down that debt, so it's no accident that Bernanke isn't worried about the state of the dollar). So those SWFs (in China and petro $ nations) left holding mountains of devaluing US dollars not worth the paper it's printed on, need to exchange those increasingly worthless dollars for tangibles to hedge the ever-dwindling worth of the US dollar, and they've chosen things like food energy and metals. Foreign Central Banks awash with US dollars have also been bizarrely buying US treasuries en masse and consequently causing interest rates to drop to the point where the only reason you would invest in US treasuries is that you would be assured (theoretically) of getting your money back. This being the case, it is no wonder that hedge funds around the world plus investment institutions (including those in the USA like pension funds for instance) are looking to other ways of increasing returns on their money too! Hello commodities!
Yesterday the U.S. Senate Committee on Homeland Security and Governmental Affairs held a hearing titled, "Financial Speculation in Commodity Markets: Are Institutional Investors and Hedge Funds Contributing to Food and Energy Price Inflation?" You can watch the full hearing on a vidcast here:
http://hsgac.senate.gov/public/audio_video/052008video.ram (requires real media player)
The best bit was the testimony of Michael Masters. Here is it is pdf form (a rivetting read):
http://hsgac.senate.gov/public/_files/052008Masters.pdf
Yep, it's a Von Mises crackup boom alright.
Comment by weatherbill on 23 October 2008:
price of gold and oil are linked and coming down. Whether from recesion, liquidity crisis becoming loose or the latest insider info from Lindsey Williams on the alex jones show on youtube, I am awaiting patiently for gold to drop some more, then I am only gonna hold enough fiat for living expenses for 3 months......I'll just sell some gold if I need more at higher or lower prices, but eventually, mega high prices when it all crashes. I think it crashes quickly when it does and only about a month of time before even gold is worthless in a planned invasion of america by chinese and russians when we defualt on our loans and cannot pay them back and they are left holding worthless us dollars and the petro dollar crashes......al prophecied in detail on youtube and google, henry gruver, dumitru duduman,.......google jonah ben noah and chinese invasion of america......it is coming
Comment by rick e on 23 October 2008:
Just a thought
Do all country’s have a foreign deficit?
If so maybe at the G 20 all the country’s can all cancel each others deficit and everything will be back to normal, what ever that is,
Oh and if there is a war it does not matter because Australia is just about all foreign owned so we will be safe
Pingback by Barack Obama Ensures a Long Depression | Florida Tenth Amendment Center on 13 December 2009:
[...] illusory boom, we will be doomed to years of unemployment, stagnation, and ultimately the “crack-up boom” of the economy. And this isn’t even to mention the threats posed to our economy by [...]
Comment by Aaron on 30 January 2010:
What are people going to use to purchase all these items, their savings?
Comment by David K. Meller on 31 January 2010:
I wish that I could disagree with Mr. Bonner's rather gloomy conclusions, but as a longtime student of von Mises and austrian Economics, I must ask Mr. Bonner "what took you so long"? All of the underlying factors were in operation at least since 15 August 1971 When President Nixon (a conservative Republican, if that matters), repudiated the redemption of dollars held by foreign central banks in gold, unilaterally repudiating Bretton Woods, and setting up a nationwide program of Wage and Price Controls! As the US Dollar was the reserve currency of the rest of the world,and had been since 1946, and this primary currency was permanantly and completely severed from gold, the foundations of the current worldwide crackup were irreversibly laid back in 1971!
We are all in for some very interesting times, and the remaining question seems to be whether the legal tender laws will remain in force requiring us to use a collapsing currency with all of the social chaos that would entail, rather than repealing the Federal Reserve monopoly and allowing us to transfer out of the forced use of a defective and worthless currency, as smoothly and peacefully as possible, to workable alternatives, culminating in all likelihood into a gold standard; the primary circulating medium being understood as a specific legally defined weight in Gold! At least some, maybe even most of us, will escape that monetary towering inferno!
PEACE AND FREEDOM!!
David K. Meller
Comment by Justin on 31 January 2010:
Again with the quantity theory of money.
Pingback by Justin Raimondo: The State of the Empire | War On You: Breaking Alternative News on 31 January 2010:
[...] basis of it all is eroding with such rapidity that the structure is bound to come crashing down in one fell swoop, rather than falling to the ground piecemeal, like Rome. Americans have good cause to be concerned, [...]
Pingback by US Debt | News | Yellow Capital Blog on 29 April 2010:
[...] http://www.dailyreckoning.com.au/crack-up-boom/2007/06/26/ [...]
Comment by david on 25 June 2010:
6/24/10
WHAT A BUNCH OF BLAH BLAH FROM ALL OF YOU.
YOU THINK THE END IS NEAR, BUT YOU HAVE NOTHING CONSTRUCTIVE TO SAY.
YOUR PRATTLING 'INSIGHTS' ARE A REHASH OF WHAT YOU'VE READ.
MAKE SOME MONEY TRADING AND YOU'LL SHUT UP.
BEST REGARDS TO YOU,
DAVID MC EWEN
Comment by bizcon on 5 July 2010:
Hi,
In the final analysis, who will bell the cat?
Comment by Louis Wheeler on 3 March 2011:
Another phrase which is used to describe a crack up boom is a “hyper inflationary depression.” We seem to headed toward this, worldwide, but the level of despair has not yet risen sufficiently for people to abandon hope in the dollar. A year or more seems ahead of us until we see annual price increases of over 50 to 200%.
The only correction for a crack up boom is allowing interest rates to rise to market levels like FED chairman Paul Volcker did in 1977. This seems impractical, now. As the world’s largest creditor nation, 20% prime rates would make the interest on the national debt exceed tax revenues. What Ben Bernanke and FED is trying to do is produce a stagflation where they can inflate the money supply to achieve three ends: fund the federal deficit (now at over 40%), buy up the underwater mortgages and keep insolvent banks and bankers from bankruptcy. There is considerable doubt if the FED can achieve this. A controversy has arisen as to how the economy will fail: a deflation or a crack up boom. One assumption is that, since a delation is what the Fed is attempting to prevent, then we will get that.
I am uncertain. There are simply too many ways this house of cards can fall apart. Compounding the FED’s problems is that most of the world’s central bankers are inflating at a similar rate, so they would tend to fail together. I am placing my money on a crack up boom, because that is more scary than a deflation or depression. Why? Because, in a crack up boom, the currency becomes worthless and then we get the depression. Besides, there are point where a canny person can make a serious profit. That is, if you can avoid the tax collector.