In Jim Cook's Archive


The great economist, Mises, postulated that sound money protected the citizenry against the predatory inroads of government. Ideologically he thought sound money to be as important as the Constitution and Bill of Rights. The founding fathers certainly would have agreed, but none could begin to visualize the vast gulf that exists between the principle of sound money and today’s monetary looseness.

George Washington warned in a letter, “Paper money will…ruin commerce, oppress the honest and open the door to every species of fraud and injustice.” A more worrisome quote comes from currency expert Larry Parks, “With the monetary system we have now, the careful savings of a lifetime can be wiped out in an eye blink.” This horrible suggestion refers to a renewed possibility of hyperinflation.

The first full week of the new year brought a tsunami of economic warnings and hand wringing. Mr. Bush explained a program of tax cuts to restore economic growth. Mr. Bernanke promised to slash interest rates. Dire warnings about a pending recession emanated from a host of analysts and economists. The prevailing wisdom argued for a massive reliquification through the expansion of money and credit. As usual, Wall Street worried less about inflation than next year’s bonuses.

The crux of the issue was addressed in an excellent essay by analyst David Jensen. He quotes Ludwig von Mises, “There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.” It’s clear that the monetary authorities and the government are intent on further credit expansion to fend off a recession. However, bad loans and mortgages are being cleared from the system. These liquidations lead to an economic downturn. In the worst of these recessions, credit contracts.

Mr. Jensen sums it up, “After a prolonged period of credit and monetary expansion coupled with the associated distortion that permeates the entire economy, this distortion and unsustainability makes itself apparent rapidly and then cannot be arrested through further monetary easing. One can only destroy the currency with such attempts.”

In other words, he’s claiming that the real estate bubble and other excesses cannot be reinflated with monetary easing. Such attempts (which will be ongoing) can only lead to the ruination of the dollar. Mises himself instructed that a currency is doomed when the people who rely on it begin to believe that inflating is a process that will not be stopped. As Mr. Jensen points out, only a small amount of the $150 trillion in world capital markets need pursue tangible assets before commodities, energy and precious metals explode into hyperinflation.

Analyst Doug Noland concurs that the contraction cannot be cured, “The ongoing bust in Wall Street-backed finance will undoubtedly be a major issue for 2008. No amount of Fed rate cutting can reverse this spectacular debt collapse…. Problems that will beset the colossal leveraged speculating community have only begun to emerge.”

Mr. Noland explains, “Today, ongoing credit excess, current account deficits and financial outflows inundate the world with dollar balances.” As U.S. Treasury debt approaches $10 trillion and annualized credit creation $5 trillion, newsletter editor William Buckler postulates, “A monetary monster is stalking the world. It is an enormous credit generation, all originating in the U.S. through the many lenders inside the U.S. financial system.”

Mr. Buckler continues, “At some point this year, we will be able to inform our worldwide subscribers that a major central bank or a group of central banks is balking at constantly having to buy the U.S. dollar. At that point, the international value of the U.S. dollar will crash!….U.S. corporate earnings, never mind U.S. banks and financial sectors which are rolling in rivers of red ink and write-offs, will fall. The U.S. stock market will be next. The Dow has a lot of catching up to do on the downside.”

Author Martin Hutchinson certainly agrees when he argues that the boom in financial services has passed and will shrink by half. “That process will inevitably be far more painful for the sector than is currently being envisaged even by the most pessimistic analysts. At the end of it, it is likely that a high proportion of prominent names will have disappeared…”

Financial advisor Ed McCarthy, describes the vast credit expansion as “the front end of a powerhouse 18-wheeler truck, missing any load in the rear compartment. The credit thus created was all acceleration and speed with no thought given to deceleration.” He emphasizes, “there is no, repeat, no infrastructure in place to handle the ongoing train wreck that the alchemists have created!”

The recession that’s unfolding will be an inflationary one. This stagflation will be hard on conventional assets. Gold and silver have the best chance of flourishing during inflation, especially when other assets are battered by contraction and red ink. Low interest on bank savings and reduced yields in the face of rising inflation will further harm prudent Americans. A big economic downturn, with rising unemployment and shrinking consumer spending would hit a surprised public like an iron fist. The enormity of private and public debt suggests that a recession could quickly morph into a depression, runaway inflation, or both.

The government maintains a monopoly on money. That should give no one comfort. Political consideration and vast socialistic spending schemes have debased the dollar, down 95% in purchasing power in my lifetime. As the authorities juggle economic forces they don’t fully understand, pray for a soft landing. Meanwhile, reduce your exposure to purely paper assets and add to your tangible assets, such as silver.

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