In Jim Cook's Archive


The Road to Destruction

“The damned Fed is creating as much money in one lousy quarter as they averaged in a whole year in the 90s!”

Mogambo Guru – editor

“Bank credit expanded an amazing $1.054 trilling during the quarter to $7 trillion. That was a growth rate of 13.4%.”

Doug Noland – economist

“Boatloads of credit are being created outside the banking system. Much of it destined to fund second homes in Vail.”

Rob Peebles -analyst

In terms of credit growth, this is the greatest inflation orgy in history.”

Dr. Kurt Richebacher – economist

“The only thing I’m completely confident of is that the end result of this irresponsible money-printing by the Fed, lending by the financial institutions, and behavior on the part of the public will be a tremendous amount of pain for everyone.”

Bill Fleckenstein – editor

Lately we’ve begun to hear about real estate prices topping out. The Economist magazine calls the real estate boom larger than the stock market bubble of 2000. Will real estate continue to appreciate? Nobody knows the answer to that question, but we do know the government will do everything in its power to keep the real estate bubble expanding. That’s because a sharp decline in real estate values would lead to deflation. To forestall such an event, the Federal Reserve regularly expands money and credit. They do this in ever larger amounts, whenever they feel it necessary

The free market economist, Murray Rothbard, explained, “The Fed can and does increase the money supply all the time, whether it be boom or recession. There hasn’t been a contraction of the money supply since the early 1930s, and there is not likely to be another in the foreseeable future. So now that the money supply always increases, prices in general are always going up, sometimes more slowly, sometimes more rapidly.”

According to the great Austrian economist, Ludwig von Mises, this habitual expansion of money and credit generates regular booms and busts. Mises was the first economist to arrive at this explanation of the business cycle, which had baffled economists for centuries. He wrote, “All those economists who want to explain the trade cycle as being caused by factors other than credit expansion must admit that no boom could arise if the amount of money and credit available were not increased. This implies that they cannot help admitting the fundamental thesis of Austrian theory.”

Mises’ accomplishments are enormous. In 1920, he confronted revolutionary communists and socialists with the argument that their centralized state planning must fail because of a lack of market pricing. Years later, when collectivism collapsed, even left wing economists saw the truth in Mises’ historical checkmate. That’s not all, Mises was able to show that inflation was no more than a form of taxation and a means to redistribute wealth. He proved that prices will generally fall without government-induced money injections. Importantly, he argued that increases in the money supply benefits society not at all, but only dilute purchasing power.

Nobody wants to hear these things today. We like our inflation, especially when it lifts the prices of assets we own. A student of Mises, the economist Hans Sennholz, noted “False interest rates and artificial liquidity create great illusions of wealth in business equity and real estate.” Mises pointed out, “In the early stages of every instance of credit expansion and inflation, there is always optimism. People do not want to pay attention to the warning voices of economists. They stubbornly insist that their present situation has nothing in common with the boom periods of the past, and that the theorists are wrong in predicting the breakdown of the ‘prosperity.’”

I want to give you a look into the future for a moment. The certainty that we will have more government inflating makes it possible to glimpse a rough outline of what is to come. Listen to the great economic thinker Mises. “Expansion of credit does lead to a boom at first, it is true, but sooner or later this boom is bound to crash and bring about a new depression. Only apparent and temporary relief can be won by tricks of banking and currency. In the long run they must land the nation in profounder catastrophe. For the damage such methods inflict on national well-being is all the heavier, the longer people have managed to deceive themselves with the illusion of prosperity which the continuous creation of credit has conjured up.”

“It is true that credit expansion at first creates an economic boom. But the artificial prosperity of the easy money orgy of a few years must finally lead to a slump and depression. Credit expansion is very popular with politicians who do not worry about tomorrow.”

“The credit expansion boom is built on the sands of banknotes and deposits. It must collapse.”

Murray Rothbard, the brilliant student of Mises, explained the genesis of the boom. “Why do booms, historically, continue for several years? The answer is that as the boom begins to peter out from an injection of credit expansion, the banks inject a further dose. In short, the only way to avert the onset of the depression is to continue inflating money and credit. For only continual doses of new money on the credit market will keep the boom going and the new stages profitable. Furthermore, only ever increasing doses can step up the boom, can lower interest rates further, and expand the production structure, for as the prices rise, more and more money will be needed to perform the same amount of work. Once the credit expansion stops, the market ratios are re-established, and the seemingly glorious new investments turn out to be malinvestments, built on a foundation of sand.

“It is clear that prolonging the boom by ever larger doses of credit expansion will have only one result: to make the inevitably ensuing depression longer and more grueling.”

Mises continues, “It is true, the banks (or the governments) are in a position to prolong the boom for some time by injecting progressively increasing quantities of bank notes and deposits into the market. But the artificially created prosperity cannot last forever. Sooner or later it must come to an end. There are only two alternatives:

  1. The banks do not stop and go on expanding credit at a progressively accelerated pace. But the spell of inflation breaks once the public has the conviction that the banks and the authorities are resolved not to stop. If no limit of the inflation and, consequently, of the general rise of prices can be foreseen, a general flight into real values starts. Everybody becomes aware of the fact that to hold cash and deposit balances with the banks involves loss, and that he does better to buy and store goods. Everybody is anxious to get rid of money and to exchange it for some other commodities, no matter how much he must pay for them. Prices are running away, and the purchasing power of the monetary unit drops to zero. The national currency system cracks up.
  2. As a rule, the banks do not let things go so far. They stop sooner by restricting credit. Then the day of reckoning dawns. The illusions disappear, people begin again to see reality as it is. The blunders committed in the boom become visible.”

The bust that follows an inflationary boom distressed Mises. “Accidental, institutional, and psychological circumstances generally turn the outbreak of the crisis into a panic. The description of these awful events can be left to the historians. It is not…(our task)…to depict in detail the calamities of panicky days and weeks and to dwell upon their sometimes grotesque aspects.”

“Credit expansion is not a nostrum to make people happy. The boom it engenders must inevitably lead to a debacle and unhappiness.”

“The final outcome of the credit expansion is general impoverishment. Some people may have increased their wealth; they did not let their reasoning be obfuscated by the mass hysteria, and took advantage in time of the opportunities offered by the mobility of the individual investor….but the immense majority must foot the bill for the malinvestments and the overconsumption of the boom episode.”

Government economists and Wall Street spokesmen have their heads in the sand when they assure us that inflation is under control. Bogus government statistics that indicate low inflation rates mislead us. Sixty-dollar oil and soaring prices for commodities, real estate, collectors items, art and antiques reflect the constant government inflating more accurately than does the Consumer Price Index.

Mises was hoping for sound money when he wrote, “Only the acceptance of a rigid principle will prevent an unprecedented credit expansion and its unavoidable outcome, a slump more terrible than that of 1929.” Unfortunately, there is no rigid monetary principle to prevent government inflating. A slump more terrible than 1929 is inevitable. It will follow a severe bout of inflation, or perhaps hyperinflation. We are already approaching a level of asset appreciation that borders on hyperinflation.

There are worse things for America than hyperinflation and depression. One of Mises’ great friends and intellectual allies, Henry Hazlitt argued, “A period of inflation is almost inevitably also a period when demagogy and an antibusiness mentality are rampant. If implacable enemies of the country had deliberately set out to undermine and destroy the incentives of the middle classes to work and save, they could hardly have contrived a more effective set of weapons than the present combination of inflation, subsidies, handouts, and confiscatory taxes that our own politicians have imposed upon us.”

According to Mr. Hazlitt, inflation also impacts the moral tone of a nation. “In a free enterprise system, with an honest and stable money, there is dominantly a close link between effort and productivity, on the one hand, and economic reward on the other. Inflation severs this link. Reward comes to depend less and less on effort and production, and more and more on successful gambling and luck.”

“It is not merely that inflation breeds dishonesty in a nation. Inflation is itself a dishonest act on the part of government, and sets the example for private citizens. When modern governments inflate by increasing the paper-money supply, directly or indirectly, they do in principle what kings once did when they clipped coins. Diluting the money supply with paper is the moral equivalent of diluting the milk supply with water. Notwithstanding all the pious pretenses of governments that inflation is some evil visitation from without, inflation is practically always the result of deliberate governmental policy.”

Mr. Hazlitt concluded his case against inflation. “It is harmful because it depreciates the value of the monetary unit, raises everybody’s cost of living, imposes what is in effect a tax on the poorest….wipes out the value of past savings, discourages future savings, redistributes wealth and income wantonly, encourages and rewards speculation and gambling at the expense of thrift and work, undermines confidence in the justice of a free enterprise system, and corrupts public and private morals.”

Economist Hans Sennholz reminds us, “If a government resorts to inflation, that is, creates money in order to cover its budget deficits or expands credit in order to stimulate business, then no power on earth, no gimmick, device, trick or even indexation can prevent its economic consequences.”

You can continue to believe the wizards of Wall Street and Washington, who claim their inflationary brew will perpetuate prosperity, or you can listen to the classical economists who have combined the lessons of history with the basic principles from two centuries of sound economics. Whether you choose to listen or not, be assured that the following inevitable consequences of inflation will cloud your future; an ongoing financial and economic crisis, moral and cultural disintegration, stagflation, bigger government, escalating hatred of business, runaway social spending, the criminalization of success, higher taxes and a shrinking dollar. Somewhere out there lies complete and total collapse. That utter collapse is coming as surely as the sun will rise tomorrow and the government will keep inflating until the bitter end.

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