RUNAWAY INFLATION
“The appearance of periodically recurring economic crises is the necessary consequence of repeatedly renewed attempts to reduce the ‘natural’ rates of interest on the market by means of banking policy.” 1931
Ludwig von Mises (1881-1973) – Leading advocate of the Austrian School
“To combat the depression by a forced credit expansion is to attempt to cure the evil by the very means which brought it about.” 1932
FA. Hayak (1899-1992) – Student of Mises and Nobel Prize Winner.
“So now we see, at last, that the business cycle is brought about, not by any mysterious failings of the free market economy, but quite the opposite: By systematic intervention by government in the market process. Government intervention brings about bank expansion and inflation, and when the inflation comes to an end, the subsequent depression-adjustment comes into play.” 1969
Murray Rothbard (1926-1995) 1932 – Foremost of Mises U.S. disciples.
One hardly knows where to begin. America has currently embraced the monetary policies of a banana republic. The Argentine and Zimbabwe models cannot be far behind. For years (35 to be exact) we have warned about the consequences of unbridled credit expansion. We argued that artificially low interest rates would lead to catastrophe. Now the first installment of this crisis has been visited upon us. Our policymakers have greeted this dilemma with even more ruinous money and credit policies that compound the problem. We’ve had the earthquake. The Tsunami is yet to come.
The monetary authorities in Washington, who are supposedly the brightest among us, have adopted a short-term strategy resplendent with economic error. As usual, the politicians are clueless. Somehow the idea has gained ground that recklessly expanding money and credit (inflating) will cure our economic ills without repercussions. Nothing could be further from the truth. This is currency debasement on a grand scale.
The greatest economist that ever lived, Ludwig von Mises, warned against the exact monetary policies adopted by the U.S. “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 a 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.”
Thirty-five years ago I began to study the writing of Ludwig von Mises. Have his economic theories proven correct? Did Mises write and speak the truth? You be the judge. Over the years I have written predictions and conclusions based on Austrian Economics, the school of economic thought fostered by Mises. I dug out a few from earlier newsletters.
1976 – “We are proceeding recklessly down a road of monetary expansions that has brought ruin to each and every state or nation that has attempted it.”
1977 – “We are guaranteed an inflationary epidemic that saps the vitality of the country and its economy.”
1977 – “Sometime in the future the evils of monetary expansion will sunder us. No nation has ever escaped the havoc that springs from loose money and credit.”
1985 – “Tremendous cyclical upheavals lie ahead.”
1985 – “The East is rising while the West declines.”
1995 – “Our economic sins are real. They defy ready solutions. Consequently, you can lose enormously on your paper assets. Your retirement and savings plans can be devastated.”
1997 – “Massive exposure to derivative risk by U.S. banks is another alarming trend. Major banks appear to be speculating heavily in currency and derivative markets. Balance sheets are burdened with financial leverage and astonishing levels of derivative risk that require liquid international markets to unwind positions.”
1998 – “Today we inflate at will. Fiat money created out of thin air, runaway government borrowing, huge government financial guarantees, staggering levels of leverage in securities markets, consumer credit excesses, negative savings rates, and monstrous trade and budget deficits, have created a financial house of cards.”
In 1998 I wrote a novel, “Full Faith and Credit, A Novel About Financial Collapse.” Here’s how it was advertised: “Credit collapse and panic! Retirement funds, bond funds and real estate are decimated. Massive derivative defaults capsize major banks and hedge funds.”
I’m not tooting my own horn here. I’m showing you that with Austrian economics you can predict the economic future. At the end of this article you should be equipped to see what’s coming. That will protect you like nothing else.
1999 – “An unexpected crash in financial markets will kill off speculation.”
January 2000 – “For those who think the stock market will never crash, here’s 20 powerful reasons.”
2001 – “What’s most likely going to happen to the economy is a credit collapse of a magnitude and dimension that shakes the U.S. to its very foundation.”
2002 – “Years of inflationary money and credit creation have fostered unmanageable levels of debt and spending. Now the debt is beginning to strangle us. An agonizing liquidation will sweep homeowners and mortgage lenders away on a tidal wave of foreclosures.”
Let’s face it, this is a pretty impressive forecasting record. Am I that smart? Not really. Only smart enough to figure out that Ludwig von Mises had nailed down the truth.
Here’s what Mises wrote that is so applicable today. “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:
- 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.
- 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.”
Unfortunately, the banks aren’t restricting credit. They are being overridden by the government. They are being forced to expand credit. To assist the banks, the central bank is lowering interest rates. Go back a paragraph and read number one. Now you know.
