Weekly Market Update by Retirement Lifestyle Advocates
Have you ever heard of a ‘crack-up boom’?
You may want to get familiar with the term and what it means before you experience it.
Let me state at the outset of this piece that I am biased, some might even say extremely biased. And they may be right.
I am biased in the sense that I am firmly against Keynesian economic policies which are currently dominating US economic and monetary policy even more than in the past. That’s a big statement given the massive quantities of money that the Federal Reserve has manufactured from thin air over the past several years.
For those unfamiliar with Keynesian economics, it is an economic theory advanced by John Maynard Keynes who advanced the idea that when an economy slows down and private sector spending wanes, the government needs to step in and spend to make up for the lack of spending in the private sector.
I am of the firm opinion that Keynesian policies don’t work and end badly because Keynes himself had the same opinion.
You can’t make this stuff up.
Keynes promoted and encouraged the pursuit of economic policies that he knew would eventually fail. In a tract Keynes penned in 1923 on the topic of monetary reform, Keynes wrote this, “Long run is a misleading guide to current affairs. In the long run, we are all dead.” (Source: https://www.azquotes.com/author/7958-John_Maynard_Keynes)
In my view, a better approach to economic policy is to take an Austrian view, as Ludwig von Mises did.
Examining where we are today from an economic policy standpoint, the predictions promulgated by Mr. von Mises are presently coming to pass.
Janet Yellen, former chair of the Federal Reserve and experienced money printer had this to say in her Senate confirmation hearing last week. Ms. Yellen has been nominated for the position of Treasury Secretary. (Source: https://www.zerohedge.com/economics/when-boom-turns-crack-boom)
“But right now, with interest rates at historic lows, the smartest thing we can do is act big. In the long run, I believe the benefits will far outweigh the costs, especially if we care about helping people who have been struggling for a very long time.”
You don’t have to be an economist to understand that Ms. Yellen is proposing more Keynesian solutions; more stimulus-funded by more money creation out of thin air.
Mr. von Mises warned us of the ultimate outcome of these reckless policies. This from a “Zero Hedge” article on the topic:
As credit expansion pumps money through the economy, wild and unpredictable things happen. Austrian economist Ludwig von Mises, in his work, Socialism: An Economic and Sociological Analysis, explained:
“Credit expansion can bring about a temporary boom. But such a fictitious prosperity must end in a general depression of trade, a slump.”
But what happens if a credit expansion is followed by an additional expansion of credit? Does the debt ever have to be repaid? With enough credit-based money, can’t the economic depression be postponed forever?
Even Mr. Keynes knew the answer to this question, he stated that ‘in the long run we are all dead’. Keynes knew that he was mortgaging the future with his policies but calculated the fallout was a long way down the proverbial road.
More from the “Zero Hedge” article:
Again, we turn to Mises, this time his economic treatise, Human Action, for edification:
“If the credit expansion is not stopped in time, the boom turns into the crack-up boom; the flight into real values begins, and the whole monetary system founders.”
The boom brought about by credit expansion at the beginning of the new millennium ended in 2008 with a massive financial crisis and economic recession. The mammoth credit expansion that followed, floated the economy up on a rising tide of debt. But it was not self-sustaining.
More and more credit has been needed to merely prop up GDP. Economic growth’s dependent on greater and greater issuances of credit. Without it, a general economic depression would occur.
Perversely, the stability of the debt structure depends on additional credit and rising asset prices. These, of course, ultimately make things more unstable. Nevertheless, even with massive inflation of the money supply, central bankers are worried about deflation…not inflation.
Prices – including stocks, real estate, and college tuition – levitated by earlier credit expansions want to come down. Central bankers want to push them up.
When central planners shut down the economy last year to bend the coronavirus transmission curve, they succeeded in collapsing the debt structure. Putting moratoriums on evictions and foreclosures and placing a hold on student loan payments doesn’t solve this. Nor does printing up trillions after trillions of dollars and pumping it into the economy as ‘stimulus’ to counteract the collapse.
The rapid vaporization of wealth the central planners have set us up for will be of scope and scale the world has never before seen. We don’t know if the bottom will fall out next year or five years from now. But we’re certain the boom has turned into the crack-up boom.
Here we’ll leave the final words to Mises, Human Action:
“The final outcome of the credit expansion is general impoverishment.”
The article that I’ve quoted above makes a couple of well-founded points.
One, the more money that the Fed has created out of thin air the less the impact on the economy. Put another way, once significant levels of money are created through credit expansion, it takes even greater levels of money creation to just maintain the illusion of prosperity.
The second noteworthy point is a quote from von Mises, “if the credit expansion (money printing) is not stopped in time, the boom turns into the crack-up boom; the flight into real values begins, and the whole monetary system founders”,
A ‘crack-up boom’ is defined as an economic crisis that involves a recession in the real economy and a collapse of the monetary system due to continual credit expansion and resulting in unsustainable, rapid price increases.
A ‘crack-up boom’ has two characteristics:
One, excessive money creation that leads to significant inflation.
Two, inflation is followed by hyperinflation which ultimately ends in the abandonment of the currency by market participants and a simultaneous recession or depression.
Each week on the RLA radio program, I have the privilege to interview some very bright authors, economists, and money experts. While each of these experts has a unique viewpoint, from my observation these expert’s opinions have us experiencing one of two outcomes. In other words, these experts, in general terms, fall into one of two categories:
Category One: we will experience deflation. Large debt levels are without a doubt, inflationary.
Category Two: we will experience inflation followed by deflation. This is the outcome that Mr. von Mises described in his work.
Going back nearly 8 years to 2013 when I taught a class at a local university for aspiring retirees, I offered my opinion that we would have to see one of two outcomes, we would either experience deflation or inflation followed by deflation.
For the latter outcome to occur, we would need to see exceptionally large amounts of new money created. I am now of the strong opinion that is the most likely outcome.
Sadly, it seems that both von Mises and Keynes will ultimately be correct in their forecasts.
The crack-up boom that von Mises described would create a temporary illusion of prosperity before it caused significant if not irreparable damage to the currency. He forecast inflation, followed by hyperinflation, followed by general impoverishment.
Keynes forecast that in the long run, he’d be dead.
Looks like they may both be right.
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The radio program this week features an interview with multi-time, best-selling author, and economist Harry Dent.
I caught up with Harry from his home in Puerto Rico and chatted with him about Bitcoin and the markets. The interview is now available as part of the podcast and is posted on the website.
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