Category Archives: Economics

A Big Theory of Boom and Bust, by Jeffrey Tucker

Posted on December 8, 2022 | Leave a comment

The Austrian economists worked out the theory of booms and busts in a fiat money system. From Jeffrey Tucker at dailyreckoning.com:

Our times of boom to bust are the perfect illustration of the credit cycle first presented in its fullness in the 1920s. Why then? Because this was the first decade after most countries created central banks. They caused some very odd behavior that made 19th-century-style economics seem to have less explanatory power.

That was when a few economists working in Vienna put together a model for understanding how business cycles work in a modern economy. Their names were Friedrich von Hayek and Ludwig von Mises. They drew on their theoretical knowledge based on the following inputs:

Richard Cantillon (1680–1734) observed that when governments inflate the money supply, the effects are unevenly distributed among economic sectors, affecting some more than others and in different ways.

Adam Smith (1723–1790) explained that a critical element of rising wealth is embedded in the division of labor, in which individuals specialize in tasks and cooperate across firms and those firms cooperate with each other.

Carl Menger (1840–1921) saw money as an organic market creation, not an invention of the state, which implies that it should be produced like any other good or service.

Knut Wicksell (1851–1926) demonstrated that interest rates function as a price mechanism to allocate investment decisions over time, which is why the yield curve exists. Manipulation of the interest rate disturbs the natural allocation of resources.

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In The End The $ Goes To Zero And The US Defaults, by Egon von Greyerz

Posted on December 4, 2022 | Leave a comment

That’s where this train is headed. From Egon von Greyerz at goldswitzerland.com:

With US and Global debt exploding prior to both assets and debt imploding, let us look at the disastrous consequences for the US and the world.

Debt explosion leading to the currency becoming worthless has happened in history for as long as there has been some form of money whether we talk about 3rd century Rome, 18th century France or 20th century Weimar Republic and many many more.

So here we are again, another monetary era and another guaranteed collapse as von Mises said:

“There is no means of avoiding the final collapse
of a boom brought about by credit expansion”

This disastrous borrowed prosperity, with ZERO ability to repay the surging debt,  will lead to one of the three consequences below:

1. THE US$ GOES TO ZERO

2. A US DEFAULT

3. BOTH OF THE ABOVE

The most likely outcome is number 3 in my view. The dollar will go to ZERO and the US will default. The same will happen to most countries.

I outline the consequences for the world at the end of his article.

Many people say that the US can never default. That is of course absolute nonsense.

If a country prints worthless debt that nobody will buy in a currency that no one wants to hold, the country has definitely defaulted whatever spin they put on it.

In the next few years, not just US but all sovereign debt will only have one buyer which is the country that issues the debt. And every time a sovereign state buys its own debt, it has to issue more worthless debt that nobody will touch with a barge pole.

Printing more money to pay for previous sins has never worked and never will.

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Posted in Banking, Business, Collapse, Currencies, Debt, Economics, Economy, Financial markets, Governments, History

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The Lost World of the Barbarous Relic, by George F. Smith

Posted on December 4, 2022 | Leave a comment

It’s hard for a country to wage war if its government is on the gold standard. From George F. Smith at lewrockwell.com:

It’s one of the greatest ironies of history that gold detractors refer to the metal as the barbarous relic, when in fact the abandonment of gold has put civilization as we know it at risk of extinction.

The gold coin standard that had served Western economies so brilliantly throughout most of the 19th century hit a brick wall in 1914 and was never able to recover, so the story goes.  Europe turned from prosperity to destruction, or more precisely, to the prosperity of a few and destruction of others, as the Great War got underway.  The gold coin standard had to be ditched for such a prodigious undertaking.

If gold was money, and wars cost money, how was this even possible?

First, people had been in the habit of using money substitutes instead of money itself – paper bank notes instead of the gold coins for which they could be redeemed on demand.  People found it more convenient to carry paper around in their pockets than gold coins.  Over time the paper itself came to be regarded as money, with the gold it represented a clunky inconvenience from the old days.

Second, banks had been in the habit of issuing more bank notes and deposits than they had gold in their vaults and would on occasion arouse the suspicion of the public that the notes were making promises the banks couldn’t keep.  The courts sided with the banks and allowed them to suspend note redemption while otherwise staying in business, thus strengthening the government/bank alliance.  Since the deposits really belonged to the banks once they were deposited — said the courts — bankers could not be accused of embezzlement.  The occasional bank runs that erupted were interpreted as a self-fulfilling prophecy.  If people lining up to pull their money out believed their banks were insolvent, the banks soon would be.  Most people had no idea their banks were loaning out most of their deposits.  They didn’t know fractional reserve banking, a form of counterfeiting, was the norm.

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Posted in Banking, Business, Civil Liberties, Currencies, Debt, Economics, Economy, Governments, History, Money

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Winter in Central Europe and for the dollar, by Alasdair Macleod

Posted on December 3, 2022 | Leave a comment

Economic realities may drive the West to the bargaining table with Russia on Ukraine. From Alasdair Macleod at goldmoney.com:

In this article I examine the current state of the fight for hegemonic control between America on the one side, and Russia and China on the other. It is being fought on two fronts. Ukraine, the one in plain sight, is about to endure a winter without power and adequate food potentially leading to a humanitarian crisis.

The other front is financial with America facing a coordinated attack by Russia and China on its dollar hegemony. The Russians are planning a replacement trade settlement currency, which if it succeeds, could unleash a flood of foreign-owned dollars onto the foreign exchanges.

We have no way of knowing how advanced this plan is, but the indications point perhaps to a gold-based digital currency. Moscow establishing a new gold exchange, Asian central banks accumulating additional gold reserves, and Saudi Arabia seeking non-dollar payments for oil sales are all circumstantial evidence.

As well as these plans, there has been an underlying shift away from a long-term everything financial bubble, with the prospect of higher interest rate levels in time. The reasons for foreign ownership of fiat dollars are diminishing, and a successful new Asian trade currency will only add to the dollar’s woes.

Could this pressure compel America de-escalate Ukraine and sanctions against Russia? The argument to do so has become compelling. It is also a way to lower energy prices, giving central banks needed room for interest rate manoeuvre. 

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Posted in Banking, Business, Currencies, Debt, Economics, Economy, Energy, Geopolitics, Governments, War

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The Uncertainty in China Is Kryptonite to Global Markets, by Charles Hugh Smith

Posted on November 27, 2022 | Leave a comment

When things go wrong in China it has a global impact. From Charles Hugh Smith at oftwominds.com:

Few seem alive to the potentially consequential financial risks arising from uncertainties evolving in China.

One thing we know rather definitively is that markets don’t like uncertainty: uncertainty is Kryptonite to markets.

Another thing we know is that the events unfolding in China are generating uncertainty on multiple levels. Whatever policy decisions are made, the potential consequences generate waves of profound uncertainty.

Should authorities respond to exploding Covid caseloads with heavy-handed lockdowns, that will trigger production and shipping consequences for global trade. If restrictions are relaxed, the healthcare consequences are also uncertain, as China lacks the facilities such as ICU beds in sufficient quantities to deal with a contagious virus spreading in a populace with very little immunity.

The reactions of both authorities and the people generate an entirely different level of uncertainty. Authoritarian regimes are trapped: if their response is increasingly brutal repression, punishment and lockdowns, this risks changing the populace’s understanding of the social contract in a destabilizing dynamic.

But offering concessions opens the door to demands for further concessions, and this path is an equally destabilizing dynamic.

There are no positives for global markets in any of these developments, as each potential outcome has difficult-to-predict and control second order effects. Covid lockdowns have the potential to topple various supply-chain dominoes, and by weakening economic activity, they also have the potential to topple dominoes in the populace’s understanding of the social contract between citizens and the state.

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Posted in Banking, Business, Currencies, Debt, Economics, Economy, Geopolitics, Government, Trade

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First to Go: The Money, by Bill Bonner

Posted on November 27, 2022 | Leave a comment

Every bubble the last few decades seems to have popped and then given rise to an even bigger bubble. The bubble currently popping will be the bubble to end all bubbles, and nothing larger will follow. From Bill Bonner at bonnerprivateresearch.substack.com:

(Source: Getty Images)

Bill Bonner, reckoning today from Baltimore, Maryland…

Yesterday, we took a look into the murky past, to see what lurked therein. Today, we turn our minds to the future, which may prove murkier still.

As we saw in China, during the 1930s and ‘40s, the government printed money to pay its bills. It ran up debt it couldn’t pay. And then, the hyperinflation of the 1950s opened the door to Mao’s communists. After that, it was one disaster after another.

Americans think they can continue to borrow and spend forever. Investors are trained to believe that stocks always bounce back. They think that if they just hold on, soon they will be making money again.

And if they owe money, they think they’ll soon be able to refinance at even lower rates.

But all that has changed. Now that we have inflation, it’s a whole new ballgame.  The Fed can still print money, but now it will cause consumer prices to rise even faster. Your stocks may go up, as they did from 1966 to 1982, but inflation will wipe out your gains. And when you go to refinance your house, you will be hit by a double-whammy. Falling house prices may have erased your ‘equity’…while rising mortgage interest increases your monthly payments.

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Posted in Banking, Currencies, Debt, Economics, Economy, Financial markets, Government, History

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An Economic Candle Burning From Both Ends, by Jeffrey Tucker

Posted on November 25, 2022 | Leave a comment

The past often dictates the future. It’s no longer a question of if the economy collapses, only when. From Jeffrey Tucker at The Epoch Times via zerohedge.com:

Some facts of our times follow. As you read, consider your own household and portfolios and how they measure up.

Disposable personal income per capita has been in decline in real terms for 19 straight months. This is not just dollar amounts but dollars adjusted for purchasing power. We are just now level with 2019, which is to say that Americans have lost three years of financial progress.

Savings has hit a new low of 3.2 percent, which is where it stood just after the 2008 financial crisis, and this contrasts with 6 percent rates after 1980 and 10 percent average rates in the postwar period.

Credit card debt just jumped to a 20-year high and is still soaring.

(Data: Federal Reserve Economic Data [FRED], St. Louis Fed; Chart: Jeffrey A. Tucker)

Money, credit, and capital are draining from long-term investments, drying up the venture capitalists and putting a tight credit squeeze on large businesses where firings in the professional sector have already begun.

Inflation is still embedded and this is because consumers have come to expect it and adjust their spending habits accordingly, plus wage costs are rising in sectors like hospitality, retail, and manufacturing.

As an example, the latest housing-price data shows annualized inflation at 15.4 percent year over year, even as the buyers’ market is mostly locked up. That’s the very essence of stagflation: rising prices amidst declining output.

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Posted in Business, Collapse, Debt, Economics, Economy, Financial markets, Governments

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Can a Deeply Unserious America Fix Its Economy? By Jeff Deist

Posted on November 25, 2022 | Leave a comment

Unserious people don’t make hard choices. America is a land of unserious people upon whom hard choices will soon be thrust. From Jeff Deist at lewrockwell.com:

Does America simply lack the political will to face economic reality?

In the teeth of the Depression, Treasury secretary Andrew Mellon famously told President Herbert Hoover to “liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate”—in other words, to resist bailing out any industry through state intervention. This was a tough sell even in those days, and of course Hoover succumbed to politics and took the opposite approach, greatly and needlessly damaging the US economy for decades to come.

Less often quoted are Mellon’s follow-up words to Hoover: Liquidation would “purge the rottenness out of the system,” so “people will work harder” and “live a more moral life.”

Mellon, having lived most of his life in an America without a central bank, understood economic recessions as necessary cures rather than ills to be avoided. But he also understood the human price that would be paid in the aftermath of a period of phony economic prosperity. Only hard work and personal sacrifice, person by person and town by town, could get America out of its economic mess. Fiscal and monetary policy would provide no free lunch, as millions of Americans learned the hard way in the 1930s.

Fast-forward to 2022, and it’s hard to imagine Janet Yellen calling for liquidation or telling Americans to improve their moral fiber. Nobody votes for austerity or personal responsibility, and any politician or bureaucrat or central banker who even suggests it is doomed today.

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Unhappy Marxist Thanksgiving, Everyone! By Thomas DiLorenzo

Posted on November 24, 2022 | Leave a comment

The pilgrims didn’t have much to be thankful for until they discovered that capitalism and free markets work well. From Thomas DiLorenzo at lewrockwell.com:

In recent years the unhinged Marxist Left in “higher” education along with the hard-Left pop communists in the teachers’ unions have been preaching that Thanksgiving is a celebration of genocide, mass murder, and imperialism.  The Pilgrims murdered all the Indians, they say, and then sat down and treated themselves to big feast to celebrate their feat.  They even invented the elementary schoolish word “Thankskilling” to describe it.  (Send your kid to a university and he, too, can learn to sound like an uneducated Marxist moron for the rest of his life).

In reality, if the Pilgrims had anything to celebrate it was the destruction of an early form of socialism that allowed them to survive and prosper.  When the first settlers arrived in Jamestown, Virginia in May of 1607 they found incredibly fertile soil and a cornucopia of seafood, wild game, and fruits of all kinds.  Nevertheless, within six months all but 38 of the original 104 Jamestown settlers had starved to death.  Two years later the Virginia Company sent 500 more settlers and within six months 440 of them were dead by starvation and disease.  This became known as “the starving time.”  The Massachusetts Pilgrims fared no better.  About half of the 101 people who arrived on Cape Cod in November of 1620 were dead within a few months.

In 1611 the British government sent Sir Thomas Dale to serve as the “high marshal” of the Virginia colony.  He immediately recognized the problem:  The Virginia Company had adopted a system of agricultural socialism under which everything grown or produced would go to a “common store” and divided equally among all  the family groups.  The man who worked hard sixteen hours a day would be given the same remuneration as the man who did not work at all.  Dale’s solution was to establish property rights by allotting three acres of land to each man, who was still required to pay a fee to the Virginia colony (most early American immigrants were indentured servants) but then could keep everything else for himself and his family.

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Posted in Capitalism, Economics, Economy, Energy, Horseshit, Labor

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An Incompetent Federal Reserve Board Caused the Great Depression and the New Deal that Gave Congress’ Power to New Executive Branch Regulatory Agencies, by Paul Craig Roberts

Posted on November 20, 2022 | Leave a comment

The New Deal helped transform the U.S. government from mostly benign to the monstrous blob we know and hate today. From Paul Craig Roberts at paulcraigroberts.org:

An Incompetent Federal Reserve Board Caused the Great Depression and the New Deal that Gave Congress’ Power to New Executive Branch Regulatory Agencies. The 1930s saw the Great Depression used to vitiate legislative power and put it into the hands of executive branch agencies.  It was a major step in destroying the accountability of government.

The Fed’s “Depression” and the Birth of the New Deal

Market failure reconsidered

Paul Craig Roberts, Wm. E. Simon Chair in Political Economy, Center for Strategic and International Studies,  Senior Research Fellow, Hoover Institution, Stanford University, and Chairman, Institute for Political Economy

Lawrence M. Stratton, Research Fellow, Institute for Political Economy

Published in 2001 by the Hoover Institution, Stanford University, in Policy Review (No. 108)

According to new deal historians, capitalism failed in the 1930s. What, then, is it doing flourishing in the United States, Britain, and Europe and taking root in Latin America and China, where it was never previously present? For the past 20 years there has been a large and growing incompatibility between the verdicts of historians and the performance of capitalism.

In 1981 the United States reduced tax rates and reined in money growth. For two decades the economy has experienced an economic boom characterized by large income gains, high employment, and negligible inflation. In the U.K. similar reforms introduced by Margaret Thatcher have produced similar results. Heavily socialized countries such as France, Italy, and Spain have abandoned public ownership and privatized their economies. Political regimes in Eastern Europe and the Soviet Union, where a planning model had operated, failed both economically and politically and collapsed. Capitalism has appeared in Latin America and has taken hold of the Mexican, Chilean, and Argentinean economies. Even China’s rulers have found it necessary to risk their political power by endorsing markets and private property in order to participate in the global economy.

Big government (in terms of its presence in the economy) is everywhere in retreat. A Democratic president, Bill Clinton, declared that “the era of big government is over.” Yet the history books and much analysis of public policy during the 1930s remain unadjusted and still proclaim the failure of capitalism. The disconnect between historians and reality grows with each passing day, because historians cannot explain the Great Depression except in terms of capitalism’s failure.

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