Here at the Economic Prism we long for a concrete foundation we can stub our toe on. The resulting pain would be comforting. For it would provide confirmation that consequences still exist. Thus we’ll begin today’s supposition with some perspective…
“Credit expansion can bring about a temporary boom. But such a fictitious prosperity must end in a general depression of trade, a slump,” noted 20th century economist Ludwig von Mises.
But what happens if a credit expansion is followed with 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 ad infinitum?
“If the credit expansion is not stopped in time,” said Mises, “the boom turns into the crack-up boom; the flight into real values begins, and the whole monetary system founders.”
Losing Its Magic
No doubt, the central bankers of the world are engaged in the zealous pursuit of a crack-up boom. New stimulus programs of cheap credit and quantitative easing are emanating out of China, Japan, and the European Union. The Federal Reserve has the federal funds rate pressed down to practically zero…for six years and counting.
Yet the economy lurches along, stumbling and slogging, in search of a solid footing. 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, which has since floated the world economies up, appears to be losing its magic.
More credit is needed to buoy up GDP. Economic growth’s dependent on additional 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 levitated by earlier credit expansions want to come down. Central bankers want to push them up. “We will do what we must to raise inflation and inflation expectations as fast as possible, as our price-stability mandate requires,” said European Central Bank President, Mario Draghi, on November 21.
Central Bankers Unite
At today’s fork in the road, the central bankers of the major economies have united with the shared objective of raising inflation. They want raise the price of goods and services by lowering the value of money. They want people – that’s you – to spend money not save.
The general populace has been told central bankers can manage the economy like NASA managed the Apollo 11 moon landing. The truth is central bankers and monetary policy influencers are making it up as they go. They keep expanding credit in the hope they’ll, somehow, stimulate economic growth.
Several hundred years ago – plus a little more – this same approach was tried by the strongest and shrewdest men that Europe had ever seen. France’s leading statesman of the day, a master orator named Mirabeau, succumbed to the temptation of the printing press. Once the Country’s economy and finances had been put on the fiat money course there was no turning back.
“In spite of all the paper issues, commercial activity grew more and more spasmodic,” explained Andrew Dixon White in his classic work, Fiat Money Inflation In France. “Enterprise was chilled and business became more and more stagnant.
“The plenty of currency had at first stimulated production and created a great activity in manufacturers, but soon the markets were glutted and the demand was diminished.”
Each downturn in France’s economy was countered with evermore issuances of paper money, until the populace lost all confidence in the currency. Between 1790 and 1795 the price of flour increased 11,250 percent…and all other prices increased by a comparable amount. By 1797 France’s currency was worthless and its economy in shambles.
“The final outcome of the credit expansion is general impoverishment,” remarked Mises.
The rapid vaporization of wealth the central bankers 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 they’ll eventually push things too far…the crack-up boom will be their gift to the world.
for Economic Prism