The Final Collapse of the Economy

The great classical economist of the Austrian School, Ludwig von Misses wrote, “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.”

One of Mises foremost students, the late economics professor, Murray Rothbard (the other was the nobel prize winner, Freidrich Hayek) wrote about attempts to prolong the boom by manipulating interest rates. “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 reestablished, 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.”

The extent of the credit expansion in the U.S. drew these comments several years ago by economist Kurt Richebacher. “There is something unique and unprecedented about the present U.S. bubble: the phenomenal magnitude of the credit excesses. Credit creation is completely out of control in relation to economic activity and domestic savings.” More recently he wrote, “ The U.S. economy’s sharp downturn is basically a reaction to the unsustainable, preposterous credit and spending excesses that have accumulated during the boom.”

Richebacher agrees, “Borrowing and lending in the past several years has massively shifted to credit channels outside of the banking system. The main sources of credit creation today are the securities markets and a plethora of non-bank financial intermediaries. With investment bankers and non-bank financial intermediaries now the kings of credit creation in the United States, the money supply data are a woefully inadequate indicator of monetary conditions.”

Douglas Noland further explains. “Not only has the amount of credit creation been unprecedented, the quality of the lending has been exceptionally poor – the fundamental problem for the U.S. financial sector is that it has created too much leverage and too much paper of increasingly poor quality.”

What are the consequences? Noland tells us one of them, “An explosion of money and credit is, by definition, highly inflationary. After all, the excessive creation of new financial claims – or new credit – fuels overspending and what should be recognized for its unmistakable inflationary effects.” Much of this inflating fueled the dramatic rise in asset prices. Asset inflation dwarfed rising consumer prices.

Mises also stressed serious consequences. “There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of the voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.” In other words, do we take our medicine now or do we continue to expand money and credit.

Mises warned, “The boom can last only as long as the credit expansion progresses at an ever-accelerated pace. The boom comes to an end as soon as additional quantities of fiduciary media are no longer thrown upon the loan market. But it could not last forever even if inflation and credit expansion were to go on endlessly.” He instructed that, “If the credit expansion is not stopped in time, the boom turns into the crackup boom; the flight into real values begins, and the whole monetary system founders.” He concludes, “The final outcome of the credit expansion is general impoverishment.”

There you have it, a litany of critics who see current monetary policy as a prescription for inflation, an economic bust and lower living standards. No wonder nobody wants to listen.

There are methods for controlling such problems. For instance, requiring that unsecured debt not exceed the lending institution’s capital. No one does them, of course, so yes, we’re screwed.

God is moving us back to the soil where we can raise some of our own food. I am trying to get as far away from this socialist economy as possible.

Yes, no one wishes to choose austerity measures now to avoid a greater bust in the future. Apparently everyone is willing to just keep up the spending until the bust occurs inevitably, ensuring greater disaster in the future.

Few persons now alive are prepared for this, which will make the social upheaval even worse.

Which trickles down to product, and it has, and to self worth, we have priced ourselves off the market. I am only speaking of those that sit in the pews with me. It is unchristian.

Mises also stressed serious consequences. “There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of the voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.” In other words, do we take our medicine now or do we continue to expand money and credit.

The point is companies force this issue. There is this effort to grow at all cost. It isn’t enough that the company produces a great product and profit as well, they have to increase. Instead of using profits to maintain the quality, it is compromised due to the demands to grow. The point “MAN” cannot be happy just to be productive and profitable we want more…to the demise of our souls, if we don’t get wise.

There you have it, a litany of critics who see current monetary policy as a prescription for inflation, an economic bust and lower living standards. No wonder nobody wants to listen.

I could see it, and an expert I am not.

ACCT Re: The Final Collapse of the Economy

God is moving us back to the soil where we can raise some of our own food. I am trying to get as far away from this socialist economy as possible.

Some? If you don’t grow it, I have a feeling in the not too far future, you won’t be eating.

The G-20 nations may propose devaluing all currencies, including the dollar and the euro. This government move is theft! What is the difference between a thief stealing 50% of our money or the government devaluing your money by 50%?

Franklin Roosevelt devalued the dollar by Executive Order #6102 by confiscating gold and raising its price 69.3%. FDR stole from my grandfather! FDR’s action was also unconstitutional. Expect more of the same in our time. Led by higher gold prices, debts become a fraction of re-inflated asset prices. On that basis alone, I would never buy bonds, especially government bonds!

If people do not buy bonds, there will be no economic recovery, ever.

The only clock that is broken is the U.S. dollar. The government has not given us honest money. Remember, only the government can cause inflation. I had an inkling of what was to come in 1970. Before I left Switzerland in January 1971 I converted $10 of American money into Swiss francs. I still have those Swiss francs and they are worth a lot more than $10!

I have been predicting that the dollar would go bankrupt since I graduated from college in 1970. I mentioned that to someone one time and he got very angry! I even mentioned the bankruptcy of the dollar in the economic classes that I taught at a Community College.

It has taken a very long time to destroy the almighty dollar. The process started with the creation of the Federal Reserve in 1913. I do not know if this recent credit crisis will precipitate the dollar’s total collapse, but we continue to move in that direction.

I don’t know. If inflation/devaluation is seen as a wealth tax, then maybe the government is reasonably justified in exacting it. I’m playing a bit of a Devil’s Advocate here, but I’d like to hear some views on this.

If people do not buy bonds, there will be no economic recovery, ever.

The central bank can buy bonds with newly created money. This makes it possible for the government to spend money it doesn’t tax or borrow from investors. The interest the government pays on the bonds it sells to the Fed is then returned to it, and so in effect the government spends this newly created money for free. Of course, this can result in inflation in the long run, which is in itself a form of tax, but a very cheap and easy one to take.

The only clock that is broken is the U.S. dollar.

All currencies today are paper fiat currencies, and their value is only based on the credibility of the government issuing and central bank regulating them. The upside of fiat currencies is that they offer a degree of flexibility in times of crisis. The downside is that they all become worthless sooner or later.

Not exactly. You cited three dead economists and applied what they said in the past as if they were talking about the current situation. That is hardly a litany of critics. It is just you and Douglas Nolan, neither of whom are economists.


And, for those in debt, the value of that debt is cut in half. In the short term it is good for the borrower, bad for the lender. In the long term, bad for everyone, because there will be no faith in the currency standard. And there shouldn’t be, especially for those wishing to lead productive lives.

The “savers” will be the ones, ironically, who will shoulder this burden. The resources that they have set aside for future use will be pilfered in this way. Both irresponsible spenders and responsible savers will go down the same tube.

Few people think there will not be some form of world-wide economic collapse. The question remains though, what will it all look like when and after it happens? The usual means of preparing for hardship may not apply like they used to.

Governments may either have trouble meeting their financial obligations - there may be cutbacks in welfare, wages and public health - or they will have no trouble but will have to do so through borrowing and then debasing their currencies. Through debasement, people will lose their paper savings. If there is a currency collapse, a new currency will be issued and real wealth (property, material possessions) will remain as it is, but its value will be redenominated in the new monetary unit. There may be some severe hardship for a while, and then the game of musical chairs will start again, though probably with somewhat different rules, which will lead to a further collapse several decades down the line.

Yeah, pretty much. Everyone with a lick of sense knows this. Unfortunately there are enough voters out there that think money grows on trees and one can really get something for nothing, an economic ex nihilio, that politicians will continue to lead us to our doom. Even in Greece, the populous are so naive that they are rioting over austerity measures that they have caused to be put in place. Sheer madness!

I believe that when all is said and done, 2012 will become the year when the majority of people realize that China is now the world’s #1 superpower.

I encourage everyone to get as far away from the economy as possible. We have built a world without God and that world is failing and passing quickly. All the money in the world will not buy you any food when the grocery shelves are empty.

One of the biggest confusions in the current mess in the housing market is the claim that it is the result of greed. The problem with that explanation is that greed is always a feature of human interaction. It always has been. Why, all of a sudden, has greed produced so much harm? And why only in one sector of the economy? After all, isn’t there plenty of greed elsewhere? Firms are indeed profit seekers. And they will seek after profit where the institutional incentives are such that profit is available. In a free market, firms profit by providing the goods that consumers want at prices they are willing to pay. (My friends, don’t stop reading there even if you disagree - now you know how I feel when you claim this mess is a failure of free markets - at least finish this paragraph.) However, regulations and policies and even the rhetoric of powerful political actors can change the incentives to profit. Regulations can make it harder for firms to minimize their risk by requiring that they make loans to marginal borrowers. Government institutions can encourage banks to take on extra risk by offering an implicit government guarantee if those risks fail. Policies can direct self-interest into activities that only serve corporate profits, not the public.

No free market economist thinks “greed is always good.” What we think is good are institutions that play to the self-interest of private actors by rewarding them for serving the public, not just themselves. We believe that’s what genuinely free markets do. Market exchanges are mutually beneficial. When the law messes up by either poorly defining the rules of the game or trying to override them through regulation, self-interested behavior is no longer economically mutually beneficial. The private sector then profits by serving narrow political ends rather than serving the public. In such cases, greed leads to bad consequences. But it’s bad not because it’s greed/self-interest rather because the institutional context within which it operates channels self-interest in socially unproductive ways.

To call the housing and credit crisis a failure of the free market or the product of unregulated greed is to overlook the myriad government regulations, policies, and political pronouncements that have both reduced the “freedom” of this market and channeled self-interest in ways that have produced disastrous consequences, both intended and unintended.

The current mess is thus clearly shot through and through with government meddling with free markets, from the Fed-provided fuel to the CRA and land-use regulations to Fannie and Freddie creating an artificial market for risky mortgages in order to meet Congress’s demands for more home-ownership opportunities for low-income families. Thanks to that intervention, many of those families have not only lost their homes, but also the savings they could have held onto for a few more years and perhaps used to acquire a less risky mortgage on a cheaper house. All of these interventions into the market created the incentive and the means for banks to profit by originating loans that never would have taken place in a genuinely free market.

In the end, all I can ask of you is that you continue to think this through. Explaining this crisis by greed won’t get you far as greed, like gravity, is a constant in our world. Explaining it as a failure of free markets faces the obvious truth that these markets were far from free of government. Consider that you may be mistaken. Consider that perhaps government intervention, not free markets, caused profit-seekers to undertake activities that harmed the economy. Consider that government intervention might have led banks and other organizations to take on risks that they never should have. Consider that government central banks are the only organizations capable of fueling this fire with excess credit. And consider that various regulations might have forced banks into bad loans and artificially pushed up home prices. Lastly, consider that private sector actors are quite happy to support such intervention and regulation because it is profitable.

If I had to develop a scenario where markets perform poorly for a protracted period of time, it would contain some combination of these elements:

  1. An environment characterized by unsustainable debt. More specifically, it would be an environment where investors actually become worried about unsustainable debt particularly in the U.S. or China (since the euro zone’s unsustainable debt is pretty much old news). Recognition by the public of unsustainable debt, and only this recognition, could put a stigma on further monetary accommodation, rendering it ineffective in its stated and unstated goal. After all, global debt is outpacing global growth with ease:

Central banks are very over leveraged at this point:

  1. A blow-up of global derivatives. The 2008 financial crisis was pinned very much on the systemic nature of global derivatives, i.e. banks exposed to questionable financial assets created a severe counterparty risk that left other banks and financial institutions exposed in a big way. The top four biggest banks in the U.S. hold roughly 95 percent of $250 TRILLION in U.S. derivatives exposure.

As of the most recent report from the Bank of International Settlements, global derivatives rose to a record $707 trillion in 1H 2011. Back to the U.S. banks, their exposure to Europe is key here: The BIS reports that U.S. banks hold $641 billion in loan exposure to the European periphery nations.

Who, at this point, barring a major concern from something as just described above, isn’t going to side with the gravity-defying forces of quantitative easing?

Assuming accommodation from central banks remains on the table, it’s going to take a major shift in monetary policy or global growth expectations before investors start fleeing risk assets in a significant and lasting way. We saw some softness across markets this week. It’s possible we get a playable move lower in currencies, partly technical-driven and partly overdue.

But without a substantial fundamental catalyst, it will probably amount to nothing more than a new buying opportunity if you are playing along with central banks.

Best wishes,


Very good points that face reality.

The trouble with that theory is that China’s economy is largely driven by revenue received from exports to the Western World. If the economies of the Western World collapse, then the Chinese economy will no longer receive much of the revenue needed to sustain her people or her industry.

Bottom line is that the Chinese ascendency may be fleeting, at best.

Having said that, I do agree with the remainder of your statements. I do believe that it is about to get really ugly in the coming months and next couple of years. But the notion that China will emerge as the world’s superpower, for any more than a very brief time, is probably not true.

Communist China is already the #1 superpower. I am saying that by the end of this year most people will probably recognize that fact.

Socialism and administrative law have made this country a failure. Incentive is the key difference between capitalism (private ownership of resources) and socialism (state ownership of resources). Private ownership boosts incentive, while public ownership retards it.

I suggest that you go in the opposite direction that Obama, the abortion president, is leading us. Get as far away from this economy as possible.

No doubt that’s good advice, but for most people it’s impossible to do. And when the economy collapses, the government will blame “the rich” while OWS incites violence.

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