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Are we living in the last days of a worldwide crack up boom asks Bill Bonner?

Posted on 07 May 2013 with no comments from readers

Are we living in the final stages of a worldwide crack up boom or, as it is also known, inflation of asset prices due to money printing? Agora Financial owner Bill Bonner certainly thinks so. He reckons what we are seeing is a classic demonstration of the Austrian economic model as propounded by Ludwig von Mises decades ago.

First let’s review a series of quotes from this great economist and see if this does in fact match with our recent global experience of rising asset price inflation whether than be in real estate, stocks or gold and silver. On a 10-year view all these assets have inflated hugely while headline or consumer price inflation has been much lower in comparison…

Von Mises prophesy

‘This first stage of the inflationary process may last for many years. While it lasts, the prices of many goods and services are not yet adjusted to the altered money relation. There are still people in the country who have not yet become aware of the fact that they are confronted with a price revolution which will finally result in a considerable rise of all prices, although the extent of this rise will not be the same in the various commodities and services.

‘These people still believe that prices one day will drop. Waiting for this day, they restrict their purchases and concomitantly increase their cash holdings. As long as such ideas are still held by public opinion, it is not yet too late for the government to abandon its inflationary policy.

‘But then finally the masses wake up. They become suddenly aware of the fact that inflation is a deliberate policy and will go on endlessly. A breakdown occurs. The crack up boom appears. Everybody is anxious to swap his money against ‘real’ goods, no matter whether he needs them or not, no matter how much money he has to pay for them. Within a very short time, within a few weeks or even days, the things which were used as money are no longer used as media of exchange. They become scrap paper. Nobody wants to give away anything against them.

‘It was this that happened with the Continental currency in America in 1781, with the French mandats territoriaux in 1796 and with the German mark in 1923. It will happen again whenever the same conditions appear. If a thing has to be used as a medium of exchange, public opinion must not believe that the quantity of this thing will increase beyond all bounds. Inflation is a policy that cannot last.’

So where are we now? The asset inflation has happened and yet money still functions as a medium of exchange. Is this about to change as it has in the past under money printing? We have certainly seen asset prices inflate as a consequence of money printing. Is it hyperinflation next?

If so the last thing you will want to hold is paper money as Russians found out in the 1990s. Hard assets like real estate or precious metals hold their value and for that matter the shares of companies whose profits can rise with inflation and are not decimated by it (Warren Buffett wins again).

Bond crash

Bonds as an alternative to holding cash are also in jeopardy. Global interest rates will soar in this kind of environment as the central banks lose control of the show. Bonds and paper money will evaporate into thin air, or become worth very, very much less than they are now.

In a sense people with money who are buying real assets now are doing the right thing. But these asset prices will also swing around violently as so many people will be utterly ruined in the fall of paper money.

At least that is what the Von Mises prophesy concludes. Many commentators say that global money printing today is without precedent. That is not strictly true except for modern times and even then you have examples like post-Soviet Russia. The knowledge about what comes next is only too clear.

But of course nobody wants to face up to it. That’s the ostrich school of economics!

Posted on 07 May 2013 Categories: Banking & Finance, Bond Markets, GCC Economics, Global Economics, Gold & Silver, Hedge Funds, Investment Gurus, Private Equity, Sovereign Wealth Funds, US Dollar, US Stocks

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