Investment Rarities Inc.
Submitted by Charleston Voice
Feb. 5, 2005
The Austrian School of Economics flourished in Europe in the early part of the century. Professor Ludwig von Mises (Meeses) emigrated to the U.S. from Austria and became a powerful American spokesperson for sound money, free markets, and limited government. His business cycle theory showed that easy money and credit brings about an economic boom. Then he warned, "The boom can last only as long as the credit expansion progresses at an ever-accelerated pace. - The credit expansion boom is built on the sands of banknotes and deposits. It must collapse. - There is no means of avoiding the final collapse of a boom brought about by credit expansion." Mises believed the damage in the ensuing recession or depression depended on the scale of prior credit excesses.
A contemporary Austrian thinker, Dr. Kurt Richebacher, argues that the boom has become a huge bubble centered in the financial markets. He warns, "Asset price bubbles arise when money and credit expand well in excess of economic activity. The excess money winds up in the financial markets, propelling asset prices to unjustified and unsustainable levels completely out of proportion to the general price level. In this way, U.S. stock valuations over the last year went from ridiculous to insane."
Consumers and corporations borrowed almost a trillion dollars last year, of which half went into financial markets. This year mind-boggling increases in margin debt and record financial leveraging were piled on top of last years massive home refinancing and huge corporate borrowing.
What happens when money and credit growth ends and the boom collapses? We paraphrase Mises. Business must restrict its activities. Prices drop suddenly. Factories close, construction projects are cancelled, workers are discharged, and consumption drops. The final outcome of the credit expansion is general impoverishment. The immense majority of people must foot the bill for the bad investments and overconsumption of the boom episode.
This describes the onset of an ordinary recession. Dr. Kurt Richebacher suggests we could get much worse. "An impending U.S. downturn is poised to hit a deceptively frail financial and economic foundation. The consumer sector is tapped out with a monstrous debt load and negative savings. The business sector is running a huge cash flow deficit while in the midst of an unsustainable borrowing binge and aggressive expansion of dubious enterprises. In the financial sector, overieveraging and reckless speculation exist as never before. The combined excesses of all three sectors underlie the unprecedented U.S. stock market and economic bubble. In short, the entire system is an accident waiting to happen."
Says Mises, "Accidental, institutional, and psychological circumstances generally turn the outbreak of the crisis into a panic. The description of these awful events can be left to the historians. It is not ... (the task of economists)... to depict in detail the calamities of panicky days and weeks and to dwell upon their sometimes grotesque aspects."
In the 1930's credit extremes caused an economic collapse that retarded progress for a decade. The present credit expansion appears worse than that of the 1920's and more excessive than Japan. Furthermore, at the inception of any slowdown or economic crisis, the monetary authorities are quick to inject new money and credit (Long-Terin Capital). According to Professor Mises, this postpones the problem, but makes it worse in the long run.
What must be understood is that the "New Paradigm", the "New Era", the future without setbacks, is no more than a belief that continuous inflating and credit expansion can rescue us from any economic problem. That policy carried to its conclusion will insure a great depression and ultimately the onset of a financial dark ages.
One of Mises' students, the Nobel Prize Winner, Freidrich Hayek said, "The disquieting but unalterable truth is that a false monetary and credit policy, pursued through almost the whole period since the last war, has placed the economic systems of all the Western industrial countries in a highly unstable position .......
Ludwig von Mises had numerous other accomplishments in his lifetime. Way back in 1920 he showed that collectevism must fail because of a lack of market pricing. He was an effective enemy of socialism and big government. If you would like to read more about Ludwig von Mises and other freedom philosophers, send for our free book, "The Great Gold Comeback."
Investment Rarities Inc.
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