According to Ludwig von Mises, an upswing occasioned by credit expansion can only be maintained by further credit expansion; and, in the long run, “it turns into depression when the further progress of credit expansion stops.” This outcome is absolutely certain and today’s financial crisis underscores the point. The economic boom of recent years has been propelled forward by an unprecedented credit expansion. At each turn, when the market was threatened with contraction, further credit expansion was urged.Original article here*
The magic wand of credit expansion is like heroin addiction. The more you take, the more you want. The day inevitably comes when you cannot increase the dosage because you run short of supply. And so it is with credit expansion. The markets are accustomed to easy money. They now require easier and easier money. They are addicted. Eventually, however, they must suffer the symptoms of withdrawal.
Did we think this expansion could continue forever without consequence? Evidently we did not consider where we would end up. And now, at last, the United States Government believes it can fill the hunger for credit through a coordinated push – the last gasp of our insatiable credit addicts. President Bush offers a plan. Behind closed doors he reportedly said, “This sucker could go down.” Once again, the president’s grammar is in error. The sucker in question will go down.
Every dollar poured into the proposed rescue operation will be lost. Buying toxic debt is not a solution. The proposed mechanism for rescuing the economy represents a new falsification of values – and a new twisting of the market. The dollar cannot possibly survive this new initiative. A $700 billion bailout is only the beginning. It is merely a foretaste. What we see in Washington is an exercise in self deception. It is the self deception of a country that does not see danger, of a country that ignores the wisdom of ancestors and the ABCs of economics.
They want a booming economy. What they’ve failed to consider is the false nature of the boom thereby engendered. False values, false ideas and promises of false prosperity pepper the program of today’s politicians. They have no business at the helm of a great country. Their leadership consists in pitiful ignorance, and the republic may be in its last days. There has been a shocking willingness to destroy the country’s currency. “If the government does not care how far foreign exchange rates may rise, it can for some time continue to cling to credit expansion,” Mises explained. “But one day the crack-up boom will annihilate its monetary system.”
The proposed plan to save the markets will save nothing. The proposed solution is no solution. Improper investments have been made and massive losses must result. We have to take our medicine before we can get better. Debasing our already debased currency makes things worse. We have avoided economic pain by a continuous expansion of credit. The artificial boom must come to an end. False values must pass away so that real values can be brought to the fore.
Few realize how destructive the boom has been; for the real damage is done by the regime of false values and our collective investment in those values. “The boom is called good business,” noted Mises, “prosperity, and upswing. Its unavoidable aftermath, the readjustment of conditions to the real data of the market, is called crisis, slump, bad business, depression.” The latter, however, is the period of healing and correction."
Sunday, September 28, 2008
Deal Done, Meltdown Only Slowed, NOT STOPPED
Some form of liquidity injection plan has just been agreed to in Washington, if the reports on CNN are to be believed. I have no knowledge of the particulars.
I have been in favor of the injection, but in the BEST CASE scenario, the injection will only cause the rate of change, the SPEED of the collapse, to change - it will not change the ultimate outcome, in my opinion.
The American people are going to be forced to change everything - their expectations, their saving and consumption habits, their work habits, their childbearing and divorce habits, their retirement expectations, etc... Measured against the American people's expectations, we are truly on the verge of earth shaking, economic, social and political, change - and not the "Change" our presidential candidates are talking about.
I get a great deal of email and comments from folks telling me that we are saddling our children and grandchildren with "Debt". Didn't we just saddle all of America with a huge amount of debt? And what happened? We defaulted on that debt. Our descendants will do no less. Debts, like promises, are made to be broken.
The following is from J.R. Nyquest's excellent website:
THe Right appears to want their cake and eat it, too. The Left appears to want the system to collapse so that they can rebuild it into a "fair" world. The old line, "Be care what you ask for; you may get it", really applies here. Only you might only get half of want you want, the other half might just eat you alive.
American investors who continue to believe in financial assets, rather than assets representing an interest in hard assets, are going to come to ruin. RUIN. Everybody talks TOUGH when they have a full belly, and a warm place to sleep, and money that can still buy something in the bank. Remove ANY of those 3, and you find we are not so tough anymore.
The injection will NOT stop the ultimate collapse in the US$ and U.S. financial assets along with the economy, but it might give you the time to get your house in order, while lulling most into a false sense of security. The Middle Class is going to shrink in ways few thought possible, as will the ranks of the Rich. In the end, if you re reading this it is likely that you are a middle aged man with a family to provide for and some assets to protect. You are not running for president, just trying to run your family. Do not allow your self to be lulled into that false sense of security, or you will have wasted every second of time you have spent reading my stuff.
Mentatt (at) yahoo (d0t) com
Posted by The Short Story Man at 9:08 AM