If the Grinch had a day job, perhaps he would be a hatchet man, stuffing pink slips in banker’s stockings. The banks are certainly doing a fair job of sucking the holiday cheer out of Wall Street.
There are always reasons to be of good cheer, no matter how bad financial matters get. Life is much more than a mailbox stuffed with bills or a rotten balance sheet. Nonetheless, it’s a good idea to reflect on how we got here.
For more than three years now, I have been writing about what I call “the Austrian endgame.” I didn’t come up with the rules of the game; that is just my nickname for what is happening. The gist of the Austrian endgame is a prediction from Ludwig Von Mises, the father of Austrian economics, from many decades ago.
It is amusing -- in a sad sort of way -- to see all these Wall Streeters walking around surprised. It is amusing only because Ludwig Von Mises predicted we would wind up in this jam. He called the tune before the band even started to play.
Von Mises’ prediction
Here is what Von Mises said:
There is no means of avoiding the final collapse of a boom expansion brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.
That may sound complicated, but it really isn’t. The key thing to understand is that governments do not like recessions. Economic downturns tend to make the political leaders of the day look bad. So, in their infinite wisdom, governments do their best to avoid recession by stimulating the economy whenever bad tidings loom.
This stimulation is the “credit expansion” Von Mises spoke of. Credit expansion basically means printing money. It can mean looser lending standards, but that is roughly the same thing, as happy-go-lucky lending means more money sloshing around the system.
Ben Bernanke is trying to keep the boom alive -- and the banks from imploding -- by opening the credit spigots. Alan Greenspan opened those spigots many, many times.
(Greenspan seemed to have the same solution for every problem he ever faced -- more stimulus! More money! Back then the Maestro only spoke in riddles; now his excuses are delivered in plain English.)
The party has to end
Back to Von Mises’ prediction… When government opens the money floodgates, the boom is prolonged for a while. The good times continue to roll. But the inevitable consequence is a massive buildup of debt. By definition, the government is throwing money around precisely when the economy would naturally be slowing down if left to its own devices. As a result, that extra money is put to strange and frivolous uses.
When money is scandalously easy, people are more likely to buy jet skis and Winnebagos and Bermuda vacations. Companies are more likely to go on lavish spending sprees and plow wheelbarrows full of cash into stock buybacks. Prices go up in round-robin fashion as buyers flip assets back and forth to each other. It’s a big party. Debt is the looming hangover.
What Von Mises pointed out is that, if the government throws a drunken free-for-all, at some point the free-for-all must stop. You can’t run the printing presses forever, just as no one can drink an infinite number of vodka tonics. Morning has to come.
Cruel morning intrudes
Morning is upon us now. Fed chairman Bernanke is shifting from foot to foot, debating whether to take away the punchbowl or keep things going a little longer. But most everyone knows now what is coming. Those who don’t want to see are forced to peek at the carnage through spread fingers. The debt hangover is kicking in with a vengeance.
The final question is, what happens when the Fed is well and truly cornered? Bernanke is close to being cornered now; the plight of the imploding financial sector has hemmed him in.
Who does he rescue? If the easy credit continues, inflation will run amok and the dollar will be destroyed. If it doesn’t continue, the foolish banks -- and more than a few consumers -- will fall to their knees under a backbreaking load of debt (which they took on during the good times, when it was blithely assumed the party would never end).
Goodnight, greenback
Chances are good that the dollar will be sacrificed. The greenback’s status as a world reserve currency will eventually be forfeit. It’s easier to let a paper currency slide into oblivion than an entire economy. Better still, a doomed dollar shares the load with all those overseas investors sitting on trillions’ worth of dollar-denominated assets. (They are nice folks, but they don’t vote.) And after all, the dollar is only paper. That’s all it ever was. Right?
Again, the news is not all bad. There is still a lot of wealth left in the world. There are still a number of excellent opportunities for growth, both at home and abroad. And there is even the possibility that the U.S. stock market shoots higher and higher, like a mad bottle rocket, in the final stages of dollar decline. (More on that possibility another day.)
Regardless, it’s good to have an idea of what’s happening. Nor would it hurt to own some gold.
Below you’ll find Stephen Oakes’ take on the rottenness of the banks. “When will it all end?” he asks. Read on for his thoughts, and a potential way to profit.
Warm Regards,
JL
