Mises in the Asian Times

August 8, 2007 12:49 PM by Mark Thornton | Other posts by Mark Thornton | Comments (2)

Von Mises on the "crack-up boom". (Our emphasis):

"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. It would then encounter the barriers which prevent the boundless expansion of circulation credit. It would lead to the crack-up boom and the breakdown of the whole monetary system."

"The credit expansion boom is built on the sands of banknotes and deposits. It must collapse. If the credit expansion is not stopped in time, the boom turns into the crack-up boom; the flight into real values begins, and the whole monetary system founders. Continuous inflation (credit expansion) must finally end in the crack-up boom and the complete breakdown of the currency system."

We think Von Mises has it correct - he usually does. But I guess the difference between gold bugs and us is that we don't think we are anywhere near a complete breakdown of the currency system. We don't think inflation is the big problem.

FX Trading –Dot.gold!

I attended an investment conference last week. One of the stars, the key guys, is a very bright and nice man. He gave a very interesting and entertaining opening speech. In it, he properly warned about the incredible excesses of credit in the system and the potential for a "crack-up boom", as defined by the late great Austrian school economist Ludwig von Mises.

And to hide from said "crack-up boom", the speaker went on to extol the virtues of gold. But to us, gold in this cycle is the equivalent of dot.gold, no different than dot.com. It seems just another liquidity-driven asset class, and worse yet offers no yield to boot.

Von Mises on the "crack-up boom". (Our emphasis):

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. It would then encounter the barriers which prevent the boundless expansion of circulation credit. It would lead to the crack-up boom and the breakdown of the whole monetary system.

The credit expansion boom is built on the sands of banknotes and deposits. It must collapse. If the credit expansion is not stopped in time, the boom turns into the crack-up boom; the flight into real values begins, and the whole monetary system founders. Continuous inflation (credit expansion) must finally end in the crack-up boom and the complete breakdown of the currency system.

We think Von Mises has it correct - he usually does. But I guess the difference between gold bugs and us is that we don't think we are anywhere near a complete breakdown of the currency system. We don't think inflation is the big problem.

Granted the relative asset bubble-ology can be considered inflation - but we don't buy the term "asset bubble" in and of itself is a reliable terminology. What portion of said "asset bubble" is driven by real reasons, ie real wealth creation, and what part is just speculative premium - hard to tell. All in the brain of the beholder we guess.

Anyway, we wonder why in the heck inflation is so low. If someone 10 years ago ever conceived of derivatives representing over seven times the level of total global gross domestic product, besides first telling them they are nuts, you would probably have said that much money in the system would push global inflation to, well, "crack-up boom" levels.

But here we are, August 2007, and with all the hand-ringing about inflation (ie common government variety measured inflation, not the conspiracy theory stuff which is much higher we know) one has to wonder why it's not much higher, given the vast pool of liquidity. Those deflationary pumps in the background must have been running 24 hours a day seven days a week to counter the 24-hours-a-day-seven-days-a-week central bank printing presses.

So if you are predicting your gold-buying on inflation, it may be time for a premise check. For if the credit problem morphs into hedge-fund contagion, we will see much in the way of credit default. And that's usually a deflationary process.

We think as this deflationary process naturally plays itself out, investors over time will realize gold is just another liquidity-driven asset, little different in the end than the liquidity-driven assets of the Nasdaq we used to call dot.com.

So, too much credit yes. But to dot.gold as a hiding place, we say no!

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Jack Crooks has actively traded in global equity, fixed income, commodity, and currency markets for more than 20 years. He is president of Black Swan Capital, a currency and commodities market advisory firm - BlackSwanTrading.com