Comments (17)

• William H. Stoddard

  That's an interesting and plausible analysis. But I do wonder about the claim that bubbles are the product of credit expansion. Certainly it's true of many, probably most bubbles. But is it always the case? For example, was the Dutch tulip mania not a bubble, and if if was, where was the basis in credit expansion? Or did it have some other source, and what was that source?

  Published: September 12, 2008 9:33 AM

• SooperDave

  ...likely to be as effective as the Niedermeyer character from the movie Animal House was in attempting to stop the John Belushi–triggered stampeding crowd at the end, pitifully screaming, "Remain calm, all is well."

  Niedermeyer? I think it was Chip Diller.

  Published: September 12, 2008 9:38 AM

• Matthew

  The article was excellent, though I will continue to quibble with the point that Bernanke has revved up the printing presses. The monetary base has been growing at historical norms, and for those who believe that interest rates are necessarily perfectly connected with growth in the money supply (or even the monetary base), see Frank Shostak's article at http://mises.org/daily/2934.

  Published: September 12, 2008 9:49 AM

• fundamentalist

  William,
  There is a real good article on this site about the Dutch tulip bubble that shows considerable increases in the money supply. I'm sorry I don't have the link, but I'm sure you can search for it. Nevertheless, Austrian econ theory demonstrates that even if credit expansion doesn't cause bubbles, bubbles can't happen without credit expansion.

  Published: September 12, 2008 10:07 AM

• Daniel

  I believe this is the article Fundamentalist mentioned:
  http://mises.org/journals/qjae/pdf/qjae9_1_1.pdf

  Published: September 12, 2008 10:55 AM

• Fred

  As to the cause of the tulip mania I refer you to

  Early Speculative Bubbles and Increases in the Supply of Money

  at http://mises.org/Books/bubbles.pdf
  

  Published: September 12, 2008 11:40 AM

• Jay

  I don't know squat about economics as pertains to education since I have a 9th grade school level system. What I do know, as someone who handles millions on dollars a year for clients, is that we are very in need of a newly based monetary system. For many years we have let the FDIC create money out of thin air and support government nationalization of our lives. Letting markets determine rates of exchange is precisely what capitalism is about, yet we let government backed speculative, overpaid, under-educated, financial analysis dig us into a hole.

  Published: September 12, 2008 12:06 PM

• Eric

  Once Nixon severed all physical links between gold and fed notes, did anyone besides a few Austrians see how this could only have but one outcome?

  What fleabag debtor government ever exercised restraint in the creation of money?. After all, it really is the perfect scheme for empire builders.

  1. The public is too stupid and ill educated to understand the monetary system. Most even believe that paper money is real wealth.

  2. The public sometimes reacts to tax increases. What they don't get upset about is the inflation tax since that's easily blamed on business.

  3. Fear trumps all who would oppose the road to serfdom. Welfare, Warfare, and Worthless money. Works for them.

  There's another sucker born in the US every second. More than enough to replenish any number of our youth that get killed overseas.

  It's difficult to see how the empire could exist without the ability to create money. I wonder what life is going to be like after this empire bubble bursts. Hopefully there'll still be a world to rebuild.

  
  

  Published: September 12, 2008 12:38 PM

• William H. Stoddard

  While blaming inflation on greedy businessmen is a fine old cliché of popular economic thought, ever popular with the left, there's an equally fine old cliché on the right: blaming it on greedy labor unions that force wages up. Having both those superficial analyses makes inflation an even better device for hidden taxation, because conservatives and liberals can be distracted into arguing over two different misleading explanations, neither of them focusing on the real cause of the problem.

  Published: September 12, 2008 4:44 PM

• James R

  Eric, you're making a grave error if you believe that the average American cannot understand the monetary system.

  As an example, take the Money: The Forbidden Isssue in American Politics chapter of Ron Paul's The Revolution: A Manifesto book. In that chapter, Ron Paul distills the collective wisdom of Austrian economics into 20 short pages. It is possibly one of the most succinct, well-written, understandable, and convincing explanations of the United States' economic and monetary woes. A 5th grader could easily read and understand it.

  The problem is that 5th graders (and the rest of the American public) simply don't know that they need to read it. After all, politicians aren't going to tell them—they know perfectly well that the end result will be that a furious American public wrests the printing press back from their grubby little fingers. The bankers aren't going to tell them, because they're next in line at the printing press. And the majority of the media today is too busy selling entertainment to actually bother to report news.

  Just as a forensic investigator uses black (ultraviolet) light at a crime scene to expose gory detail not visible to the naked eye, shining the light of Austrian economics on our monetary system reveals outrageous corruption (fractional reserve banking, fiat currency) that has been hiding in plain sight all along.

  For almost 150 years, the United States had sound currency and a sound economy. We can have it again. But we must work for it, and that means educating our fellow man instead of wallowing in pessimism.
  

  Published: September 12, 2008 6:35 PM

• yeah

  Yeah, it was Kevin Bacon/Chip Diller who said "Remain calm, all is well!"

  What I want to know is, what happens when upside down mortgages become widespread in the economy? They've bailed out the creditors—right?—so the bubble mortgages are all fixed no matter how low real estate eventually falls.

  I remember reading an article last year about the upside down car loan vehicles they had to keep pulling out of irrigation canals in Florida... What will the housing equivalent will be?

  And another thing—when? That's what I want to know. When are we going to see seventy thousand dollar condos, like in the early 90's when I was in high school. Because I'm not seeing them yet. When I started my career those days were long gone.

  Published: September 12, 2008 6:46 PM

• Fabio Papa

  Amazing article! Spot on. I disagree on only one thing (how predictable!). We do not need to go to a commodity based currency. The real solution as F. A. Hayek suggested is the denationalisation of money (read his book by that name). In short, it says that the gub'ment should not be in the business of printing money. (Sure, the fed does it in the US, but it amounts to the same thing). That should be left to free enterprise. Because of competition, businesses (bank-type institutions) each having their own currency, would be forced to regulate their currency in such a way to avoid inflation and deflation. People would gravitate toward those two-or-three currencies that were the most stable.

  It is in the government's best interest to print too much money. It would be in the best interest of the 'currency providers' to print just exactly the right amount. No more recessions, no more depressions.

  This system would have all the benefits a commodities-based system, without actually having to go that route. Yes, its a hard sell, but I think the depression that is (surely) coming will be a good "motivator." That, combined with education on the subject (i.e. talking about it) will produce a grass-roots movement that no government can stop.

  Published: September 12, 2008 11:04 PM

• Jeremy

  Fabio - If there was truly a free market in money, with no government intervention of any type, 100% commodity based monies would be the only ones that survived.

  Jesus Huerta de Soto makes a good case for this in Money, Bank Credit, and Economic cycles, available at mises.org if you do a google search for 'desoto.pdf'

  Published: September 12, 2008 11:53 PM

• Paul Marks

  The article is a mixture of two things:

  A correct attack on the credit/money bubble financial system.

  And an attack on an "American Empire".

  As has often been show military spending (let alone an "empire") need have nothing whatever to do with a credit/money bubble.

  Indeed military spending in the United States is far less today than government spending on the ever expanding health, education and welfare programs.

  Although, of course, a credit money expansion need not have anything to do with an expansion of government spending (on anything).

  For example the credit money expansion of the late 1920's happened in a period when Federal government was a tiny fraction of the economy and was actually in decline.

  The central problem is the belief that bank lending need not be 100% financed by real savings - that "monetary policy" can provide an alternative method of backing bank lending.

  That is the problem.

  All this stuff about an "American Empire" (and so on) misses the point.

  You could abolish the American military today, and the basic problem (lending not being 100% from real savings and government/the Fed trying to save financial industry enterprises from going bust) would remain.

  Published: September 13, 2008 5:10 AM

• Kevin

  To Paul Marks re: empire. To me, ending the empire implies an end not only to military, but also to domestic despotism which includes government's monetary chicanery.

  If anyone can recommend one to me, I'd be interested in reading/viewing an analysis of the US empire in terms of boom/bust trends shared with former empires. Specifically as it related to good-will extended or what I'll call figurative credit. For instance, are there correlations between monetary expansion literally, and figurative credit given by one nation's government to another? The US gov't is extended this figurative credit every time a nation accepts a demand that works against their net interests or whenever a military base is installed/maintained against the will of the local population. This credit began growing post-WW2 and has spiked post-Bretton Woods and especially since the collapse of the USSR. Post-WW2 expansion could be seen as more natural given that our role was generally considered a good deed and it happened to coincide with the beginning of major global growth (i.e. similar to a monetary base that grows to keep pace with economic growth).

  The latter, more recent, periods of figurative credit growth have been wholly unnatural and were thus a bubble. The signs of that bubble's pop is evident in Russia's recent assertion of power as well as continued dissatisfaction with the presence of American bases in some countries, even if their governments have not capitulated on the population's behalf.

  Let us hope that as this bubble deflates (or pops outright), Americans get behind the idea of peaceful, global commerce rather than a rally towards another world war.

  Published: September 13, 2008 10:21 AM

• bill wald

  The bubble is the large middle class in the western world. Prior to WW1 80% of all western people were working poor, and half lived in real poverty. The trickle down of industrialization occurred between the wars but the big growth of the middle class started with the Marshall Plan, the G.I. Bill, and the Freeway system.

  The money supply couldn't keep up with the economic activity. Before WW2 most blue collar workers had no legal access to credit except a mortgage with a local bank that required a 20% cash down payment.

  The credit card (Diner's Club) was invented in 1949, then came American Express (?). The system began to bog down because of the gold system. The middle class exploded when the world went off the gold standard.

  The chickens have come home and the world is reverting to the historical norm of 80% working poor but confidence game is kept going by grade/education inflation. Another 10 years and half the poor people will have at least 2 years of what passes for college. College grads can't be poor people, can we? We were promised . . . .

  
  

  Published: September 13, 2008 11:09 AM

• Juan

  "The trickle down of industrialization occurred between the wars but the big growth of the middle class started with the Marshall Plan, the G.I. Bill, and the Freeway system."

  Nonsense.

  "The chickens have come home and the world is reverting to the historical norm of 80% working poor"

  More nonsense.
  

  Published: September 13, 2008 3:25 PM