Mises on this current situation (IMO). The reason I'm saying the Fed must act, is that we are are now entering the crack-up boom phase, after which it will truly be too late. The second maladjustment aspect he speaks of is already too late.:
He warned, "The credit expansion boom is built on the sands of banknotes and deposits. It must collapse." He stated that, "If the credit expansion is not stopped in time, THE BOOM TURNS INTO THE CRACK-UP BOOM; THE FLIGHT INTO REAL VALUES BEGIN, 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."
Mises further claimed that, "Expansion (of credit) squanders scarce factors of production by malinvestment and overconsumption." Malinvestment means building shopping centers rather than factories. Overconsumption means a borrowing and spending boom by consumers that depletes savings and reduces capital investment.
Mises was aware that a credit excess could spill over into stock and bond speculation. But even he would be surprised at today's unprecedented level of credit-induced speculation. He would be depressed by the astonishing levels of public and private debt, government borrowing, central bank market interventions, trade deficits, non-bank credit growth, money velocity, illiquidity, overconsumption and foreign indebtedness. The magnitude of these excesses seemingly without penalties would appear to be rewriting the laws of economics as expressed by Mises. Trade deficits fail to harm the dollar. The stock market outperforms the economy. Capital gets used up by government and consumers at the expense of investment. Yet business rolls along. Savings are depleted but interest rates stay low. The boom seems unending, the bust postponed indefinitely. Can these phenomenon persist?
Absolutely not says Mises. "Credit expansion is not a nostrum to make people happy. The boom it engenders must inevitably lead to a debacle and unhappiness." He warns that, "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...(our task)...to depict in detail the calamities of panicky days and weeks and to dwell upon their sometimes grotesque aspects." |
