Credit expansion, wrote the great Austrian economist Ludwig von Mises, is not a nostrum to make people happy. “The boom it engenders must inevitably lead to a debacle and unhappiness.”
That seems a pretty accurate summary of the current situation for the western economies: a debacle, and unhappiness. Von Mises also wrote that “The final outcome of the credit expansion is general impoverishment.”
And, “What is needed for a sound expansion of production is additional capital goods, not money or fiduciary media. The credit boom is built on the sands of banknotes and deposits. It must collapse.”
It seems to us that we may be fast approaching the tail end of a 40-year experiment in money. When President Nixon severed the link between gold and the US dollar in 1971, he opened the floodgates for a credit expansion to dwarf all credit expansions.
The arteries of the global monetary system are now clogged with debt. Since it simply cannot all be serviced or repaid, it won’t be. But our politicians are nothing if not committed to sticking subsequent generations with the bill.
Moreover, the conventional financial media continue to keep central bankers on their pedestal; having fawned over the appointment of Mark Carney as the new Bank of England head, the Financial Times has just declared ECB president Mario Draghi their Person of the Year, for having ‚ “turned the tide in the three-year-old eurozone crisis.”
Such thinking is astounding for the rest of us who know the Emperor’s new clothes when we see them.
Fund managers Lee Quaintance and Paul Brodsky of QB Asset Management have long written with great articulacy about the nature of the problem. Here is an extract from their most recent commentary, “It’s Time”:
“Gold bugs can’t understand how the public can be so unaware, how highly intelligent policy makers can be so immoral, and how the mainstream media can be so incurious. We can’t understand why more men and women in the investment business haven’t joined some of the more successful ones that have come around to precious metals . . .”
“. . . Boundless inflation will become apparent to the public either when: 1) banks begin using their new reserves to try to issue more credit; 2) mysterious “animal spirits” (i.e., when leverageable balance sheets meet common greed) spontaneously combust, or; 3) next Tuesday for no apparent reason.”
“Why all the fuss about what the catalyst will be or when it might occur. . .? Most bonds with any sort of duration and stocks held mostly by levered entities. . . are likely to be losers in real terms. Alternatively, precious metals (physical held above and below ground) and natural resources with inelastic demand properties are significantly under-owned.”
QB’s team goes on to calculate a ‘shadow gold price’ using the Bretton Woods monetary calculation for valuing the fixed exchange rate linking gold to the US dollar: Base Money divided by US official gold holdings… indicating a shadow gold price of over $10,000 today.
As QB take pains to point out, this is not necessarily a target price for gold. But it does suggest that any talk of being in a bubble is absolute nonsense when gold is also a) almost completely unheld by institutional asset managers, and b) trading at around $1700 (as opposed, say, to $10,000).
(Note: the graph above incorporates the most recent Fed announcement of debt monetization levels of $85 billion per month through to June 2015).
We honestly wanted to round off the year with a more uplifting summary of the investment scene, but a grim combination of central bank insanity and financial media buffoonery would make any such summary an offence against reason and common decency.
Although we would naturally wish for a more benign investment climate, we must play the hand we’re dealt– a world gravely impacted by the monetary and financial distortions perpetrated by doltish control-engineer goons.
And so we stick to a disciplined investment ethos. For while a pessimist complains about the wind, and an optimist expects the wind to change, the realist adjusts the sails.