Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Time to take the RED Pill - 28th May 24
US Economy Slowing Slipping into Recession, But Not There Yet - 28th May 24
Gold vs. Silver – Very Important Medium-term Signal - 28th May 24
Is Gold Price Heading to $2,275 - 2,280? - 28th May 24
Stocks Bull Market Smoking Gun - 25th May 24
Congress Moves against Totalitarian Central Bank Digital Currency Schemes - 25th May 24
Government Tinkering With Prices Is Like Hiding All of the Street Signs - 25th May 24
Gold Mid Tier Mining Stocks Fundamentals - 25th May 24
Why US Interest Rates are a Nothing Burger - 24th May 24
Big Banks Are Pressuring The Fed To Losen Protection For Depositors - 24th May 24
Another Bank Failure: How to Tell if Your Bank is At Risk - 24th May 24
AI Stocks Portfolio and Tesla - 23rd May 24
All That Glitters Isn't Gold: Silver Has Outperformed Gold During This Gold Bull Run - 23rd May 24
Gold and Silver Expose Stock Market’s Phony Gains - 23rd May 24
S&P 500 Cyclical Relative Performance: Stocks Nearing Fully Valued - 23rd May 24
Nvidia NVDA Stock Earnings Rumble After Hours - 22nd May 24
Stock Market Trend Forecasts for 2024 and 2025 - 21st May 24
Silver Price Forecast: Trumpeting the Jubilee | Sovereign Debt Defaults - 21st May 24
Bitcoin Bull Market Bubble MANIA Rug Pulls 2024! - 19th May 24
Important Economic And Geopolitical Questions And Their Answers! - 19th May 24
Pakistan UN Ambassador Grows Some Balls Accuses Israel of Being Like Nazi Germany - 19th May 24
Could We See $27,000 Gold? - 19th May 24
Gold Mining Stocks Fundamentals - 19th May 24
The Gold and Silver Ship Will Set Sail! - 19th May 24
Micro Strategy Bubble Mania - 10th May 24
Biden's Bureau of Labor Statistics is Cooking Jobs Reports - 10th May 24
Bitcoin Price Swings Analysis - 9th May 24
Could Chinese Gold Be the Straw That Breaks the Dollar's Back? - 9th May 24
The Federal Reserve Is Broke! - 9th May 24
The Elliott Wave Crash Course - 9th May 24
Psychologically Prepared for Bitcoin Bull Market Bubble MANIA Rug Pull Corrections 2024 - 8th May 24
Why You Should Pay Attention to This Time-Tested Stock Market Indicator Now - 8th May 24
Copper: The India Factor - 8th May 24
Gold 2008 and 2022 All Over Again? Stocks, USDX - 8th May 24
Holocaust Survivor States Israel is Like Nazi Germany, The Fourth Reich - 8th May 24
Fourth Reich Invades Rafah Concentration Camp To Kill Palestinian Children - 8th May 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

The Power of The Theory of Money and Credit

Economics / Elliott Wave Theory Dec 10, 2009 - 08:01 AM GMT

By: Douglas_French


Best Financial Markets Analysis ArticleWith the great bursting of the real-estate bubble in 2008, the federal government is reforming and expanding its regulatory oversight in hopes of legislating away booms and busts. Recent decades have featured a series of speculative manias followed by harrowing financial busts, with central banks applying the same tonic — a flood of monetary stimulus — to salve the nation's financial wounds.

The repeated stimulus has only served to create new bubbles, continued malinvestment, and more financial pain. The Federal Reserve's easy-money response to the collapse of Long-Term Capital Management in 1998 led to the dot-com stock bubble and bust, which lead to even more monetary easing, which begat the housing bubble.

Back in August 2002, Keynesian economist Paul Krugman, who would win the Nobel Prize in economics six years later, editorialized in the New York Times:

This was a prewar-style recession, a morning after brought on by irrational exuberance. To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.

And create a housing bubble he did: by increasing the money supply nearly 30 percent in just the two years after Krugman wrote his column. But in the aftermath, government now seeks to legislate stability. "Over the past two decades, we have seen, time and again, cycles of precipitous booms and busts," US President Barack Obama told reporters as his administration rolled out new regulations to increase market stability. "In each case, millions of people have had their lives profoundly disrupted by developments in the financial system, most severely in our recent crisis."

The current chief economic advisor to the president of the United States, Lawrence Summers, speaks often of "creating a new foundation for a less-bubble-driven economy," with the idea that more regulation of the fractionalized banking system cartelized by a central bank will create such stability. Despite causing the worldwide economic instability, central banks around the world are set to expand their reach to supervise the markets that their interventions distort.

"There is a logic to the systemic regulator being the central bank as they control monetary policy and can prick an asset bubble," Barbara Ridpath, chief executive of the International Centre for Financial Regulation told Reuters.

Ms. Ridpath is talking about the same Federal Reserve that has diabolically crushed the value of the dollar since its inception in 1913 and especially since 1971 after the faintest of the remaining ties to gold were severed. And now with the latest crisis, has expanded in unprecedented fashion. "Well and truly," writes Grant's Interest Rate Observer, "the Fed isn't your father's central bank. The new, supersized Fed piles a huge superstructure of risky assets on a tiny sliver of capital."

So while governments and their friends are stumping for central banks to have more regulatory power, Grant's, using the work of Peter Stella at the International Monetary Fund, says "that if the Fed's own examiners were handed the Fed's own financials (unlabeled of course) and asked to render a regulatory decision, they would order the place shut down."

It is not lack of regulation that has caused the current depression — which is the economy desperately gasping to recover from multiple decades of Keynesian monetary stimulus and its disastrous effects. But politicians, bureaucrats, regulators, modern financial commentators, Nobel Prize–winning economists and central bankers have proven they lack any knowledge of what money is and what causes business cycles.

It was Ludwig von Mises, as Murray Rothbard wrote in Economic Depressions: Their Cause and Cure, who "developed hints of his solution to the vital problem of the business cycle in his monumental Theory of Money and Credit, published in 1912, and still, nearly 60 years later, the best book on the theory of money and banking."

But Mises's great work has been ignored by policy makers. The federal response to the 2008 meltdown is 12 times greater than that to the Great Depression of the 1930s, according to Grant's. And yet even this is not viewed as enough to save the economy.

The Financial Times reports the existence of a Federal Reserve staff memorandum that makes the case for a −5 percent federal funds rate. Meanwhile Japanese authorities are toying with the idea of outlawing cash in that country. Despite using every fiscal trick in the book and keeping interest rates at zero for a decade, that economy has been mired in a postbubble depression. So the thinking is that nominal interest rates of zero are too high and current "theory would suggest that nominal interest rates of −4 per cent might be closer to what is required to rescue the economy from another deflationary spiral," reported the Times Online.

These developments would not have surprised Mises. In discussing "The Freely Vacillating Currency," he wrote that the United States was "committed to an inflationary policy," and except for the "lively protests on the part of a few economists" the dollar would have been on its way to being "the German mark of 1923."

Indeed America's debts at this writing exceed those of Germany in 1923 — even relative to the size of the US economy, author and financial commentator Bill Bonner writes, in fact 100 times greater.

"Yet the future of the dollar is precarious," Mises presciently penned in The Theory of Money and Credit, "dependent on the vicissitudes of the continuing struggle between a small minority of economists on the one hand and hosts of ignorant demagogues and their 'unorthodox' allies on the other hand."

As this new edition is being produced, the ignorant demagogues and their powerful allies are having their way, with all of us paying the price, and with prospects for the future bleak. But it is the demand for the republication of Mises's great monetary work that gives us hope — hope that a new generation of economists will learn from this masterwork and take up the struggle for sound money and honest banking that will unleash capitalism's restorative magic.

Douglas French is president of the Mises Institute and author of Early Speculative Bubbles & Increases in the Money Supply. He received his masters degree in economics from the University of Nevada, Las Vegas, under Murray Rothbard with Professor Hans-Hermann Hoppe serving on his thesis committee. See his tribute to Murray Rothbard. Send him mail. See Doug French's article archives. Comment on the blog.

© 2005-2022 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in