By Bill Bonner
When a kiss is over, its over. When a bubble
pops...well thats all she wrote!
All kisses end, even the wettest French kisses. So do
all bubbles. Even sloppy mega-bubbles of liquidity.
This one will be no exception. But of course, its not
the certainties that make life interesting ¦ but the
uncertainties -- the known unknowns and the unknown
unknowns, as Mr. Rumsfeld says. We are all are born of
woman and end up where all men born of women end up as
dead. But that doesnt mean we cant have some fun
between baptism and last rites.
You'll remember we said that this worldwide financial
bubble is both more worldly and more financial than any
in history.
And, for the moment, it is very much alive. So much
alive that the media can hardly keep up with it. Forbes
magazine, for example, tries to estimate the wealth of
the world's richest people. But the rich dont typically
give out their balance sheets, telephone numbers and
home addresses. So, there's a fair amount of guesswork
in the calculations.
But when it came to guesstimating the net worth of
Stephen Schwarzman, founder of Blackstone, the Forbes
crew wandered off into fiction. They put his wealth at
about $2 billion. Recent filings in connection with the
new Blackstone IPO show he earned that much in a single
year!
In this phase of the bubble, it is as if your neighbors
were throwing a wild party and you werent invited.
You detest them, envy them and want to join them, all at
once. A very small part of the population is having a
ball; everyone else is getting restless and wondering
when the noise will stop.
We wish we knew. And we've given up guessing.
Meanwhile, the experts, commentarists, kibitzers and
analysts are saying that there is a whole new phase of
the giant bubble about to unfold; things could get a
whole lot crazier. Even many of our respected colleagues
are pointing to a text by the great Austrian economist,
Ludwig von Mises, for a clue. What we have here, they
say, is what Mises described as a "Crack-Up Boom".
Before we go on, readers should be aware that the
Austrian school of economics is probably the best
theory about the way the world works. Like the Daily
Reckoning, it is suspicious of efforts to control the
natural workings of an economy, in general and
suspicious of central banking, in particular. The fact
that it was a one-time Austrian, Alan Greenspan, who
became the most celebrated central banker in history
only increases our suspicions. He was able to master
central banking, we imagine, because he understood what
it really is a swindle.
What is a "Crack-Up Boom?" Von Mises explains (with
thanks to Ty Andros for reminding us):
This first stage of the inflationary process may last
for many years. While it lasts, the prices of many goods
and services are not yet adjusted to the altered money
relation. There are still people in the country who have
not yet become aware of the fact that they are
confronted with a price revolution which will finally
result in a considerable rise of all prices, although
the extent of this rise will not be the same in the
various commodities and services. These people still
believe that prices one day will drop. Waiting for this
day, they restrict their purchases and concomitantly
increase their cash holdings. As long as such ideas are
still held by public opinion, it is not yet too late for
the government to abandon its inflationary policy.
But then finally the masses wake up. They become
suddenly aware of the fact that inflation is a
deliberate policy and will go on endlessly. A breakdown
occurs. The crack-up boom appears. Everybody is anxious
to swap his money against "real" goods, no matter
whether he needs them or not, no matter how much money
he has to pay for them. Within a very short time, within
a few weeks or even days, the things which were used as
money are no longer used as media of exchange. They
become scrap paper. Nobody wants to give away anything
against them.
It was this that happened with the Continental currency
in America in 1781, with the French mandats territoriaux
in 1796, and with the German mark in 1923. It will
happen again whenever the same conditions appear. If a
thing has to be used as a medium of exchange, public
opinion must not believe that the quantity of this thing
will increase beyond all bounds. Inflation is a policy
that cannot last. .
Mises is describing the lunatic phases of a classic
inflationary cycle.
At first, no one can tell the difference between a real
dollar – one that is earned, saved, invested or spent –
and one that just came off the printing presses. They
figure that the new dollar is as good as the old one.
And then, prices rise…and people don’t know what to make
of it. Later, they begin to catch on…and all Hell
breaks loose.
You see, if you could really get rich by printing more
currency, Zimbabweans would all be as rich as Midas,
since the Mugabe government runs the presses night and
day.
Von Mises died in 1973 “ long before this boom really got
going -- let alone cracked up. He may never heard of a
hedge fund or even a derivative, for that matter. A
world money system without gold? He probably couldnt
have imagined it. People spending millions of dollars
for a Warhol? Twenty million for a house in Mayfair?
Chinese stocks at 40 times earnings? He would have
chuckled in disbelief. He understood how national
currency bubbles expand and how they pop, but he
probably never would have imagined how insane things can
get when you have a whole world monetary system in
bubble mode.
He'd have recognized the beginning of this bubble and
he'd have recognized the end, but the middle or the
beginning of the end -- that would have dumbfounded him.
During his lifetime he saw a Crack Up Boom in Germany in
the 20s and a few more here... but he never saw a
world-wide Crack Up Boom.
No, dear reader, no one, anywhere, has ever seen a
worldwide CrackUp Boom.
We're the first, ever. Pretty exciting, Uh ?
