In an era marked by expansive credit and monetary policy, we find a precarious balance within the global economy. As government planners attempt to buoy economic activity with easy credit, financial markets increasingly resemble a fragile structure built on shifting sands of debt. This tumultuous environment prompts us to seek stability, although true foundations seem elusive.
At Economic Prism, we yearn for the reassurance of a firm footing, recognizing that even a painful stubbed toe could signify a grounding in reality—a reminder that economic consequences still hold sway. To frame our discussion today, let’s reflect on a poignant observation from economist Ludwig von Mises.
“Credit expansion can generate a fleeting boom. However, this illusion of prosperity inevitably gives way to a downturn,” Mises observed in the 20th century. But what becomes of a credit expansion when it is perpetuated by yet more credit? Is repayment ever truly on the horizon? Can an unending supply of credit stave off economic downturns indefinitely?
“If credit expansion is not curtailed in a timely manner,” Mises warned, “the initial boom transforms into a crack-up boom; the rush for tangible assets begins, leading to a collapse of the entire monetary system.”
Losing Its Magic
Indeed, global central bankers seem fervently in pursuit of a crack-up boom. Programs aimed at stimulating economic activity, characterized by low-interest financing and quantitative easing, are emerging from major economies such as China, Japan, and the European Union. The Federal Reserve has maintained the federal funds rate at nearly zero for six continuous years.
Despite such efforts, the economy lurches forward, struggling to find solid ground. The credit-fueled growth of the early 2000s culminated in the 2008 financial crisis, and now, the extensive credit expansion that has supported economies worldwide is showing signs of diminishing returns.
Increasing amounts of credit are essential to sustain GDP growth; without it, an economic downturn looms. Ironically, the stability of our debt framework relies on additional credit and rising asset prices, both of which inherently contribute to greater instability. Central bankers, even amidst substantial monetary inflation, express concern over potential deflation rather than inflation.
Past credit expansions have inflated prices, yet the desire to reduce them persists. Central bankers aim to counteract this trend. As Mario Draghi, President of the European Central Bank, stated, “We will do what we must to raise inflation and inflation expectations as swiftly as possible, in line with our mandate for price stability.”
Central Bankers Unite
At this critical juncture, central bankers from leading economies have joined forces with a unified goal: to stimulate inflation. They seek to increase the prices of goods and services by devaluing currency, encouraging spending over saving among consumers.
The masses have been led to believe that central bankers can orchestrate the economy akin to NASA’s precision in the Apollo 11 moon landing. However, the reality is that these monetary policy influencers are operating in an uncharted territory, continually expanding credit with the hope of triggering economic growth.
This approach is not new; it mirrors strategies used centuries ago by some of the most influential leaders in Europe. France’s eminent statesman, Mirabeau, succumbed to the allure of the printing press. Once the transition to fiat currency commenced, the country found itself on an irreversible path.
“Despite the proliferation of paper currency, commercial activity became increasingly sporadic,” remarked Andrew Dixon White in his notable work, *Fiat Money Inflation in France*. “Initial boosts in production and manufacturing activity gradually led to market saturation, causing demand to wane.”
Each economic downturn prompted further issuance of paper currency, ultimately eroding public confidence in the currency. Between 1790 and 1795, the price of flour surged by an astounding 11,250 percent, with other prices reflecting similar increases. By 1797, France’s currency had plummeted in value, plunging the economy into chaos.
“The eventual consequence of credit expansion is widespread impoverishment,” Mises cautioned.
The impending, drastic erosion of wealth orchestrated by central bankers portends a scale that history has yet to witness. The timeline for this collapse is uncertain, whether it materializes next year or five years from now. However, it is inevitable that they will overreach; the crack-up boom will emerge, leaving indelible effects on a global scale.
Sincerely,
MN Gordon
for Economic Prism
