Guest Post by Bill Bonner


The Return of the Worldwide Crack Up Boom

[A Daily Reckoning classique, originally broadcast on June 27, 2007…]

A kiss is still a kiss. A sigh is still a sigh…

And a bubble is still a bubble.

When a kiss is over, it’s over. When a bubble pops…well…that’s all she wrote! All kisses end – even the wettest “French” kisses. And so do all bubbles – even sloppy mega-bubbles of liquidity. This one will be no exception. But of course, it’s not the certainties that make life interesting… it’s the uncertainties – the known unknowns and the unknown unknowns, as Mr. Rumsfeld says. We are all born of woman and end up where all men born of women end up – dead. But that doesn’t mean we can’t have some fun between baptism and last rites.

You’ll remember we said that this worldwide financial bubble is both worldlier, and more financial than any in history.

…if you could really get rich by printing more currency, Zimbabweans would all be as rich as Midas…

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 don’t 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 weren’t 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:

“‘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 have never heard of a hedge fund… or even a derivative, for that matter. A world money system without gold? He probably couldn’t 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 could 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 worldwide Crack Up Boom.

No, dear reader, no one, anywhere, has ever seen a worldwide Crack Up Boom. We’re the first, ever. Pretty exciting, huh?

Bill Bonner
for The Daily Reckoning

12 thoughts on “CRACK UP BOOM”

  1. There are cracks a-showing alright but no boom to be heard.

    There was one snap-crackle-pop today, however, when all the old bank and government economic archives, data and records suddenly vanished in a flash of fire that killed 9 people today in Argentina.

    Duplicates? Not so you’d notice them. That’s one way of getting rid of incriminating evidence: Burn it up.

    That’s what we should do with the USA direct debt and unfunded Debt and all the 650 $trillion of derivatives out there.. Burn them up, shrug, let all the counter parties and banks go bust, light a fire in the remains to get rid of the garbage and start over with a gold backed currency..

    The upper 1% would rapidly expand to the upper 60%.

    The bottom 40% would have to line up at soup kitchens for a while, but what the hell, everyone will have to pay a price for starting over.


  2. I wonder what would happen if Germany suddenly went apeshit jumping up and down, seizing US assets, etc and demanding the immediate return of their gold. Which they have every right to do.

    It might indeed precipitate BOOM given the gold appears to be gone.

  3. “I wonder what would happen if Germany suddenly went apeshit jumping up and down, seizing US assets, etc and demanding the immediate return of their gold.”

    C’mon, you know what would happen… Germany would suddenly be a terrorist state, and we’d be treated to nightly news stories about their Nazi past and how horrible they were/are/will be. The whole propaganda regime is transparent to anyone paying attention.

  4. Not quite on topic, but I think it relates.

    I’ve been thinking about minimum wage lately (ever since the SOTU address delivered by POTUS last week). I understand both sides of the argument, raising wages, raises prices. (OT: Those who have not seen “In Time (2011)”, its worth a watch, tho I hate Justin Timberlake.)

    The fist job I ever had, was as a gas station cashier. At the time I worked there, they had 2 gas stations (the one I worked at, and another 8mi away), and a mechanics garage (which was also HQ, about a block away). While the .co existed, they ended up expanding to 2 more gas stations, one of which was over 40 mi away.

    My older bro had worked there for several years before I started. They were a “Phillips 76” when he started, they switched over to Citgo. I believe Venswella had just purchased that brand at the time they switched. Citgo demanded that employees earn $6/hr vs the minimum wage of $5.25 at the time. Despite the years my older brother had worked there prior, when I started with that $6/hr baseline, he did not earn that much more then I (he got a fairly massive raise when the switchover happened).

    Despite that higher then “usual” minimum wage, that ‘mom and pop’ chain still managed to expand.

    Now here’s where I start to ask questions. Had they had to pay $10.10, would that company still been able to expand? If they had not, would not it opened an opportunity for a different ‘mom and pop’ company to own those distant gas stations? Would that have not spread the wealth more evenly? (Despite the crisis we are in, I still believe in the american dream. But we need to dream for other americans and not just ourselves.)

    Should we not demand that employers that have thousands upon thousands of employees (like Walmart) pay at a much higher scale then companies who only have 3-5 workers? Taxpayers should not be subsidising Walmart. Our tax structure should not be setup to benefit corps on worldwide scale. Worldwide scale corps have proven time after time that they only just avoid paying their due taxes due to tax havens.

    Walmart uses the interstate & local road system for distribution. I know many like to attack Obama for saying “you didn’t build that”, but when you understand what he was trying to say, it really applies here. Walmart had nothing to do with the building of the nation’s roads. Yet they use and abuse those roads to send crap to their stores. The heavier the vheicle the more damage you do to the roads. Fuel taxes are supposed to maintain our roads. It’s pretty clear that out here in more “rural” areas then the major Metros, those road taxes are just not keeping up. Yet, its not the light Prius drivers that are skating on fuel taxes by being ultra-efficent that are the ones doing the damage. Its the Walmarts etc, who need to drive heavily loaded Semi-trucks down these roads that do the damage.

    I’ve also worked for ‘mom and pop’ stores that have been driven out of business by Walmart doing a conversion to a “super.” In ’05 I worked for a Bakery. Once it was announced that the in town Walmart was going super, the owners knew the writing was on the wall for the end of their bakery (also explains why I was denied my $0.05/hr raise after 1 year).

    Denied a 1% raise? I quit over that. I was only working 20h a week, so a grand total of $1/week before taxes. There was a tad more to it then that, but I garuntee the CPI raised over 1% that year.

    Let me ask this, how often have the crew around here gotten raises smaller then the goverment CPI figures? And did you put up with it?

  5. Whoa, no sooner do I type that, then does ZH cover it again:

    They fall to the same fallacy that they have been railing against for years. The fact that you can’t just rely on averages to tell the story now that the middle class has almost disappeared.

    When you look at wages, and yearly YoY wage increases, its the Wall Street bankers (et al) who’s wages have been going up lately. Most have been frozen in place, or declining (should they have to change jobs). It’s only when you average everyone together with those upper 1%ish jobs do you see something of a gain on the average.

    Most of us have not seen a real gain in years. We keep going backwards while our government minders tell us “forward!”

    I was -> <- close to buying some gold from the US.Gov back in early 2001. I'd built a computer, was looking for something else to do with my income. Never did that tho I did buy some silver at the time. what busts my balls is that one of the coins I bought was the "2001 White House Visitors Center coin", $10 of each coin was supposed to build a visitors center at the White House. 9/11 happened, was never built. That one got lost. I still own my silver set of the 2000 mint coins. My 2000 quarters are coin silver, marked with an S for San Fran. The Dime and .50 cent piece are also coin silver, with S markings to match. I've done the math, what I paid for that set back in early 2001, are double now.

    That was my first job. I've never come close to having that kind of "extra income" since to think about buying PMs.

    Too many in the financial analysis market are too focused on the averages, and not looking at how the high end is skewing the numbers.

  6. Further off topic… I grew up on Classic Rock, toyed with Rap and Punk, liked Industrial, eventually took to Techno. Throwing a decade on that, I’ve gotten more “flexible” in my music interests. One of my favs lately:

    The 1st song, was/is the theme song of “The Vikings”, was also featured on last week’s “The Originals.”

    Still, one of the best albums I’ve listened to this year, altho I’m a tad biased, considering I’m mostly scandinavian.

  7. QE was an act of desperation. Instead of letting the banking system create all the credit-money, the Fed stepped in to do so in a desperate attempt to keep an exponentially rising system….rising.

    People get rid of cash as fast as they can today.

    They buy stocks. They buy bonds. They buy land or homes or gold or silver or guns or ammo or heirloom seeds….

    …but the last thing they want is cash.

    The Fed has overseen the destruction of OUR money ON PURPOSE.

    What happens when money loses value day after day, week after week?
    1. Taxes soar on income and property. Politicians and their piglets SQUEAL in delight!
    2. What WOULD have been saved is taken to the Wall Street Casino, where commissions are laundered into campaign finances and reelection of ruling parties.
    3. The Merry-Go-Round economy speeds up as the velocity of money rises far above what people would PREFER, if they could simply save their money and its value was secure.

    A stable-money environment would mean ONLY good business prospects would acquire capital for expansion. A Fed-Monopoly-Money regime rewards shysters, con artists and crooked politicians.

    No wonder the USA is just a vast criminal enterprise now, and we’re all members.

  8. The dollar’s destruction is assured, but all logic suggests the following sequence:

    1. Derivatives of dollars fall first. This means the ocean of IOU-dollars will evaporate as the value of bonds plummets and their interest rates thus spike higher.

    2. Coincident with that, stock prices collapse.
    3. People and businesses, drowning in debt, sell everything but the kitchen sink in order to service their debt loads and stay out of bankruptcy.
    4. Prices thus for everything (including wages, which are nothing but the price of labor) plunge.

    Only once the credit portion of the money supply has collapsed to where what’s left is deemed supportable will the value of REMAINING dollars begin their path to zero. The form this takes seems likeliest to be CONGRESS seizing the Fed and attempting to reflate the Greater Depression’s economy with banknotes.


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