The boom in real estate and stocks continues much longer and goes much
further than a rational person would expect because whenever the boom
wanes, aditional credit is injected by the banks. However as prices
get higher it takes ever more credit to continue the boom and it's
vulnerability becomes more and more obvious. The Fed has stated
repeatedly it will meet any serious threat of deflation with more
money and credit. This is where the real kicker comes in and I have
never read it so clearly before. Eventually the public becomes
convinced that no matter what there will be no deflation and no end to
inflation. At that point the public realizes that holding cash is
always a losing proposition and flees to real assets...
The following is from a recent article by Robert Kirby:
Murray Rothbard, the brilliant student of Mises, explained the genesis
of the boom. "Why do booms, historically, continue for several years?
The answer is that as the boom begins to peter out from an injection
of credit expansion, the banks inject a further dose. In short, the
only way to avert the onset of the depression is to continue inflating
money and credit. For only continual doses of new money on the credit
market will keep the boom going and the new stages profitable.
Furthermore, only ever increasing doses can step up the boom, can
lower interest rates further, and expand the production structure, for
as the prices rise, more and more money will be needed to perform the
same amount of work. Once the credit expansion stops, the market
ratios are re-established, and the seemingly glorious new investments
turn out to be malinvestments, built on a foundation of sand.
"It is clear that prolonging the boom by ever larger doses of credit
expansion will have only one result: to make the inevitably ensuing
depression longer and more gruelling."
Mises continues, "It is true, the banks (or the governments) are in a
position to prolong the boom for some time by injecting progressively
increasing quantities of bank notes and deposits into the market. But
the artificially created prosperity cannot last forever. Sooner or
later it must come to an end. There are only two alternatives: 1. The
banks do not stop and go on expanding credit at a progressively
accelerated pace. But the spell of inflation breaks once the public
has the conviction that the banks and the authorities are resolved not
to stop. If no limit of the inflation and, consequently, of the
general rise of prices can be foreseen, a general flight into real
values starts. Everybody becomes aware of the fact that to hold cash
and deposit balances with the banks involves loss, and that he does
better to buy and store goods. Everybody is anxious to get rid of
money and to exchange it for some other commodities, no matter how
much he must pay for them. Prices are running away, and the purchasing
power of the monetary unit drops to zero. The national currency system
cracks up. 2. As a rule, the banks do not let things go so far. They
stop sooner by restricting credit. Then the day of reckoning dawns.
The illusions disappear, people begin again to see reality as it is.
The blunders committed in the boom become visible."
The fact is that IT IS TOO LATE FOR OPTION 2.
We have been told in no uncertain terms by Federal Reserve Governors
that there will be no deflation. Whatever funds are needed to avoid
deflation will be made available. The electronic printing press will
be resorted to.
That simply means that the US Dollar is doomed to extinction.
The bell is tolling for the US Dollar but the bell is also tolling for
us. We need to make some important investment decisions in the months
and years ahead.
Gold is the only commodity that has always been produced for
ACCUMULATION and not for CONSUMPTION. Silver used to be in the same
category, but has recently become more of an industrial metal.
The reason that gold has been accumulated over the millennia is
because IT RETAINS ITS PURCHASING POWER OVER TIME. It is a haven where
wealth can be stored during times when existing Government money is
being rapidly debased and losing its purchasing power exactly the
situation we are facing over the next few years.
Currently the price of gold is at bargain basement levels. Not only
has the price been manipulated downwards, but investors have to
re-learn the benefits of holding gold. This they will do rapidly as
the events relating to the US Dollar become obvious to everyone. We
need to acquire some additional gold holdings while the bargain prices
remain. I suspect that, like all bargains, this situation will not
last much longer.