Describing what he called the “crack-up boom,” Ludwig von Mises, the great Austrian economist, said:
The boom cannot continue indefinitely. There are two alternatives. Either the banks continue the credit expansion without restriction and thus cause constantly mounting price increases and an ever-growing orgy of speculation — which, as in all other cases of unlimited inflation, ends in a “crack-up boom” and in a collapse of the money and credit system.
Or the banks stop before this point is reached, voluntarily renounce further credit expansion, and thus bring about the crisis. The depression follows in both instances. (emphasis added)
Although it would be the wiser policy, there is no evidence that the world’s central bankers have the wisdom, either individually or collectively, to select the second alternative. More specifically, they lack “the courage to act” (as Ben Bernanke’s recent, self-congratulatory memoir was so ironically titled); they and their political, big finance and big business cronies are afraid to swallow the “d-pill,” the economic medicine named “depression.”
A good, old-fashioned, pre-1929 depression (like the short-lived, eleven-month depression in 1920–1921, before the days of “modern” central banking and “enlightened” Keynesian intervention “cures”) is the only tonic that can clear out the malinvestment built up since the beginning of the fiat money era. That era began in August of 1971. That is when Richard Nixon, informed that U.S. gold reserves were precipitously declining as a result of President Johnson’s March 1968 action to reduce the gold reserve ratio from 25 percent to zero, “temporarily” suspended the convertibility of the U.S. Dollar into gold. That “temporary” measure has been in effect for forty-five years.
Finally freed from the constraints of what they could not print (i.e., gold), central bankers and their cronies in government, finance and big business were given a license to debase all formerly hard currencies. (Such currencies were “hard”, as they were linked, via the Bretton Woods arrangement, to the dollar, which was backed by gold.) And debase they did: they replaced real investment capital (i.e. actual savings) with cheap, invented credit; they replaced market-derived price (of money) discovery, i.e., market-derived interest rates, with central-bank-proclaimed interest rates.
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The actions of central bankers to suppress real price discovery (i.e., market-derived interest rates) now has led to nearly $12 trillion of sovereign debt having been issued with interest rates below zero (“NIRP,” or “negative interest rate policy”). That means that more than one third of all sovereign debt worldwide now carries negative interest rates.
That nearly $12 trillion total includes $3.2 trillion of short-term sovereign debt and $8.5 trillion of long-term sovereign debt. The total NIRP debt is up $1.3 trillion from the end of May. Even more astounding is that the total amount of negative-yielding debt with maturities of seven years or longer has ballooned to $2.6 trillion. That is nearly double just since April of this year. In fact, all of the debt issued by the Swiss government — every borrowed franc, even Swiss fifty-year bonds — now carries a negative yield. All of the debt issued by the Japanese government (JGBs) with maturities up to twenty years now carries a negative yield.
Imagine lending money to anyone, even the Swiss government, for fifty years, ultimately getting back less than you loaned … and paying for the privilege! What such an investor has to believe, in order to make such a loan, is that inflation over the next fifty years will be substantially negative (i.e., a great, and long-lasting deflation), with the result that the purchasing power of the Swissie will increase substantially over the next fifty years. But every major currency on the planet, including the US dollar, the British pound, the Japanese yen and the Euro/DM, has lost purchasing power over the last forty-five years (since the end of Bretton Woods).
Without some form of scarce commodity backing (e.g., precious metals) for currencies, why would anyone, particularly sovereign bond investors, believe that currency units, which can be conjured at will from thin air (not a scarce commodity) by desperate governments, will be worth more, not less, over the next fifty years? But believe it they do, proving that, at least with respect to high finance (better named low-IQ finance?), you can fool all of the people (the investment public) all of the time.
NIRP simply never could exist in a real-money world, where credit, like all commodities, is scarce and must be rationed by the market. But European Central Bank chief Mario Draghi, with the implicit and explicit assent of all the world’s central bankers and the urging of their cronies in government, finance and big business who get “first crack” at the conjured money, has reiterated over and over that there would be “no limits” to what he and the ECB might do with respect to printing money and further reducing interest rates. (No wonder the workaday citizens of Great Britain voted overwhelmingly for Leave.)