Western Economies in Trouble, Asia is where the Money is

“There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved.”

– Ludwig von Mises

Read it and weep.

Von Mises was saying that there is no escape. There is no magic elixir… no panacea… no free lunch. When you borrow money, you have to pay it back. End of story.

The borrowing phase – a credit expansion – is pleasant enough. You feel rich…and smart. You have money to spend. Your assets go up in price. Your stock rises. You even think you’ve discovered some miracle formula – some way to get rich without working or saving. It’s as simple as buying a house. Then, it goes up in price. So buy another one…or two or three of them.

And then, alas, along comes the day when you have to pay back the money you’ve borrowed – the credit contraction. Now, you don’t feel so smart. Because, when everyone is trying to pay down debt, no one has money to bid up asset prices. Your house actually falls in price…and you desperately try to get rid of those extra houses, hoping to get back what you have in them.

Yesterday, the Dow fell 277 points. It is a bear market, dear reader. That’s what stock markets do in a credit contraction. Assets, generally, become cheaper.

“Home sales dive” in South California, comes another report. Sales are off 42% from a year ago. Prices are down more than 10%. And it won’t end there…

Even the slicks on Wall Street are having trouble. The expansion stage of the credit cycle was pure molasses to them. But the contraction stage is bitter medicine. Today’s International Herald Tribune tells us that Citigroup (NYSE:C) has turned to the moneybags in Singapore for a $22 billion bailout. Over at Merrill Lynch (NYSE:MER), they already hit up the Singaporeans for $6.2 billion in December. They’re writing down some $8.4 billion in subprime debt, creating the biggest loss in the firm’s 93-year history. This month, they turned to Korea and Japan to fill a $6.6 billion hole.

Why go to Asia to raise money? Because that’s where the money is.

“Asians have trillions in dollar reserves,” Lord Rees Mogg explained over lunch yesterday. “They probably think they have enough of our money. Over the next few years, it looks as though the Western currencies…and Western economies…are going to be in trouble.”

As reported here yesterday, retail sector is showing signs of slower consumer buying. Even the luxury outlets – such as Tiffany and Ralph Lauren – have seen their stocks cut 20% to 50%.

What can be done about it?

As von Mises describes, above, the only alternatives are to stop the process of credit creation voluntarily…or to continue to a “final and total catastrophe of the currency system.”

In the late ’70s, the Fed chose to abandon further credit creation. It was obvious that more money and credit was making consumer prices rise without causing genuine economic growth.

Now, three decades later, consumer inflation rates are still tolerable. It’s the threat of recession that seems insupportable. And so, between sooner or later, the choice is clearly – later. Better to try to fight the little devil in front of us, they say; let someone else worry about that big devil Beelzebub.

Word on the street is that the Fed may act before its regularly-scheduled meeting later this month…and it may cut rates by a whopping 0.75%. Whether or not it will actually be able to stop the correction now in progress, we don’t know. But our Trade of the Decade just looks better and better. Buy gold on dips; sell stocks on rallies.

The feds can control only the quantity of paper money or the quality of it. If they lean down hard on the quantity side, pushing trillions of dollars worth of new cash and credit into the system in order to try to avoid a serious recession, the quality of the money will suffer. The Asians will be more eager than ever to dump the dollar; the greenback will fall…and gold will soar.

If, in the unlikely event that they were to voluntarily give up on credit expansion, reducing the quantity of dollars in order to protect the quality, they may be able to stop gold’s rise. In that case, a sharp recession would mean falling share prices. This is the trick that Paul Volcker pulled off in the early ’80s. The price of gold collapsed…and stocks took off. But not before he had pushed up short-term lending rates to 20%…and drove the economy into its worst recession since the ’30s…and knocked down stocks so low you could buy the entire Dow for the price of one ounce of gold.

No matter what happens, we’ve got a long way to go before we reach that kind of turnaround point. And most likely – given the situation – it won’t come at all until we’ve been through Von Mises’ “crack-up” – the final and total catastrophe of the currency system.


Bill Bonner
for Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

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2 Comments on "Western Economies in Trouble, Asia is where the Money is"

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André Levy
Is gold really the trade of the decade? Or is it buying TIPS? The economy is pointing down? The Fed cuts rates; bonds edge up. More money is fueled into the economy; more inflation. TIPS edge even higher! Greenberg (TheStreet) says TIPS are better than gold: http://www.thestreet.com/s/an-inflation-play-as-good-as–or-better-than–gold/newsanalysis/assetmanagers/10381369.html Others say TIPS are for the gullible: http://www.themoneyblogs.com/TheMessThatGreenspanMade/my.blog/inflation-stocks-tips-and-gold.html What a silly polemic! Gold and TIPS protect against different things. The first protects against asset inflation; the other against consumer goods inflation. What’s the difference? Assets are means of production. Their value is in producing items of consumption, for the present… and for the… Read more »

i would like to add that von mises said ‘crack-up booms’ never quite repeat in timing and scope, but still are inevitable. and only get delayed and made worse by government action.

the only alternative is a labour based economy, which would have it’s own picadillos.

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