GDP and Inflation

Money Matters, Monumentally - Part eight: Everything is awesome, until it isn’t

Wednesday October 10, 2018 Konrad Hurren

There has been ample ink spilled lamenting and praising the statistics on business confidence; as well as much attention given to the fact that October (ish) marks a 10 year anniversary since the Global Financial Crisis (aka the Great Recession). It’s interesting that so much attention is given to these phenomena - as if crises are outlier events, while the normal state of the world is the boom phase.

 

They’re not, and it’s not.

 

In the words of De Soto (2006)[1] we have a “manic depressive” economy – everything is awesome, until it isn’t, then it is again, then it isn’t. Says De Soto:

 

“Indeed businessmen, journalists, politicians, union members, and economic agents in general have come to consider the artificial expansionary phase characteristic of a boom to be the normal stage of prosperity, which should be sought and maintained in any way possible.”

 

Throughout this Money Matters series here we’ve briefly covered how money works, and why it matters. Our sixth article covered thephenomenon of malinvestment which is essentially systematic mistakes in investment decisions by entrepreneurs, caused by the monetary inflation falsifying their accounting calculations.

 

The clearing out (selling) of these malinvestments constitutes the “bust” of the boom and bust we call the “business cycle”. Clearly then, the boom phase is driven by “cheap money” (inflation through credit expansion under Fractional Reserve Banking). And since the bust only came about because of the boom then the bust must also be caused by this inflation. And so it follows that the boom and bust are endogenous[2] to a system of “funny money” - where credit expansion through Fractional Reserve Banking is legitimised. Where we have “funny money” so too will we have recurrent business cycles.

 

This boom and bust cycle has another effect, which we have so far left undescribed. But which manifests itself in some very observable phenomena. This effect is caused by the repeated violent swings of the business cycle wearing down the prudent entrepreneurial spirit of the people. To quote De Soto (2006) again:

 

“Moreover the new money created via the expansionary granting of loans is used to finance all sorts of speculative operations, takeover bids and financial and trade wars in which the culture of short-sighted speculation prevails. In other words the misconceived idea that it is possible and desirable to accumulate astronomical profits with astonishing ease and swiftness spreads.”[3]

 

We saw precisely this phenomena in the years leading up to 2008 – where people were encouraged to take out the largest loan they could on any house they could find.[4] So great was this speculative spirit that a number of television series were produced following the exploits of “house flippers”.

 

We also saw this play out (albeit MUCH faster) reaching a peak in November and December 2017 in the crypto-asset market. Message boards all across the internet positively hummed with activity: “Guys! Get in on (suchandsuch coin/project) – to the moon! Lambos! Lambos on the moon!” Any and all projects were funded until the market capitalisation of all crypto-assets was just over $800 billion USD (as of writing it is now $215 billion).

 

We continue to see this to this day. With countless mergers and acquisition bids - as well as share buy-backs. Not to mention constant propaganda about how fast house prices are increasing - with calls for some interesting “solutions”. In short, there is a bubble in everything, and it is probably too big to fail.

 

To reiterate – the speculative behaviour, the artificial boom, as well as the inevitable bust are endogenous to our system of “funny money”. So long as our money is funny we shall have the bubble in everything.

 

In the next article we’ll take a closer look at the market for crypto-assets. With a “big picture” view of what such a thing means for you. Also, keep an eye on our website for a short series about entrepreneurs, what they are, and why they’re vitally important.

 



[1] De Soto, J. H. (2006). Money, bank credit, and economic cycles.

[2] Economist’s word for when something is an intrinsic part of a system, caused by other things in that system.

[3] Some of our readers may be familiar with the “animal spirits” of J M Keynes. In some ways what we discuss here is similar. But rather than be the cause of the crisis, as Keynes saw, it is a symptom.

[4] In the US market particularly.