Last week gold and silver had to withstand the usual bullion bank assault that occurs during option expiration on the Comex. The largest concentration of open strikes was at $1,700 for gold and $32 for silver. Although they managed to knock gold below $1,700 for a brief period, it closed on Friday at $1,711.10 and silver held at $32.09. There are only three settlement days left in October and we expect resistance at $1,725.
Technically speaking, gold has formed a “teacup with handle” formation and that is a very bullish formation. We are now in the process of developing the “handle” and the next major move should be up. The last time we had this particular formation was in 2008 and gold shot up dramatically from that point forward.
There is much written about the destructive monetary policies of the Federal Reserve and their policy of QE to Infinity. But how many of you know that the issues we face today were predicted long ago by famed Austrian economist Ludwig von Mises (1881-1973)? I was first introduced to Mises in 1984, by my employer at the time – and mentor, Jim Cook. There are several newsletter writers, including Doug Casey, Mark Skousen and Peter Schiff who are ardent followers of Mises.
Things really started to fall apart when the academic community in the US fully embraced the teachings of John Maynard Keynes. At least the “print money when the economy lags,” portion. Where we went astray was in not reigning in the money creation after the recovery. So we have lived in a world of constant money growth, well beyond the growth of the economy, since President Roosevelt’s administration. It really escalated under the stewardship of Alan Greenspan and Ben Bernanke. We are about to pay the piper.
Austrian economists were near universally ignored by the ivory tower academics and the media and there was not one major university that taught a course embracing their views. What are the views of von Mises and the Austrians? How do they apply to our current problems?
In his most recent book, National Bankruptcy: Why The Middle Class is Doomed, Jim Cook wrote the following essay on Ludwig von Mises. If you want to understand why our fiscal policies have led us to the brink of destruction and why neither Presidential candidate offers any hopeful solution, read the following. (I have added my own comments in parentheses and underlined.)
Hard money advocates and free market economists consider (Mises) to be the greatest economic thinker in history. He believed in limited government, the gold standard, sound money, capitalism and personal freedom. (Does this sound like Ron Paul’s platform?) Mises attended the University of Vienna during the high tide of the “Austrian School” of economics. His accomplishments are prodigious. In 1920, he showed that socialism and planning must fail because of the lack of market pricing. Mises’ insightful checkmate to collectivism was widely acknowledged when communism collapsed seventy years later.
Among other things, Mises was able to show that inflation was no more than taxation and redistribution of wealth; that prices will most often fall without government induced money injections; that increases in the money supply, e.g. a sudden doubling of everyone’s money holding benefits society not an iota and in fact only dilutes purchasing power; that only growth in the factors of production, land, labor, plant and equipment will increase production and standards of living.
In a brilliant and important theoretical accomplishment Mises answered a problem most economists thought unanswerable. How can we explain that the price of money in influenced by demand if to have demand it must first have a price? He traced the origin of money back in time to a useful barter commodity (e.g. silver and gold).
The dramatic implication was that money could only originate on the free market out of demand. Government, despite any attempts to the contrary, could not originate money. Money is not arbitrary pieces of paper but must originate as a useful and valuable commodity. Mises also pointed out how central banking acts as an accomplice to government money expansion. And he began to explain his great business cycle theory. Recognizing that the market economy could not generate by itself a series of booms and busts he fixed the blame on an outside factor – the habitual expansion of money and credit.
He argued that a credit-induced boom must eventually “lead to a crack-up boom.” He wrote, “The boom can last only as long as the credit expansion progresses at an ever-accelerated pace. The boom comes to an end as soon as additional quantities of fiduciary media are no longer thrown upon the loan market. (This is why Jim Sinclair proclaims that the Fed has no other options than QE to Infinity, for to stop, Mises’ “crack-up” boom collapses. This is why Richard Russell proclaims the Fed must “inflate or die.” Their views are based on the wisdom of von Mises.) But it could not last forever even if inflation and credit expansions were to go on endlessly. It would then encounter the barriers, which prevent the boundless expansion of circulation credit. It would lead to the crack-up boom and breakdown of the whole monetary system” (Unfortunately, this is what will happen – the Fed’s QE to Infinity policy is only buying time until the system breaks down. How will you know when that is happening? A good indicator will be when gold is selling for $3,250 and rapidly rising!).
He warned, “The credit expansion boom is built on the sands of banknotes and deposits. It must collapse.” He stated, “If the credit expansion is not stopped in time, the boom turns into the crack-up boom; the flight into real values begins, and the whole monetary system founders. Continuous inflation (credit expansion) must finally end in the crack-up boom and the complete breakdown of the currency system.” (This is why we urge all of you to convert as much of your “fiat” dollars into gold and silver; to preserve your wealth when the currency system breaks down. We believe that this event is not decades away, it is most likely just a few years away.)
Mises further claimed, “Expansion (of credit) squanders scarce factors of production by malinvestment and overconsumption.” Malinvestment means building shopping centers rather than factories. Overconsumption means a borrowing and spending boom by consumers that depletes savings and reduces capital investment.
Mises was aware that a credit excess could spill over into stock and bond speculation. (Isn’t this exactly what happened to the stock market in 2000 and 2008 and the real estate market in 2008? The biggest bubble of all is the current bond market, a playpen for speculators encouraged by the Fed’s zero-interest rate policy until mid-2015.) But even he would be surprised at today’s unprecedented levels of credit-induced speculation. (Think derivatives and massive leverage used by the banks here.) He would be depressed by the astonishing levels of public and private debt, government borrowing, central bank market interventions, trade deficits, non-bank credit growth, money velocity, illiquidity, overconsumption and foreign indebtedness. Can these phenomena persist?
Absolutely not says Mises. “Credit expansion is not a nostrum to make people happy. The boom it engenders must inevitably lead to a debacle and unhappiness.” He warned, “Accidental, institutional, and psychological circumstances generally turn the outbreak of the crisis into a panic. The description of these awful events can be left to historians. It is not…(our task)… to depict in detail the calamities of panicky days and weeks and to dwell upon their sometimes grotesque aspects.”
“The final outcome of the credit expansion is general impoverishment. Some people may have increased their wealth; they did not let their reasoning be obfuscated by the mass hysteria, and took advantage in time of the opportunities offered by the mobility of the individual investor… but the immense majority must foot the bill for the malinvestments and the overconsumption of the boom episode.” (Those who position their wealth in gold and silver will be the ones in the minority who survive the consequences of the boom episode.)
Austrian economics rests on the foundation of readily observable human actions. Beings have goals, they set out to attain them; they have individual preferences; and they act within the framework of time. Each person and his or her actions are different and unique. The very nature of human behavior defies economic codification.
Mises points out that there are not quantitative constants in human behavior. In his greatest book,” Human Action,” he developed a rational economic science based on this human factor. At the same time he tweaked the nose of today’s highly popular mathematical economics, statistical economics and econometrics. This posturing and economic forecasting he dismissed as little more than poppycock.
In the early thirties, Austrian school economics was on the verge of carrying the day. But in England, the publication of John Maynard Keynes’ General Theory of Employment, Interest and Money, provided the rationalizations necessary for politicians and government to spend and inflate endlessly. Until that moment virtually the entire body and history of economic thought stood against such theories. But, Keynes theories fit hand in glove with the mentality of intervention and statism. It rationalized politicians, economists and governments jumping in bed together to expand their power and influence.
Not that Mises was rebutted or that anyone overturned his conclusions – he was simply ignored. How many Americans have ever heard of Ludwig von Mises? How many businessmen know that he placed the girders and underpinnings under free enterprise that cement that system to reason? How many know that he won the moral high ground for capitalism?
Professor von Mises is the painstaking architect of the economy of a free society. However, mainstream economists totally ignore his blueprint. He stands far above the current arguments about how the money supply and the economy should be manipulated. For he maintains our greatest error is for government to exert any influence or control over the supply of money and the economic system.
We ignore Mises’ teachings at our own peril and he tells us so. “It rests with men whether they will make the proper use of the rich treasure with which this knowledge provides them or whether they will leave it unused. But if they fail to take the best advantage of it and disregard its teachings and warnings, they will not only annul economics; they will stamp out society and the human race.”