From time immemorial some have tried to develop a perpetual motion machine. Obviously, their efforts were in vain. Now, although our financial authorities have recognized those efforts as absurd, yet they naively persist and are working on the same principle, this time to achieve perpetual prosperity.
In this connection, it is worth quoting from Ludwig von Mises, perhaps the world’s foremost economist, when he wrote, “There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of the voluntary abandonment of further credit expansion, or later as a final catastrophe of the currency system involved.
One hears endlessly from public figures that, because the economy is slowing down, notably in the United Sates, the Federal Reserve System only will have to cut rates, entailing a buoyant stock market and an expanding economy. That rationalization is based on the widespread misconception that the 1930s depression would have been curtailed if interest rates had been lowered promptly. In fact, that was done and had no effect. Apparently, many believe that, “Isn’t it wonderful, the recession-free, feel good society is here to stay forever.”
Presumably, the Federal Reserve has a magic button to control the economy and interest rates. It is more than doubtful that perceived control mechanisms would prove to be effective.
It is recognized that the Federal Reserve is inflating the money supply by way of its printing press and at the moment no end is in sight. Anyway, if you still do not believe credit can and will implode and investment prices fall, why is the housing market plunging? Why are some sub-prime mortgages melting in the sun?
In the late 1990s, one aspect of the debt bubble was apparent in the mania for investing in mutual funds, with 96 per cent of the funds in stocks. That appeared to be the ultimate limit. Today, a significant part of speculative funds has switched into what are called hedge funds. It has been estimated by Bridgewater, a reliable source, that the average hedge fund at the beginning of this year had 250 per cent of its deposits “invested.” Recently, The Wall Street Journal reported that there are funds with ratios of deposits to stocks as high as 13 times. How can hedge funds invest more money than they have? They borrow the rest from banks and investment firms. As a consequence, the financial markets have been rising, because of an avalanche of borrowed funds, a pyramid of IOUs. Eventually, of course, debts become so huge that they cannot be sustained and default ensues when interest payments cannot be made.
Not long ago, chairman Ben Barnicke, of the Federal Reserve System, said, undoubtedly tongue in cheek, that worst comes to worst, the Federal Reserve simply would fly over the land and drop bills to sustain prosperity. Anyway, that reveals a frame of mind. In view of history, the ultimate outcome of those trying for perpetual prosperity is as predictable as others who were foolishly trying to create a perpetual motion machine.
