The credit boom is built on the sands of banknotes and deposits. It must collapse… 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. – Ludwig von Mises, Human Action, 1949
I first attended the Canton Trade Fair in October 1976. All Chinese men and women were dressed in blue shirts and blue pants, bicycles were China’s main mode of transportation, Chairman Mao had just died and China’s mantra, "We will continue to support the policies of Chairman Mao Tse-Tung and criticize the policies of Deng Xiao-Ping", was heard everywhere.
But three years later when I received White House invitations to attend the Washington DC reception for the Vice-Premier of the Peoples’ Republic of China, it was Deng Xiao-Ping who arrived; not a hard-line inheritor of Chairman Mao’s revolutionary precepts.
In 1977, Deng Xiao-Ping wrested power from China’s conservative communist ideologues and in 1978, opened China’s socialist economy to private ownership. By 2005, China’s private sector had expanded to 70% of its economy and China became an economic power in only 25 years.
While Mao Tse-Tung had successfully steered China away from Western suzerainty, it was Deng Xiao-Ping who put China on the path to financial and geopolitical power; a path that would be as rapid as it would be unsustainable – for China’s explosive growth was founded in large part on excessive credit creation in the West.
(Click on image to enlarge)
Chart source – wikimedia.org
The remarkable rise in China’s GDP reflects the just as remarkable rise of the Dow during the same period.
(Click on image to enlarge)
The correlation between the rise of China’s GDP and the rise of the Dow is unmistakable. It’s also the reason why China’s growth is unsustainable. China’s rapid growth was fueled by the unprecedented expansion of the US money supply – an expansion directly responsible for America’s exploding appetite for consumer goods from China and the US dot.com stock market bubble in the 1990s.
Chart source – www.goldmoney.com
Appointed Fed chairman in 1987, Alan Greenspan presided over the greatest credit and monetary expansion in US history, an expansion which led to America’s three largest speculative bubbles; the 1992-2000 dot.com bubble, the 1991-2006 consumer bubble and the 2002-2006 real estate bubble; three bubbles whose cumulative collapse would derail the world economy and set in motion Ludwig von Mises’ crack-up boom.
THE CRACK-UP BOOM
As von Mises wrote in Human Action in 1949 … 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…
Von Mises’ crack-up boom, or more correctly Greenspan’s crack-up boom, had its origins in the 1980s when the US greatly increased spending yet cut taxes and initiated unprecedented levels of borrowing to make up for lost revenues, consequently flooding America with excess liquidity which would set in motion America’s largest stock market bubble since the 1920s.
Although Alan Greenspan had the intellect of an über-economist, he lacked the courage to stand up to Washington DC and Wall Street. In the 1990s, when the Dow began rising far out of proportion to economic growth, Greenspan moved to stop the developing bubble in stocks by raising Fed interest rates:
I think we partially broke the back of an emerging speculation in equities. – Alan Greenspan, February 1994
But Greenspan’s rate increase didn’t stop the bubble. Share prices continued higher so Greenspan continued raising rates. After seven consecutive increases between February 1994 and February 1995 and another increase in March 1996, Wall Street demanded Washington DC stop Greenspan from further Fed tightening.
…it was not the policy of the Fed to prick bubbles by monetary means. – Alan Greenspan, March 1997
In 1998, Greenspan lowered Fed interest rates three times allowing the dot.com bubble to continue its dizzying liquidity-driven ascent. Finally, in 1999, the Fed was forced to prick the dangerously large stock market bubble which Greenspan now denies recognizing.
My video, Dollars & Sense show #11, titled The Fix Is In, explains Greenspan’s flawed tenure at the Fed and while there are reasons to explain Greenspan’s shortcomings, none can reverse the damage he has done.
Because of his inability to just say no, Greenspan left a legacy of three historic credit bubbles whose catastrophic collapse would trigger Ludwig von Mises’ crack-up boom and send America and the world into the greatest economic meltdown since the Great Depression.
THE GOAT RODEO OF CREDIT DISTORTED DEMAND
The bankers’ artificial injection of credit into free markets ultimately overwhelms supply and demand fundamentals. This distortion, conveniently overlooked during expansions, becomes painfully apparent during contractions when demand disappears leaving behind excess capacity, defaulting debts and high levels of unemployment.
Capitalism’s foundation of debt-based money was destabilized by America’s expansion of its monetary base after 1980; resulting in the eventual overcapacity of supply in the East, e.g. China. Japan, Korea, whose economies had expanded to satisfy the artificially inflated demands of the West, e.g. the US, the UK, Europe.