Thursday, 8 December 2011

Currency collapse or stock-market boom?

Business Mirror

‘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 a voluntary abandonment of further credit expansion, or later as a final or total catastrophe of the currency system involved”: Ludwig von Mises

Ludwig von Mises died at the age of 92 in 1973. Yet his words written decades before tell exactly what is happening today.

The journey to debt oblivion began in 1913 when the US created the Federal Reserve Bank, a private institution that was given the power to control the currency. Events during the next 60 years, including the outcome of the two world wars, the creation of a socialist/communist state in Russia, and technological innovation, brought the US to the position of being the largest and most important engine of global economic activity. In 1971 the long- term plan to give major governments absolute control of currency was fulfilled by the ending of convertibility of currency to gold or silver.

You cannot have unlimited credit without having unlimited currency. For the last 40 years, the world has had both.

Italy and Spain, with a total population of just over 106 million, will need to borrow $330 billion in 2012 just to refinance their existing debt. That additional debt is the same as each working person in these two countries working an extra month for free, just to pay that debt. That is impossible. Only printed money can “solve” the problem.

The European Union will announce today or tomorrow a “solution” to its debt problem. However, as Dr. Mises stated clearly, the only viable option is to stop borrowing and work for as long as it takes to pay off the debt, this time with real created wealth. But that is not on the table for discussion.

The governments’ solution is to continue debt expansion but with more control. The bottom line is that money printing is not going to stop.

According to Mises, that will cause the collapse of the currency system.

The one thing that Mises could not foresee was that now, people in the West are totally dependent on the government for their existence.

In the West, one-third to one-half of total private economic activity goes back to the government in taxes. Those taxes are used to feed, clothe and shelter the people through handouts, subsidies, and government employment.

I think Mises underestimated the ability of the global governments to continue with a corrupt system. He believed the corruption of the debt- based system would cause its eventual failure. I think Mises was wrong. I believe governments can keep it going for as long as they want to.

However, there will be more dependence on the government for a person’s basic needs, a lowering of the standard of living in the West, and higher inflation.

Roman satirist and poet Juvenal wrote in A.D. 100, “The people anxiously hope for just two things: bread and circuses.” The Roman government gave out free wheat and staged expensive circuses to maintain power. It keeps the peoples’ minds off other issues, too.

On October 13, 2008, the title of this column was “The death of debt-based wealth” and I wrote, “The stock market? Wait a few weeks and you will see the best buying opportunity [probably near 1,950] since 2003 when the index was at 1,000.”

I was wrong. The Philippine Stock Exchange index hit a low of around 1,750 the week of November 21, 2008. In March 2009, prices started taking off to the current level of 4,300.

The reason I mention this is that in 2009, massive money printing started and the global stock market staged massive rallies. In the 21st century, there is no better “bread and circus” than a stock-market boom.

The government says it costs 5 percent more in November 2011 than in November 2010 for all your basic goods. Do you believe that is true with P200 pork and the current price of gasoline? But this is true; the PSE is 6.5-percent higher than in November 2010.

Western stock markets have performed poorly this year. The Dow Jones dropped 8 percent in early November when investors thought governments might allow default by “voluntary abandonment of further credit expansion.” During the last week of November, the Dow Jones rose 8 percent as the governments’ attempt to find a “solution” through money printing.

If you believe that governments will allow a currency collapse, head for the mountains. If you believe that they will find a “solution,” head for the Philippine Stock Exchange, as you should have in 2008.

Get your stock investment prepared now.


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