Ludwig von Mises and the "Crack Up Boom"

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In recent days, the term “crack up boom” has been getting widespread media attention and, not being familiar with its origin, I did a little homework and found that the term apparently originated with Ludwig von Mises (1881-1973) who was a noted member of the Austrian School of Economics and author of “The Theory of Money and Credit,” and “Human Action.”


In his writings, Ludwig argued in favor of free markets, capitalism and individual freedom and warned against the dangers of credit expansion, hyperinflation and governments using monetary policy to create artificial economic prosperity.


Old Ludwig said that inevitably such actions would lead to inflation and then hyperinflation and finally to a place known as the “crack up boom” where everyone realizes that inflation is out of control and wants to get rid of paper money and get “real” things, no matter how much it costs to do that.  In its most extreme incarnation, nobody wants paper money for anything and then the financial system collapses.


This has happened to varying degrees a number of times in history, including the famous episode with the German Mark during the Weimar Republic in 1923 and more recently in Zimbabwe in the decade just ended with rates of inflation that were in the thousands, and by some reports, millions of percent.


I don’t know if the final destination of this financial crisis is a “crack up boom” or not, or how severe it might be if it comes.  However, certainly many of the ingredients that Von Mises warned about are clearly in place today, including rampant government intervention in monetary markets and skyrocketing commodity prices around the world. 


The View From 35,000 Feet


Last week’s economic news was widely mixed with construction spending down and the Institute for Supply Management Report and mortgage indexes making ground.


The most mixed report of the week was Friday’s employment report which was a huge miss as just 36,000 new jobs were created versus the more than 140,000 expected.  Oddly enough, the unemployment rate declined to 9% from 9.4%, heralding a joyous outcry over the “improving” employment situation.


However, since most analysts say it takes 90-100,000 new jobs per month just to accommodate new graduates and new job seekers, the decline in overall employment can only be due to people leaving the job search and so no longer are being counted in the overall numbers.


Dr. Bernanke said as much in a February 3rd speech in which he mentioned that job growth wasn’t fast enough to reduce unemployment in any kind of significant way and that it would take several years to return to “normal” levels.


He’s not kidding around because the workweek remained virtually flat over the previous month, and the important “labor participation rate,” the percentage of the population in the workforce, came in at 64.2%, the lowest in more than 25 years which is truly a shocking statistic.


Furthermore, the U6 rate, which is known as the gauge of total unemployment because it includes the underemployed and marginally employed, came in at a seasonally adjusted rated of 16.1% versus 16.5% in January, 2010, a miniscule improvement on a year over year basis when one considers the vast sums of money that have been poured on this problem. 


What It All Means


Most likely what all of this means is that the markets are being carried along by Dr. Bernanke and his quantitative easing policies, and by now it should be quite obvious to everyone that if labor market and economic growth don’t improve, the Fed will likely continue their bond buying policies beyond the stated termination date in June.


As long as Dr. Bernanke’s helicopters keep dropping money, the markets likely will continue rising and perhaps lead to a new “crack up boom.”  However, one thing seems quite certain; if the helicopters are grounded or run out of fuel, the resultant crash landing could be ugly, indeed.


Perhaps Dr. Bernanke and his colleagues should stop by their local bookstore on the way home from the office some day soon and pick up their own personal copies of “The Theory of Money and Credit,” and “Human Action,” and refresh their memories about what Ludwig Von Mises had to say.


The Week Ahead


It’s a light week of economic reports but heavy on earnings with big names like Disney, Coke, Cisco, Sprint/Nextel and Kraft reporting, along with more than 60 S&P 500 companies among the more than 400 total earnings reports coming in.


Economic Reports


Monday: December Consumer Credit


Wednesday: MBA Mortgage Index


Thursday: Initial Unemployment Claims, Continuing Unemployment Claims, December Wholesale Inventories


Friday: December Trade Balance, February Michigan Consumer Sentiment


Sector Spotlight


Winners: (NYSEArca: XOP) Oil and Gas Exploration (NYSEArca: XLB) Materials


Losers: (NYSEArca: XHB) Homebuilders (NYSEArca: XLU) Utilities, (NYSEArca: XLP) Consumer Staples


Wishing you a great week,


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Posted 02-07-2011 11:46 AM by John Nyaradi
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