Prophets in the Wilderness: Mises, Hayek, Richebächer, and Stockman
Beginning in 2001, Dr. Kurt Richebächer began writing in his monthly newsletter about what he said would end in disaster in the capital markets, namely, the expansion of central bank credit around the world.
In every issue, he came back to that theme. In every issue, he warned that this was going to create a devastating recession and breakdown of capital markets. The problem was this: however sound his analyses were, issue by issue, it got boring. It was the same old theme, over and over. He became Johnny one-note. He would talk about this aspect of the misallocation of capital, and then in the next issue, he would talk about another aspect. On and on and on he went.
At the age of 88, on August 24, 2007, he died. The following December, the recession hit the United States. Throughout 2008, large, overextended banks and financial houses began to go under, culminating in the bankruptcy of Lehman Brothers in September 2008. In 2009, the worst recession of the post-World War II era was visible to everyone.
He did not live long enough to see the fruition of his predictions. He was right the entire time, but it seemed at the time as though his warnings would never come to fruition. With respect to his own lifetime, they did not come to fruition. He did not live long enough to see the outcome of the capital markets of the process which he had been railing against for six years.
The problem he faced is the problem that David Stockman now faces. Stockman is playing an almost identical rule. He talks about the misallocation of capital, not once a month, but every day. He writes long, detailed articles on it. He is well informed about the details of the financial markets, and he is an Austrian in his perspective on the effects of central bank and commercial bank monetary expansion. He understands Ludwig von Mises' monetary theory of the business cycle. He not only understands it, he believes it. He not only believes it, he tracks it. He not only tracks it, he reports on it.
I will not say that Stockman's writing gets boring. He is a lively writer. But his theme is the same, day after day: the misallocation of capital as a result of central bank monetary expansion. He looks at one market. He looks at another market. He sees the same pattern. He keeps coming back to the same message, which is this: central bank inflation and fractional reserve commercial bank inflation have misallocated capital, and when the process finally ceases, there is going to be a crash.
I have no doubt that he is correct. I see the scenario in much the same way. But the problem for Stockman is the problem that Richebächer faced. People get tired of hearing the same old story, despite the fact that the story is accurate.
Stockman is not in his 80's. Unless he suffers a statistically abnormal fatal event, he is going to see his predictions validated in the capital markets. He is not going to die four months before the capital markets begin to unravel, as they began to unravel in December 2007.
The problem he faces is this: the China syndrome. China's central government, run by Communist apparatchiks, has been able to maintain an unprecedented period of economic growth, beginning no later than 1979. If the Communist government had not had a central bank, and if it had not had state banks, but had simply relied on the gold coin standard, the rate of economic growth would have been slower, but the nation would not now be threatened by a breakdown. There would not be empty cities. There would not be highways to nowhere. There would not be as many people living in urban areas, dependent completely on the central bank's ability to sustain the economic boom by means of endless infusions of fiat money.
A TIGER BY THE TAIL
Back in 1972, F. A. Hayek described this process as "a tiger by the tail." You can read his booklet here. Today, the world is riding on the back of the central banking tigers. All over the world, central banks have expanded the domestic monetary supplies, which has fostered booms in every nation. The central banks cannot dismount, nor can we. We can't get off the back of the tiger without being clawed.
At the time that the book was published, Hayek had been writing on this topic for four decades. He began the early 1930's. Today, his warning is even more relevant, but it is now 85 years since he began writing on this. Here is what he wrote in 1960 in his classic book, The Constitution of Liberty. The extract appears in the booklet.
A central bank can exercise only an indirect and therefore limited control over all the circulating media. Its power is based chiefly on the threat of not supplying cash when it is needed. Yet at the same time it is considered to be its duty never to refuse to supply this cash at a price when needed. It is this problem, rather than the general effects of policy on prices or the value of money, that necessarily preoccupies the central banker in his day-to-day actions. It is a task which makes it necessary for the central bank constantly to forestall or counteract developments in the realm of credit, for which no simple rules can provide sufficient guidance.
This is what we're seeing in Europe today. We're going to see it again in the United States sometime in the next 18 to 24 months, because the Federal Reserve System has ceased monetizing federal debt. It has ended QE3. We can be certain of there is going to be QE4.
The magnitude of the recession in 2008 and 2009 was sufficient to catch the attention of the whole world. The expansion of the Federal Reserve's monetary base after 2008 was larger than we have ever seen in the history of the United States. This is what it took to bail out the various high-rolling banks and insurance companies that had placed the investors' capital at risk. They had borrowed short and lent long: the carry trade. Today, the carry trade is as wild as ever. With interest rates in the short term at just about zero, gigantic fortunes are being made through leveraged investments in bonds that pay 3% or more. But the spread always reverses at some point. It's called the inverted yield curve. The gigantic fortunes will turn into gigantic losses. Count on it. Plan for it.
CONCLUSION
Ludwig von Mises developed the monetary theory of the business cycle. The academic community ignored this theory from 1912 until his death in 1973. They preferred Keynes' explanation, which justified government deficits and central bank counterfeiting. The world is now trapped in the Keynesian version of these boom-bust cycles, which Mises' theory explains, and which his recommendation of the abolition of central banking and the abolition of state licensing of fractional reserve commercial banking would eliminate, if adopted.
For six years in a row, Richebächer issued a warning that was based on Mises' theory. He was right. But he did not live long enough to see just how right he was.
That's the problem with people who understand the Austrian theory of the business cycle. They know what is going to happen; they rarely know when. When it happens, just as they predicted, they get no credit, because their original warnings were seen by so few and taken seriously by even fewer.
So, we Austrians bide our time. We issue our warnings, and we wait for the inevitable fulfillment of them. Then we do what we can to remind the public that we saw it coming, we told why it would come, and we issued fair warning. That is the best that anybody can do in the age of Keynes.