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Monday, January 27, 2014

Reading List: The Money Bubble

Turk, James and John Rubino. The Money Bubble. Unknown: DollarCollapse Press, 2013. ISBN 978-1-62217-034-0.
It is famously difficult to perceive when you're living through a financial bubble. Whenever a bubble is expanding, regardless of its nature, people with a short time horizon, particularly those riding the bubble without experience of previous boom/bust cycles, not only assume it will continue to expand forever, they will find no shortage of financial gurus to assure them that what, to an outsider appears a completely unsustainable aberration is, in fact, “the new normal”.

It used to be that bubbles would occur only around once in a human generation. This meant that those caught up in them would be experiencing one for the first time and discount the warnings of geezers who were fleeced the last time around. But in our happening world the pace of things accelerates, and in the last 20 years we have seen three successive bubbles, each segueing directly into the next:

  • The Internet/NASDAQ bubble
  • The real estate bubble
  • The bond market bubble

The last bubble is still underway, although the first cracks in its expansion have begun to appear at this writing.

The authors argue that these serial bubbles are the consequence of a grand underlying bubble which has been underway for decades: the money bubble—the creation out of thin air of currency by central banks, causing more and more money to chase whatever assets happen to be in fashion at the moment, thus resulting in bubble after bubble until the money bubble finally pops.

Although it can be psychologically difficult to diagnose a bubble from the inside, if we step back to the abstract level of charts, it isn't all that hard. Whenever you see an exponential curve climbing to the sky, it's not only a safe bet but a sure thing that it won't continue to do so forever. Now, it may go on much longer than you might imagine: as John Maynard Keynes said, “Markets can remain irrational a lot longer than you and I can remain solvent”—but not forever. Let's look at a chart of the M2 money stock (one of the measures of the supply of money denominated in U.S. dollars) from 1959 through the end of 2013 (click the chart to see data updated through the present date).


You will rarely see a more perfect exponential growth curve than this: if you re-plot it on a semi-log axis, the fit to a straight line is remarkable.

Ever since the creation of the Federal Reserve System in the United States in 1913, and especially since the link between the U.S. dollar and gold was severed in 1971, all of the world's principal trading currencies have been fiat money: paper or book-entry money without any intrinsic value, created by a government who enforces its use through legal tender laws. Since governments are the modern incarnation of the bands of thieves and murderers who have afflicted humans ever since our origin in Africa, it is to be expected that once such a band obtains the power to create money which it can coerce its subjects to use they will quickly abuse that power to loot their subjects and enrich themselves, as least as long as they can keep the game going. In the end, it is inevitable that people will wise up to the scam, and that the paper money will be valuable only as scratchy toilet paper. So it has been long before the advent of proper toilet paper.

In this book the authors recount the sorry history of paper money and debt-fuelled bubbles and examine possible scenarios as the present unsustainable system inevitably comes to an end. It is very difficult to forecast what will happen: we appear to be heading for what Ludwig von Mises called a “crack-up boom”. This is where, as he wrote, “the masses wake up”, and things go all nonlinear. The preconditions for this are already in place, but there is no way to know when it will dawn upon a substantial fraction of the population that their savings have been looted, their retirement deferred until death, their children indentured to a lifetime of debt, and their nation destined to become a stratified society with a small fraction of super-wealthy in their gated communities and a mass of impoverished people, disarmed, dumbed down by design, and kept in line by control of their means to communicate, travel, and organise. It is difficult to make predictions beyond that point, as many disruptive things can happen as a society approaches it. This is not an environment in which one can make investment decisions as one would have in the heady days of the 1950s.

And yet, one must—at least people who have managed to save for their retirement and to provide their children a hand up in this increasingly difficult world. The authors, drawing upon historical parallels in previous money and debt bubbles, suggest what asset classes to avoid, which are most likely to ride out the coming turbulence and, for the adventure-seeking with some money left over to take a flyer, a number of speculations which may perform well as the money bubble pops. Remember that in a financial smash-up almost everybody loses: it is difficult in a time of chaos, when assets previously thought risk-free or safe are fluctuating wildly, just to preserve your purchasing power. In such times those who lose the least are the relative winners, and are in the best position when emerging from the hard times to acquire assets at bargain basement prices which will be the foundation of their family fortune as the financial system is reconstituted upon a foundation of sound money.

This book focusses on the history of money and debt bubbles, the invariants from those experiences which can guide us as the present madness ends, and provides guidelines for making the most (or avoiding the worst) of what is to come. If you're looking for “Untold Riches from the Coming Collapse”, this isn't your book. These are very conservative recommendations about what to do and what to avoid, and a few suggestions for speculations, but the focus is on preservation of one's hard-earned capital through what promises to be a very turbulent era.

In the Kindle edition the index cites page numbers from the print edition which are useless since the Kindle edition does not include page numbers.

Posted at January 27, 2014 21:10