Listen to the people who predicted this: No bailouts, no New Deal, no serfdom.

Here is a list of popular personages who predicted this credit implosion and depression while the bubble was still being blown:

  • Robert Prechter. In 2002, he published Conquer the Crash, How to survive and prosper in a deflationary depression. So far right on the money except gold hasn’t fallen hard (yet).
  • Jim Rogers. The man has good timing when it counts. He bought a NYC townhouse for 107k in 1977 and sold it for 16 million last year and got the heck out of Dodge. He moved his family, business and money to Singapore and shorted the US market. Missed the turn in commodities, though, and refused to sell China out of some kind of principle.
  • Peter Schiff. Published Crash Proof in 2006, which has been pretty accurate other than Schiff’s missing the deflation stage and holding commodities and foreign stocks too long. The results of the New Deal and bailouts are likely end with the currency failure he predicts.
  • Mish Shedlock. Publisher of a popular blog, Mish has been warning of a deflationary depression since 2005 or 2006, and now has the best record of predicting its course (deflation, bailouts, gold and the dollar doing well).
  • David Tice. Manager of the Prudent Bear Fund, BEARX, which is performing spectacularly.
  • Doug Casey, the original international speculator, and publisher of the Casey Research newsletters. Missed the deflation part, also burned by commodities, but spot on about fascism.

There are countless others who saw this coming, including Congressman Ron Paul, who’s own studies of monetary policy inspired him to first run for office.

What do all of these men have in common that allowed them to see around the corner? They understand money and the credit cycle. How did they learn it? Not in college, that’s for sure, because colleges teach perverse Keynesian claptrap. They have all read the Austrian economists, in particular Ludwig von Mises and his American pupil Murray Rothbard. Their explanation of the business cycle as the credit cycle is both elegant and extremely powerful.

And what do all of these followers of the Austrian School think we (meaning our governments) should do, now that their worst fears are coming true? In a word, to a man, nothing.

Don’t fear the crash. Fear fascism.

You see, the very worst fear of Austrians is not a crash or a depression, which is actually the healthy restoration of sanity after a credit-fueled mania, but the expansion of government that seems to follow these events like day follows night. Frederic Hayek laid out these fears in The Road to Serfdom, and that is exactly where we are going: utter economic collapse. The government is going to hamstring the markets and drain our resources for its pet projects and wars, all for our own good. Their aim is to stave off a proper accounting of the losses that have already taken place, and to preserve the power of those who inflated our way into this mess.

The damage from the bubble is already done. Government adds new damage.

What not one person in 10,000 understands is that the losses have already taken place. The losses were the waste of resources and labor for doomed endeavors that never made sense: think McMansions in the desert, and the roads, power plants and strip malls that served them. The price declines that we are now experiencing are necessary to restore valuations that reflect true values, because proper pricing clears markets — it allows people to accurately assess the worth of certain items against that of others.

A 5000 sqaure foot house on a dry hillside 20 miles outside of Phoenix is a money pit, not a million dollars. It was never properly valued in terms of the labor and raw materials that went into it. But because bankers, backed up by the Fed and various government programs and guarantees, would lend $1 million to buy it, those resources were drawn out into the desert instead of to sustainable productive uses.

An honest, gold-backed monetary system and a free-market banking system with no government support would never have allowed bankers to misprice assets so greatly. Any that did would face severe difficulties inducing the public to trust them with deposits. But with FDIC, who cares what your bank does with your money? And bankers say, “with the Fed to bail me out, who cares if all my loans blow up?”

What will happen if government doesn’t lift a finger?

The owners of McMansions will lose them to the banks or other mortgage holders, and those mortgage holders, if they bought the paper with loans of their own, will lose them to others, and so on. Almost every bank in the world will fail. They have all come to depend on deposit insurance and central banks to cover for the fact that they have been reckless and insolvent from nearly day one. There will be no bank lending at all.

What will happen to the depositors? Well, almost all of their money will be lost.

So, that is what we are looking at: every bank failing, zero bank lending, almost all the money in the world going to heaven. How is that not the end of the world? Simple: It is a reverse split. In 2006, let’s say, there was a million dollars in total bank deposits. Then in 2008 all the banks go under. All that is left is the cold cash in people’s pockets, let’s say $100,000 in all.

That remaining cash becomes extremely valuable. It has to work where one million did before. If you had $10 in your pocket and $90 in the bank, you now treat each dollar as if it were ten. The key is that so does everyone else. The world still has its unit of account and medium of exchange, we have just moved the decimal point over on all prices. (Note: gold and silver would rapidly re-enter circulation and quickly become the preferred money, as they always do until government outlaws them).

Of course, deflation on this scale makes debts unpayable, so essentially all debt is defaulted upon, but of course most creditors are bankrupt too. Contracts have to be renegotiated or annulled. No big deal, really. The assets are all still there, just the same as before. Nothing has burned down. A car bought on credit still gets the same mileage as before its loan went bad, a house keeps you just as dry.

Trust the prudent and smart, not bankers and politicians.

Such an event brings about a massive transfer of wealth from the reckless to the prudent and farsighted, who are exactly the people you want making the decisions about what to do with money and assets after the crash. They are statistically and philosophically the best equipped to decide what will generate the highest returns with the lowest risk. Life goes on. There is nothing to rebuild because nothing was destroyed. It is all just reordered in a more sensible fashion. The house in the desert is scrapped for materials. The Lehman mortgage traders find something productive to do, like drive cabs.

But that outcome is so quaint, so 1800s, so gold standard. We’re more scientific today. Bernanke is a wise economist. Congress is benevolent. War is peace, and lies are truth.

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27 thoughts on “Listen to the people who predicted this: No bailouts, no New Deal, no serfdom.

  1. I agree with you.

    What I am trying to grasp is how the actions of the Fed and Treasury in supplying all of this liquidity to the market is going to cause inflation later.

    If money is disappearing as credit contracts, then if the Fed injects as much money as is disappearing, won’t that just counterbalance the money that’s gone, leaving the money supply about the same size it was before the Fed began responding to the crisis? If so, where does the inflation come from?

  2. First an essential definition: Inflation is the net increase in money and credit. Deflation is a net decrease.

    They are actually creating a lot more actual money (cash) than existed before. Cash is not destroyed, just credit, which acts like money. There is deflation now because credit is contracting rapidly and there is a lot more credit than cash (~ 50:1 trillion).

    The Fed and Treasury wish that it were still so easy to create inflation as it was when Greenspan was in charge, but now that the economy is finally fully saturated with debt and asset prices are crashing, nobody who is worthy of a loan is asking for one, and banks are not lending to those with poor credit anymore. Hence, the new cash just sits there.

    Inflation will finally come when assets are so cheap that it makes sense to borrow to buy them. The government is not willing to wait for that, however, and they are trying to prop up asset (and soon labor) prices and stimulate lending at the same time: zombification.

    Another source of inflation, of the worst sort, will be government expenditures on make-work programs and war. This is the fail-safe way to get money into circulation. When the bond market eventually chokes on Treasuries, the Fed will step in and print to buy them.

    Government expenditure by a heavily indebted nation (therefore with a strong incentive to inflate) is how the Wiemar Republic melted down.

  3. What you’re not saying, however, is that there are a lot of Keynsians who also foresaw this crisis. So just calling it does not make the Austrians right. Moreover, anyone who believes that gold is the true basis for currency is, in my mind, a metaphysician of the most catholic sort. You’re just wishing for the return of the old Austro-Hungarian empire vs. the Ottoman empire model, with stable authoritarian regimes overseeing a lot of impoverished serfs. The end of demand, since, of course, what is in demand will be gold, the only product/asset ever really worth owning. Wake up!

  4. Name them. I’ll start: Roubini. Anyone else?

    There is no “true basis for currency.” Gold just does a really good job of it. It never needs government to back it up, because people chose it freely if government doesn’t force them to use whatever script the bankers and political class create to support their schemes.

    This is also nonsense:
    “of course, what is in demand will be gold, the only product/asset ever really worth owning”

    What gives gold value? That it can be universally exchanged for things of actual use.

  5. Why don’t you read the economist Hyman Minsky, who taught at the U. of Chicago for a long time, was trained by Keynsians. His writings are all about this. Roubini is just one guy. There are many, many others.

    I was reading Paul Krugman in the Times talking about this in 2005-06.

    If there is no “true basis for currency,” then imposing a gold standard is the most authoritarian thing you can do. It achieves stability by seriously curtailing the ability of capital to move and innovate. Moreover, if you actually know something about currency and credit crises and their history, you also know that gold standards have never prevented them. Why? Because institutions just issued other forms of money, like bills of credit.

    The gold standard obsession is, to my mind, a desire to return to a world with metaphysical certainties, at bottom a form of religion very comparable to catholicism in its veneration of its idols. Not an accident that the Vatican held so much gold.

  6. You seem to be incapable of understanding the concept of freedom. Gold does not need to be “imposed.” Individuals chose it as a store of value and medium of exchange, and it does that job very well because it cannot be printed up at will.

    It does not need force (guns) to back it up, unlike paper money.

    I don’t care what people use as money, so long as they are not forced to do so at the threat of imprisonment.

    Krugman is a flat-out socialist and total fool.

    I am done suffering such.

  7. You really should get out more. Actually, you’re not done suffering such. Unfortunately, the suffering is only beginning for all of us, and if you notice, it’s not the “socialists” who have brought us to this point, but the great masters of the universe capitalists who have argued for more deregulation so they could pocket 50% of the money their banks made. 50%. Since bankers have been allowed to run free with everyone’s money, they have wrecked their own system. Marx did state (by the way, he was a big capitalist), by the way, that it would be capitalism that would create the conditions for its own downfall. And, it may very well be what we are beginning to see. And I’m no communist, believe me. However, at this point, it’s a question of just how much the state will have to step in and for how long. And might I remind you, this is the Bush administration. Hardly Keynsians. So get used to it.

    So “freedom” means that “individuals” chose gold?? Does that make sense? Which individuals? The whole concept of currency is that it’s a collective thing, so people who talk about individuals are just dodging the fact that the “individual” exists only in relation to others, whether they hold their own guns or the policeman on the street does. This kind of magical thinking will not get you anywhere my friend. Gold standards are totemism pure and simple. The truth is, “there is nothing” that could support any currency. All currency is fiat money. So even if you had a gold standard, someone could just as easily come along and say “fiat currency!” Let’s have the iron or copper standard. The contradiction is implicit in what you say. And I’m not even accusing you of making self-serving arguments because you’ve been hoarding gold thinking you’ve got something “real.”

  8. The point of my last sentence is that those who buy gold are buying another asset just like anything else. It’s value will appreciate and depreciate relative to other things, including dollars, euros, bonds, refrigerators and cars. The whole concept of an economy is that all things are exchangeable. All things, including your labor, your blood, and even your life. The state just decides what will be allowed to circulate and what will not according to certain principles. If “individuals” chose to use other individuals as currency, then we’d have slavery. Doesn’t make those individuals any less slave-holders.

    Read the history of banking crises in the 19th and 18th centuries, my friend, and you will soon learn that gold standard hardly prevented other forms of paper currency from circulating, just like official currencies today hardly prevent other forms of currency such as derivatives from circulating, and now crashing the value of currencies. The argument for gold simply has no historical or philosophical basis.

  9. Paul, you are ignorant, and a boor (“totemism”, please!), too, “my friend”.

    I agree with Mike that you don’t seem to understand the concept of freedom. Which is not surprising since you actually believe that this crisis was caused by bankers – who were simply taking advantage of the massive moral hazard opportunities presented by a government that provides guarantees for private businesses (FDIC, Fannie and Freddie implied guarantee, Fed interference in interest rate determination, etc, etc, etc).

    This debt situation could not possibly have grown to the nation-crushing dimensions it has in a free market. People would not have taken the inordinate risks with their money that they did had the government not been manipulating the interest rates to artificially low levels in order to prevent earlier corrections that would have addressed the problem before it grew to this size.

    This problem has almost nothing to do with greedy bankers. People wanting to make a lot of money fast is a universal and immutable characteristic of human beings. Give them an opportunity to take risks while someone else pays the costs if the risk doesn’t pay off, and they will. The cause of this problem is the moral hazard that results from government intervention in the free market.

    Government regulation doesn’t prevent greedy behavior, it just pushes it into less private and more nefarious realms – corruption of officials, money laundering, loophole seeking. At best it means that a whole lot of money and time is wasted hiring lawyers to find ways around the law. The proper role of government is simply to protect people’s property rights. Beyond that, each individual should bear the costs of the financial risks they take. And with gold as money it would be impossible for the government to impose these costs on everyone by printing money.

  10. Yes, totemism. anti-intellectual losers like you are sinking this country. In your world, government causes banking crises, up is down, war is peace. But your little bubble universe of guns and gold and sarah palins who think they understand the world because they can shoot moose is really only supported by ignorance. Go do a little history about banking crises, and you will quickly realize how idiotic you are.
    take care.

  11. Yeah, totemism. Otherwise known as praying to idols. The ancient Israelites were more advanced sociologically than you. That’s what your obsession with gold adds up to. Freedom?? Please? You’re just a bunch of anti-social losers who think that being free means you don’t have to interact with the rest of humanity. To my mind, it’s nothing but slavery to a fundamentally paranoid worldview. Why? Because whenever information enters that challenges the little mythopoetic world you live in, you are simply unable to digest it. That’s what the republicans who voted against the bailout represent. And, in a much worse way, you and your Ron Paul buddies. You think this country belongs to you, but all you want to do is make the government go away.

  12. Goodness. How am I anti-intellectual? I outgrew that left-wing pap that you’ve obviously been marinating in years ago. I was a member of Greenpeace, The Sierra Club, Handgun Control Inc, I subscribed to The Nation, etc, etc, all that leftist bullshit that idealistic 20-somethings get passionate about. Then I grew up and began to see the world the way it actually is.

    If believing in freedom is “anti-intellectual”, then I guess the Founding Fathers were anti-intellectual. Their determination to set up a government with checks and balances, strictly limited by a Constitution whose wording actually meant something at the time (rather than being subject to the whims of whatever judges are appointed at the moment), must have been just “slavery to a fundamentally paranoid worldview.” But who needs checks and balances now, when Mother Government will fix all problems if you just give her your love, like the French and Swedes do, right?

    You have a strange definition of intellectual, but it is consistent with my impression of people who throw around words like “totemism” and “mythopoetic”. I suspect you recently graduated from college with a degree in sociology and a minor in Obama Studies – which, if it isn’t a course of study at the kind of school you attended now, it surely will be before long.

    So, by all means, avoid owning a gun or any precious metal, and place your trust in the Democratic Party and Saint Obama to solve your problems with big bailout bills and public works projects. If naive people like you aren’t buying, it’s cheaper for me to.

  13. If this is true,
    and Im a 21 year old college student about to gradute in 2010. I only have 135 USD in my bank account.

    Is there ANYTHING I can or should do to protect myself? I Just read CONQUER THE CRASH two days ago and IM doing more of my own personal research. The Information is so conflicting but it seems that, we are facing a period of deflation now ( when it would have been a good idea to own extra currency) and that we are heading for a collapse of the money system ( where I will need lots of Precious metals to survive).

    So does that mean I need to purchase Precious metals now and Paper money for later?

    Still confused…..

  14. Well, in the Prechter scenario, the order is to hold currency first for deflation, then PM for currency failure. Best to have a mix of both from the start, since timing is always tricky.

    But as a 21 year old in college, your portfolio is insignificant. Buy a few 1/10 oz coins and forget about it.

    What matters is what else you are doing in school or out to prepare for a total societal reordering. Consider that Obama might draft you into civil service, or that your planned career path may depend on the credit bubble economy.

    I would consider developing skills that can be deployed somewhere like Hong Kong. Almost nothing taught in US colleges but hard science and programming is of universal use.

  15. I’m glad you blocked the moron, but of couse the point to make is this: don’t take our word for it, across all societies and throughout history, gold has maintained its purchasing power.

    Not much you can do with a Roman dinar, or a French assignat, or a 1922 Deutschmark, but a one ounce gold coin from any of those periods will do very nicely, thank you.

  16. Interesting web site. Happened across your site while doing a google search for something.

    Some of your assertions are scary. But I must admit, I’ve come to some similar conclusions about the direction the United States is taking though from a totally different perspective. Some of your ideas represent a convergence of two different sets of ideas that seem to be leading to the same conclusion.

    So, a question. If the United States is in fact heading for massive social upheaval, do you have any kind of prediction or idea regarding a time horizon of such a series of events if taken from a financial perspective?

    In my considerations of an event of this kind, I do not think I could leave my country. And so I must consider how my family and I could weather such event here. Having a time frame in mind would be very helpful in preperations.

    Thank you.

  17. The timing is the hardest thing…

    We could just become France, stagnation and slow decay, living for decades off the wealth that was built when the nation was free. Or we could implode rapidly as the financial crisis deepens — likely as the currency fails, if it fails, and it may not completely.

    In my mind there is a danger zone here from 1-5 years away. If we get through the financial collapse ok, we could go on for a long time as a corrupt socialist state, as almost all of Europe has since the 1930s.

  18. Mike, I’m new hear. Before I comment on this thread I’d like to thank you for providing the forum. So, thanks.

    The root of the question seems to be ‘how can I best preserve the wealth I have?’ and I think your answer, though not satisfying, is probably right:

    “And what do all of these followers of the Austrian School think we (meaning our governments) should do, now that their worst fears are coming true? In a word, to a man, nothing.”

    Where the difficulty comes is in understanding what we (meaning individuals) should do. There’s no doubt in my mind that we, as a government, will do something; that’s what governments do in times like these. Personally I don’t think the governments of the world will magically save me or my family. This leaves the responsibility as a personal one.

    What are the true measures of wealth? Dollars? Gold? Refurbished Porsche parts?

    How about food, water, power and shelter? A person can make arrangements for water and shelter, one because it’s easy to find and in great supply, the other because it can be held individually. Power and food are both problematic since the means to produce these things aren’t generally held by an individual and so subject to real ownership.

    My thinking is that the prudent investor would have clear title to a home and a water well. Cash in excess of short term needs should be converted to a barter medium. But what barter medium? Gold is popular but it’s not nutritious. Stored food rots. Its difficult to capture and contain energy.

    Is cash under the mattress better than gold? I would think not, however the collapse of the Weimar Republic suggests gold may be a risky avenue as well. I believe there are still ongoing efforts to return gold seized by the Nazi’s to the descendants of Apocalypse victims.

    I don’t see a clear solution to this problem. It seems better that we make all attempts to avoid the economic collapse that is threatening us. If that fails, I would think that all bets are off.

    Positing chaos, the rest is easy.

  19. Scott,

    Add a hunting rifle, a sidearm and an axe to that equation, and you’ve got food, heat(as long as you have a fireplace) and self defense taken care of as well. :-)

  20. Nick, I’m with you on that and it was my conclusion as well. So staying in America and living through this is probably going to involve at the very least moving out of the cities and suburbs. Since I haven’t lived in a city or suburb for over 30 years it isn’t much of a problem for me, however I do wonder if gold is really going to be necessary or useful in an environment like that.

    So buying seeds, rootstock and a good solar power system might be a more practical use of funds for the semi-rural patriot. Firewood I’ve got and we have more deer than we know what to do with.

    I envy the Swiss. They mined all the roads in and out of the country decades ago…

  21. “We could just become France, stagnation and slow decay, living for decades off the wealth that was built when the nation was free. Or we could implode rapidly as the financial crisis deepens — likely as the currency fails, if it fails, and it may not completely.

    In my mind there is a danger zone here from 1-5 years away. If we get through the financial collapse ok, we could go on for a long time as a corrupt socialist state, as almost all of Europe has since the 1930s.

    Trust me… becoming like Europe would be the best thing for the US. So Mike puts a negative normative valence on the European social model.

    I do not know what Mike means by “wealth,” but I’ll say that their social capital (if that’s a form of “wealth”) is largely depleted by immigration. And the US’ manufacturing capacity (if that is a form of “wealth”) is athropied generally by trade policies and other political stupidity. Too bad… socialism is not possible in the US. :(

    I do favor the European welfare model as a political outcome to this instead of extreme laissez-faire capitalism (despite their redistribution and high taxation, Sweden more laissez-faire than the US if we disregard the redistribution.) At least it would reduce the suffering (but reduce the creation of other forms of “wealth” and “prosperity.”) and most people would prefer that. In my view, the US model offers most people equity-like risk, and debt-like returns, but Nordic socialism offers bond-like returns with bond-like risk. (In this context, the word “bond” refers to a security with a risk/reward profile of German government bonds, US treasuries, or high grade corporate bonds; I think the deflationary crisis showed many fixed income investments have high risk such as asset backed securities.)

    Of course, Mike does not argue that the US’ former (and especially their current) economic policies is a local or global optimum that is congruent with his notion of “freedom.” But, I just wanted to say that I disagree his negative view of European socialism and point out that if socialism is actually possible, it would be to the benefit of the US.

    I also challenge the notion that European socialism is “corrupt” (it could depend on how one defines “corruption”), but if one uses the Corrupt Perceptions Index, it shows that Sweden, Denmark, Finland and Norway are less corrupt than the US. Hong Kong and Singapore do well too.

  22. Good info here Mike.


    A US conversion to a European style socialist system has huge implications for global stability. It implies reduced US economic output and reduced US influence on the world in general. Many people seem to think that this is would be a good outcome, but it is a mistake to think that the US is a destabilizing force on the world. It is not. Such an outcome essentially would require breakup of the USA and the formation of a new government with a new constitution.

    Thinking beyond the huge economic problems that the US faces, it seems as though there is going to be a power shift towards the dictatorial / communist governments, which is never a good thing.

  23. Oh. I also failed to mention that it looks like Europe is headed for much larger economic problems than the US given the demographics of Europe and all of the promises made by their governments.

    There is simply not enough money and not enough workers to pay for all of the promises made in the past. This is one of the major problems of socialist policies.

  24. I am going to pre-emptively apologize to Mike and clarify myself. I did not post that to fight, but rather defend because I like the Swedish welfare state. I said that European style socialism is the preferred outcome and it should not be viewed with a negative normative valence (as Mike does.)

    However, I am going to be realistic now instead of making policy recommendations on the US that are unrealistic. In my mind, a break up of the US is far more likely than social democracy. I do not think it is possible because of ethnic inhomogenity. Read this for more. (Yes, it was a psychology paper written by a liberal if one wants to use ad hominems on the source.) I do believe our morality is derived from our evolutionary heritage (and also market behavior; those who understand it can use it to have an edge in trading securities), and respect for the in-group is one feature of morality. It is hard to justify this using abstract moral principles (because it evolved as a means of passing on our genes to future generations), but it is a salient future in human morality. One reason why this probably evolved is to deal with the free rider problem. In addition, it is also congruent with the “selfish gene” hypothesis and “kin selection” since people who possess similar ethnic heritage have very similar genetic material relative to other groups.

    Another implication of this view is that immigration would make Japan’s problems worse. In addition, there is a large poor working class there and they do not need more competition.

    Again, using that argument, the prospect for France isn’t that good either, but this is more long run thinking and I do not think it has much use in security valuation.

  25. I am not going argue for any normative positions: I just stated that European style socialism, if implemented, would be the best outcome for the majority of people in the US. Besides, people who base their views on normative positions or apply normative thinking to the market (e.g. “the market should/ought do X”) would get killed. Mike would agree with me on this.

    To continue:
    We all know what discounting by time is. By think of it as discounting by “genetic distance.” For example, we are less likely to consider the suffering of a pig in our ethical calculus than a human. Within the human race, this overtly manifests itself as racism, and Peter Singer calls this “speciesism” outside of out the human species.

    Regarding that view… it seems to be a force for global protectionism (protects local jobs from foreigners who presumably do not share as much genetic material), although there are other forces against it.

    About the list:
    I would add Henry C. K. Liu to that list too although he isn’t an Austrian. He called the fall of the dollar in 2002.

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