To start... let me quote Ludwig Von Mises in his book... Human Action: A treatise on Economics: "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 voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."
Theres the culprit...massive credit expansion. No one can deny the massive expansion of credit in the last 30-40 years...especially since the collapse of the Bretton-Woods international monetary system in the early 1970's. The same thing happened with the collapse of the Gold Standard at the beginning of World War I. When WW I started in 1914, the European countries stopped converting their currencies into gold at the rate set and effectively killing the international gold standard at that time. A standard that had been in place since the Napoleonic wars. Since there was no way the warring governments would have been able to get the required war material under a gold standard, a system of trade deficits and governmental debt came into being. After all...if the warring countries would have stuck to the gold standard, so much gold would have left their countries, credit contraction would have been inevitable inside the respective countries since the amount of credit that was available was dictated by the amount of gold one had on reserve. This contraction would have led to economic collapse. Where did these countries get their war material? The USA of course. The US then began to see a huge trade surplus as its European trading partners purchased the needed supply of war material. These capital inflows resulted in a massive doubling of the credit base in the USA between 1915 and the early 1920's. This huge capital influx and credit expansion in turn resulted in a period of economic expansion known as "The roaring 20's". But the expansion, driven by credit creation, created oversupply by the second half of the 1920's. Now companies had created a surplus of industrial capacity, prices began to drop and so did corporate profits. While the stock market was peaking, corporate profits were falling and finally the bubble burst and the rest is history. Our current "credit crunch" differs somewhat. As the destruction of the gold standard resulted in the boom and bust cycle of the early 1900's, The destruction of the Bretton-Woods system in early 1970 and the resulting massive credit expansion soon after has continued to this point and threatens the solvency of our current credit and monetary system. The Bretton-Woods system was formulated around the end of World War II to try to bring about a smooth monetary system. World currencies were pegged at a fixed exchange rate to the dollar and the dollar was pegged to gold at $35.00/ounce. The dollars value was backed by the gold reserves of the U.S government. As we plainly see in todays currency system, exchange rates float freely and a country may devalue its currency to gain advantages in trade. The Bretton-Woods system was created as a close substitute for the gold standard and was put into place to control and prevent excessive credit creation and also to prevent unfair trading practices by the devaluation of a nations currency. It worked great for about 20 years. But in the latter 1960's, with the increase of US corporations overseas, the massive expenditures of the Vietnam war, foreign countries began to see themselves with ever increasing amounts of US dollars. As these countries began to exchange these dollars for gold from the US Treasury at alarming amounts, President Nixon suspended the convertibility of US dollars to gold and everyone agreed to allow a floating currency exchange and the Bretton-Woods system collapsed. Let the massive devaluation of the US dollar begin! As American dollars flew off the printing presses, the US dollar became the world reserve currency. Instead of the creation of credit backed by gold...therefore limiting credit. Credit creation was backed by absolutely nothing...or in other words backed by paper money. The US was now able to pay its debts to its trading partners with currency backed by nothing at all or even with US denominated debt instruments. Worldwide credit expansion began uncontrolled and resulted in the boom and bust cycles in countries like Japan, Indonesia, and now the USA. But the US expansion was different in a few respects. With the US running up trillions of dollars worth of debts worldwide, and the value of the US dollar also decreasing, these foreign countries began to be forced to turn back and invest their US dollars and dollar denominated assets back into the US. Either that or exchange their US dollars for other currencies at an unfavorable exchange rate...therefore losing a substantial amount of money. So in the end it all came back to the US and fueled the massive credit expansion here as foreign governments heavily invested their US dollar denominated assets back into the US. Now everywhere you hear the explanations of the "credit crunch" and see the Federal Reserve injecting "liquidity" into the markets when it was excessive liquidity that caused the problem in the first place. Well see how long the Fed can postpone the inevitable collapse of a monetary system based on nothing but paper. Then and only then will the American people remember why, for thousands of years, gold and silver has been the only real store of value. I'm not looking forward to the results of such a collapse. Back in the great depression, those who went through it were hard-nosed immigrants. These days, having had a silver spoon in our mouths for decades, I fear the worst...chaos.
