ABERDEEN, SCOTLAND – I’ve something a bit different for you today.
Following yesterday’s note where I speculated we’re on the cusp of another grand “alt-season” in the cryptocurrency space, I thought I’d share a snippet from our latest issue of The Fleet Street Letter Monthly Alert. In this issue, myself, Charlie Morris, and Nickolai Hubble weighed in on where we think the rally in crypto – specifically bitcoin – is heading next.
You’ll probably be familiar with my views on digital assets if you’ve been reading Capital & Conflict for a while, but Charlie and Nickolai take quite different approaches – which is why I was keen to get them all in one place in our monthly issue.
Nickolai’s take was a lot broader than both mine and Charlie’s. In fact, much of it, intriguingly, was focused not so much on BTC itself rather than the economic conditions surrounding it – and I thought it’d be worthwhile to share a snippet of his take with you to add a bit more variety to what you’re reading in this letter. Nickolai has a deep appreciation for Austrian economics, and believes we may be in the middle of the fabled economic “crack-up boom”, of which bitcoin would be a strong part. I’ll let him explain…
The Crack-up boom
By Nickolai Hubble
Chief Strategist, The Fleet Street Letter Monthly Alert
Eventually, all forms of price fixing lead to a crisis. Hugh Clegg, a member of the National Board for Prices and Incomes, wrote a book in 1970 with the title How to run an incomes policy, and why we made such a mess of the last one. It describes the debacles his organisation’s plans had caused for the British economy.
But how do things go wrong when central banks manipulate interest rates and the money supply?
The Austrian economist Ludwig von Mises explained what happens when central banks “fight” a recession by lowering interest rates or resorting to quantitative easing (QE): “[…] a monetary expansion results in misinvestment of capital and overconsumption.” The recession which follows this is a correction of the past mistakes. Mistakes that were made by the inducement of central bank policies.
Overall, this constant fiddling by central banks “leaves the nation as a whole poorer, not richer.” But each time, the central bankers simply declare they’ll get it right next time by changing some small part of how they conduct policy – the modern equivalent of How to run an incomes policy, and why we made such a mess of the last one.
Over time, this cycle of engineered booms and their consequent busts do lead somewhere, Mises explained: “Continued inflation must finally end in the crack-up boom, the complete breakdown of the currency system.”
A Crack-up Boom? What’s that?
Investopedia explains:
In the crack-up boom, the central bank attempts to sustain the boom indefinitely without regard to consequences, such as inflation and asset price bubbles.
The problem comes when the government continuously pours more and more money, injecting it into the economy to give it a short-term boost, which eventually triggers a fundamental breakdown in the economy.
In their efforts to prevent any downturn in the economy, monetary authorities continue to expand the supply of money and credit at an accelerating pace and avoid turning off the taps of money supply until it is too late.
In 2008 we discovered the consequences of money printing when it inflates asset price bubbles, as Mises warned about. The housing bubbles around the world were a textbook case of his theories playing out in reality.
In 1976, Labour’s James Callaghan discovered, much to his disappointment, the consequences when the money printing impacts consumer price inflation, Mises’ other warning. At least Callaghan admitted the mistakes:
We used to think that you could spend your way out of a recession, and increase employment by cutting taxes and boosting Government spending. I tell you in all candour that that option no longer exists, and that in so far as it ever did exist, it only worked on each occasion since the war by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment as the next step.
This cycle of booms, busts and inflations in asset prices or consumer prices is reaching an extreme point today. A point known as…
The Crack-up Boom
In short, a Crack-up Boom is when people begin to lose faith in their money and begin to buy things to avoid holding too much of that money. This purchasing behaviour appears to be economic activity, including investment, at first. It appears to meet the central banks’ desired outcome of more economic activity. But it’s really the beginning of an escape from the currency itself.
We eventually reach a Crack-up Boom because the business cycle is not just a cycle. Each repeated attempt to save the economy from the downturn causes the subsequent boom and its subsequent inevitable bust too. But, over time, these cycles lead to ever more obscene build-ups of debt, which require ever larger central bank interventions to offset the bust. The QE and deficits must get larger and larger.
Investopedia explains better than I could what happens each time the reckoning approaches:
As this crisis point approaches, the central bank has a choice: either to accelerate the expansion of the money supply in order to try to help businesses pay for the increasing prices and wages they are faced with and delay the recession, or to refrain from doing so at the risk of allowing some businesses to fail, asset prices to fall, and disinflation (and possibly a recession or depression) to occur.
That’s what happened in 2008, when letting Lehman Brothers fail underwhelmed the markets. But what happens if the central bankers overdose instead?
The crack-up boom occurs when central banks chooses, and sticks with, the first option. Economist Friedrich Hayek famously described this situation as like grabbing a “tiger by the tail”; once the central bank decides to accelerate the process of credit expansion and inflation in order to head off any recession risk, then it continually faces the same choice of either accelerating the process further or facing an ever greater risk of recession as distortions build in the real economy.
This is the moment Callaghan warned against. Because the trend was towards something even worse than a recession. Once the investing public discovers the overall trend behind the cycle, and where it’s going, they can panic. Mises explained:
If once public opinion is convinced that the increase in the quantity of money will continue and never come to an end, and that consequently the prices of all commodities and services will not cease to rise, everybody becomes eager to buy as much as possible and to restrict his cash holding to a minimum size.
[…]
This phenomenon was, in the great European inflations of the ‘twenties, called flight into real goods (Flucht in die Sachwerte) or crack-up boom (Katastrophenhausse).
If that sounds familiar, you must’ve been reading the news!
Welcome to the Crack-up Boom
Ambrose Evans-Prichard at the Telegraph sums up the data itself:
The era of Biden reflation is in full swing already. Commodities are on fire. Agricultural prices have risen 42pc since touching bottom in April. Industrial metals have risen 54pc. Both are higher than they were before the pandemic began.
The spot price of liquefied natural gas has exploded, reaching an all-time high of $32 (mmBtu) in Asia. There is panic buying. Oil lags because of the inventory glut but that will vanish as economies open up. Shipping costs for container freight have tripled on some oceanic routes.
House prices are booming. Commodity prices are surging. Cryptocurrencies are surging. Shipping costs spiked. QE is set to continue indefinitely and interest rates will remain low. Precious metals are sold out.
This is no ordinary asset price bubble or consumer price inflation. The Crack-up Boom has begun…
That’s all I can share from the issue for now – but I hope you found it stimulating. It sure gave me plenty to think about…
Back tomorrow,
Boaz Shoshan
Editor, Capital & Conflict
Category: Investing in Bitcoin