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The Worldwide Crack Up Boom



By: The Mogambo Guru & The Daily Reckoning Crew


-- Posted Monday, 25 June 2007 | Digg This ArticleDigg It!

Dublin, Ireland

Monday, June 25, 2007

---------------------

*** Kisses that end with bubble pops...not invited to your neighbor’s wild financial party...

*** The lunatic phases of a classic inflationary cycle...Zimbabweans as rich as Midas...

*** Reforms aren’t always easy to come by...very slowly getting to Ireland...and more!

--- Special Announcement ---

Get our newest $995 investment research service - for free:

http://www1.youreletters.com/t/1276597/4459110/824416/404/

---------------------

A kiss is still a kiss. A sigh is still a sigh...

And a bubble is still a bubble.

When a kiss is over, it’s over. When a bubble pops...well...that’s all she wrote! All kisses end - even the wettest "French" kisses. And so do all bubbles - even sloppy mega-bubbles of liquidity. This one will be no exception. But of course, it’s not the certainties that make life interesting...it’s the uncertainties - the known unknowns and the unknown unknowns, as Mr. Rumsfeld says. We are all born of woman and end up where all men born of women end up - dead. But that doesn’t mean we can’t have some fun between baptism and last rites.

You’ll remember we said that this worldwide financial bubble is both worldlier, and more financial than any in history.

And, for the moment, it is very much alive. So much alive that the media can hardly keep up with it. Forbes magazine, for example, tries to estimate the wealth of the world’s richest people. But the rich don’t typically give out their balance sheets, telephone numbers and home addresses. So, there’s a fair amount of guesswork in the calculations.

But when it came to guesstimating the net worth of Stephen Schwarzman, founder of Blackstone, the Forbes crew wandered off into fiction. They put his wealth at about $2 billion. Recent filings in connection with the new Blackstone IPO show he earned that much in a single year!

In this phase of the bubble, it is as if your neighbors were throwing a wild party - and you weren’t invited. You detest them...envy them...and want to join them, all at once. A very small part of the population is having a ball; everyone else is getting restless and wondering when the noise will stop.

We wish we knew. And we’ve given up guessing.

Meanwhile, the experts, commentarists, kibitzers and analysts are saying that there is a whole new phase of the giant bubble about to unfold; things could get a whole lot crazier. Even many of our respected colleagues are pointing to a text by the great Austrian economist, Ludwig von Mises, for a clue. What we have here, they say, is what Mises described as a "Crack-Up Boom."

Before we go on, readers should be aware that the "Austrian school" of economics is probably the best theory about the way the world works. Like The Daily Reckoning, it is suspicious of efforts to control the natural workings of an economy, in general...and suspicious of central banking, in particular. The fact that it was a one-time "Austrian," Alan Greenspan, who became the most celebrated central banker in history, only increases our suspicions. He was able to master central banking, we imagine, because he understood what it really is - a swindle.

What is a "Crack-Up Boom?" Von Mises explains (with thanks to Ty Andros for reminding us):

"‘This first stage of the inflationary process may last for many years.

While it lasts, the prices of many goods and services are not yet adjusted to the altered money relation. There are still people in the country who have not yet become aware of the fact that they are confronted with a price revolution which will finally result in a considerable rise of all prices, although the extent of this rise will not be the same in the various commodities and services. These people still believe that prices one day will drop. Waiting for this day, they restrict their purchases and concomitantly increase their cash holdings. As long as such ideas are still held by public opinion, it is not yet too late for the government to abandon its inflationary policy.’

"But then, finally, the masses wake up. They become suddenly aware of the fact that inflation is a deliberate policy and will go on endlessly. A breakdown occurs. The crack-up boom appears. Everybody is anxious to swap his money against ‘real’ goods, no matter whether he needs them or not, no matter how much money he has to pay for them. Within a very short time, within a few weeks or even days, the things which were used as money are no longer used as media of exchange. They become scrap paper. Nobody wants to give away anything against them.

"It was this that happened with the Continental currency in America in 1781, with the French mandats territoriaux in 1796, and with the German mark in 1923. It will happen again whenever the same conditions appear. If a thing has to be used as a medium of exchange, public opinion must not believe that the quantity of this thing will increase beyond all bounds.

Inflation is a policy that cannot last."

Mises is describing the lunatic phases of a classic inflationary cycle.

At first, no one can tell the difference between a real dollar - one that is earned, saved, invested or spent - and one that just came off the printing presses. They figure that the new dollar is as good as the old one. And then, prices rise...and people don’t know what to make of it.

Later, they begin to catch on...and all Hell breaks loose.

You see, if you could really get rich by printing more currency, Zimbabweans would all be as rich as Midas, since the Mugabe government runs the presses night and day.

Von Mises died in 1973 - long before this boom really got going - let alone cracked up. He may never heard of a hedge fund...or even a derivative, for that matter. A world money system without gold? He probably couldn’t have imagined it. People spending millions of dollars for a Warhol? Twenty million for a house in Mayfair? Chinese stocks at 40 times earnings? He would have chuckled in disbelief. He understood how national currency bubbles expand and how they pop, but he probably never would have imagined how insane things could get when you have a whole world monetary system in bubble mode.

He’d have recognized the beginning of this bubble...and he’d have recognized the end, but the middle...or the beginning of the end - that would have dumbfounded him. During his lifetime he saw a Crack Up Boom in Germany in the ’20s...and a few more here...but he never saw a worldwide Crack Up Boom.

No, dear reader, no one, anywhere, has ever seen a worldwide Crack Up Boom. We’re the first, ever. Pretty exciting, huh?

We’ll soon get to see if the fundamental things still apply...after all, this year’s Agora Financial Investment Symposium is centered on the ins and outs of global investing. The conference is taking place in Vancouver, British Columbia, July 24-27, and you won’t want to miss it. All of your favorite Agora Financial faces will be there - along with a few special guests, including Nassim Nicholas Taleb and James Howard Kunstler. Secure your spot before the tickets sell out...

AF Investment Symposium - July 24-27, Vancouver, B.C.

http://www1.youreletters.com/t/1276597/4459110/820974/3197/

More news:

--------------

Addison Wiggin, reporting from Charm City...

"On Friday, Bear Stearns bailed out one of the two subprime funds we’ve been following. On fears that the sheer size of this fiasco could topple the subprime derivatives market, BS shelled out $3.2 billion of its own cash. But the other fund carries more than $6 billion in loans and ‘reportedly holds far riskier investments,’ says The New York Times."

For the rest of this story, and for more insights into today's markets, see

The 5 Min. Forecast

http://agorafinancial.com/5MinForecast/5MinForecast_062507.html

--------------

And more views:

*** "France is pathetic...and Sarkozy is not going to change anything," said an opinionated companion at Friday’s dinner.

"They need a real Maggie Thatcher. But Sarkozy isn’t going to do anything.

I’ve been following him. He’s just another hack who wants to hold onto power at all cost, financed by one of the big commercial interests in France.

"He might even want to introduce real reforms. But he can’t. There are too many people, too satisfied. And I can tell you this - I live in McLean, Virginia...I’m an American...and America is going the same way. A bigger and bigger percentage of the voters rely on some form of government handout. They’re not really going to allow reform. They’ve got too good a deal going.

"And you know something else? The richer we get, the harder it is to introduce reforms. More and more people get more and more money from the system. That’s why George Bush set up that new drug program. I think it’s the most expensive new legislation in history. But it buys a lot of votes.

And that’s what counts. You can’t really go against the will of the majority. So, you have to keep giving them things. And the richer the society, the more you can give them. And the more you give them, the less anyone will want to support reform.

"The only reason Maggie Thatcher got away with her reforms was that the country was broke. The miners went on strike and people were running out of power. You’ve got to sink pretty low before you can pull off real reforms. It’s too bad Segolene didn’t win."

*** British airport authorities predicted "chaos" at Heathrow this summer.

Last night, we had a taste of it.

Making our way to Dublin last night, we were delayed...delayed...and delayed some more. We could have sailed a wee bonny boat across the Irish Sea faster than fly on Aer Lingus.

When we finally did get on the plane, we found that we were the only "Irishman" on it. The rest were from Africa, Eastern Europe, and India.

What is going on? We’ll let you know...

---------------------

The Daily Reckoning PRESENTS: In the midst of such serious financial times, there are only two words you need to remember: Mogambo and gold.

These are the only two things that can save you from the inevitable collapse of a worldwide asset boom of catastrophic proportions. Read on...

PLANETARY SUPER BARGAIN

by The Mogambo Guru

The Bank for International Settlements (BIS) has reported that the total clot of global derivatives in existence is now $415.2 trillion, with comes out to 789% of global GDP.

In typical Mogambo parlance, grubby financial bets financed by banks and the financial services industry now total almost eight times the value of every freaking good and service produced on the entire freaking planet in an entire freaking year!

And according to the McKinsey Global Institute, the ratio of global financial assets to annual global output soared from 109% in 1980 to 316% in 2005!

I scream "Gaaaaahhhh!" All of this central bank idiocy of creating more and more money and credit is not news to Jason Hommel of the silverstockreport.com, but a grown man screaming "Gaaaaaahhhh!" at the top of his voice seems to be startlingly novel, judging by his reaction.

Nevertheless, he writes, "Money in U.S. banks, M3, is growing at a rate of about 12% per year, or more. So, in the last 12 months, it grew by about $1.3 trillion dollars, which is $1,300 billion dollars."

So why is a guy who is primarily interested in precious metals talking about the growth of the money supply? Well, we learn why when he wonders aloud how much the 2,500 tonnes of annual world gold production (80 million ounces) is worth at $675 per ounce.

I immediately started sweating bullets, thinking that I was certainly not expecting a damned pop quiz in math, especially one multiplying such large numbers. So I breathe a huge sigh of relief when I learn that he already did the math, and says, "It’s worth only $54 billion dollars."

Then he stops and looks at me with this expectant expression on his face, like I am supposed to draw some important conclusion from this or something, but I am sitting there with this big, dumb look on my stupid face, as I don’t get it. Sensing my problem, Mr. Hommel helpfully reiterates the facts by saying "$1300 billion of new money printed. $54 billion dollars worth of new gold mined, at $675/oz."

Obviously, this is supposed to mean something to me, but it doesn’t.

Again, I just sit there, dumbfounded, feeling uncomfortable and trying to look small so that maybe he won’t see me.

After what seemed an eternity, he finally got tired of waiting for me to show some uncharacteristic smarts, and just tells me what this means.

"So," he says, "the U.S. is actually creating new paper money at a rate 24 times as much as new gold. 1300 / 54 = 24!"

I say, "That’s a lot! And thanks a lot!" as I get up to leave in case this breaks out into more math, as I have enough problems as it is, no pun intended. But he is not done with me yet, and grabs my attention with "And of course, this is hardly a fair comparison. I’m comparing U.S. dollars to world gold production. We should compare total world paper money creation rates, to world gold mining rates."

Intrigued, I sit back down to learn more about how much money the world is creating versus how much gold. Then he says, "But that’s a lot of work, and I don’t know if I can source it all out."

As soon as I heard the word "work" and how he was "sourcing this out", I was instantly scrambling to get the hell out of there. But again, before I could get more than a few yards towards the door in my panic, he lets me know that he was merely toying with me by saying he has, again, already done the work, and, "My well-researched guess is that the U.S. dollar is only about 1/4 of the world total increase of paper money. So, let’s multiply by a factor of 4."

By this time I am lost again, and realize that by this time I had forgotten what in the hell he was even talking about in the first place.

Again I was saved when he laid it all out in front of me with "$1,300 x 4 / 54 = 96! Thus, the world is creating new money at about a rate nearly 100 times faster than the world’s value of new gold." A hundred times more money than gold!

Wow! Finally, a light bulb, albeit low-wattage, goes on over my head! The amount of gold per unit of currency is rapidly falling to record levels, all over the globe, indicating that gold is a Big, Big, Super Big Bargain (BBSBB) right now, and getting more so every day, and for everybody on the planet!

Now you know why I am always screeching that gold will soar, as the dollar is just another of the world’s disastrous experiments with a fiat money and unrestrained fractional reserve banking, meaning that it will go to zero in buying power, or (in the original Latin), magnus squatus profundus. And now it is happening all over the world, as we all use fiat currencies!

The fact that gold is not rising in price right now makes me Squeal With Glee (SWG) "Whee! A chance to buy more gold, and at prices effectively cheaper by the minute!"

But gold is so alien to most people that even when you are screaming in their faces about how stupid they are, they still don’t go out and buy any! Weird!

Until next week,

The Mogambo Guru

for The Daily Reckoning

Mogambo sez: Today, students, we read a passage from the Book Of Mogambo (BOM). "And verily did The Voice Of The Mogambo (TVOTM) roar like thunder across the multitudes, ‘Oil went over $69 a barrel on Monday, proving that you can’t go wrong with holding only gold, silver and oil! Maybe not always optimally, but never wrong!’

"Thus did the enlightened leave with wisdom, and bought gold, silver and oil. The others did not, and came to rue that decision, and their suffering chastened them, but they still had a bad attitude all the days of their lives."

Editor’s Note: This year, the Mighty Mogambo is actually going to bravely exit his Big Mogambo Bunker (BMB) in order to speak at the Agora Financial Investment Symposium in Vancouver, British Columbia. Don't miss this opportunity to hear his rants live, on why "We are all Freaking Doomed!"

Agora Financial Investment Symposium - July 24-27 http://www1.youreletters.com/t/1276597/4459110/820974/3197/

Richard Daughty is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the editor of The Mogambo Guru economic newsletter - an avocational exercise to heap disrespect on those who desperately deserve it.

The Mogambo Guru is quoted frequently in Barron’s, The Daily Reckoning and other fine publications. If you’re inclined to read more, you’ll find the whole Mogambo here:

Death By Inflation Report

http://dailyreckoning.com/Writers/Mogambo/DREssays/MG062007.html


-- Posted Monday, 25 June 2007 | Digg This Article



We'd like to offer you The Daily Reckoning, a FREE daily e-mail service written by entrepreneur and master financial newsletter publisher Bill Bonner. It offers a 'refreshingly witty, erudite... sensible' look at the day's stock news. One reader says The Daily Reckoning offers 'more sense in one e-mail than a month of CNBC.'

You can begin your free subscription by clicking here, entering your email into the box, and clicking 'Subscribe'.



 



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