History comes in waves; some are tsunamis

When growth slows in capital markets, the bankers’ daisy-chain of credit and debt breaks down; setting in motion defaulting debt which leads to a recession or, in extreme cases, a cataclysmic hyperdeflationary depression.
 

A deflationary depression is where economic activity (measured by the velocity of money)  falls so low credit and debt-based capital markets are no longer self-sustaining. This happened after the collapse of the 1929 US stock market bubble, causing the deflationary depression of the 1930s, i.e. The Great Depression.

The collapse of US subprime real estate bubble in 2008 unleashed deflationary forces unseen since the Great Depression; and, today, the velocity of money is still lower than even the lowest levels of the Great Depression.

The central bank expansion of the money supply after the 2008 Great Financial Crisis kept capital markets functioning. It did not, however, revive real economic demand as measured by the velocity of money, i.e. the rate at which people spend money.

The Fed’s inflation of the money supply was similar to pouring more gasoline into an already flooded engine. Instead of restarting growth, the flood of liquidity went into financial markets creating bubbles in stocks, bonds, real estate, and other financial assets.

The S&P 500 doubled in value from November 2008 to October 2014, coinciding with the Federal Reserve Bank’s “quantitative easing” asset purchasing program. After three rounds of “QE,” where the Fed poured billions of dollars into the bond market monthly, the Fed’s balance sheet went from $2.1 trillion to $4.5 trillion. – Yahoo Finance, The Fed caused 93% of the entire stock market’s move since 2008, March 11, 2016
 

The bankers’ quantitative easing (QE) inflated an entirely new class of financial assets, i.e. cryptocurrencies/Bitcoin. Ironically, the birth of Bitcoin coincided with the central banks’ renewal of aid to banks. Encoded in Bitcoin’s genesis blockchain were the words,  The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.

On January 3^rd, The Times [London] noted the Chancellor of the Exchequer was contemplating a second bailout for the banking sector; i.e. financial institutions that indebt the public with debt-based fiat money .

Bitcoin, the world’s first cryptocurrency, was hoped by many to be fiat money’s successor. It’s spectacular ascent supported that possibility. When bitcoin was released in January 2009, its value was barely above zero, a fraction of a US penny,.  Nine years later, the price of one bitcoin was $19,783.

Note: Calling Bitcoin a currency doesn’t make it money. A loincloth may be preferable to being naked, but it still doesn’t qualify as everyday wear in most cultures.

Bitcoin, a major recipient of central bank money printing, became the largest asset bubble in history. True believers, joined by hordes of profit-seeking speculators, drove its price spectacularly upwards.
 

After 2008 despite the bankers’ expansion of the money supply, economic activity declined and the velocity of money fell.

In 2007, I wrote:

The collapse of the present financial edifice can come from many directions and from many causes. So will it be in the Time of the Vulture. When the abyss is no longer avoidable, it may be a dollar crisis that pushes us over the edge or it might be a failure of a major investment bank such as Goldman Sachs, JP Morgan, Citicorp, or Deutsche Bank or another overleveraged hedge fund like Long Term Capital Management or the inability of a small bank somewhere in the daisy chain of financial institutions to meet its obligations on a Monday morning.

In 1931 the failure of an Austrian bank, Credit Anstalt, set in motion a series of bank failures that was to plunge the world into the abyss now known as the Great Depression. Who knows what will be the cause this time? What bank? What currency? What default? What event?

Only one thing is sure. The present financial edifice, built on an inherently unstable foundation of paper money and ever-increasing mountains of debt, is vulnerable as never before. It may be a sudden movement or a gust of wind or a sonic boom. but whatever it is, it can no longer be said it will be unexpected – Time of the Vulture: How To Survive The Crisis And Prosper In The Process

However expected the event, the event itself, COVID-19, was completely unexpected. In 2020, a deadly pandemic brought economic activity to a standstill. Global markets froze, the velocity of money plunged and central bankers found themselves facing a catastrophic hyperdeflationary collapse.

THE VELOCITY OF MONEY 2000 – 2020

To prevent the otherwise inevitable collapse from happening, the Fed embarked on the largest monetary expansion in history, larger than the historic growth of money and credit after the 2008 Great Financial Crisis (GFC).

COMPARED TO THE 2020 CENTRAL BANK PANIC THE 2008 FINANCIAL CRISIS IS AN AMUSE-BOUCHE
 

When the pandemic began to tear across the United States in March [2020], the Fed — which sets monetary policy — cut interest rates to near zero and began pumping hundreds of billions of dollars into financial markets to keep them functioning. The central bank also introduced a slew of lending programs helping to stave off corporate bankruptcies. Those actions touched off the stock market’s rebound after it collapsed briefly in February and March.

The Fed is still pumping some $120 billion in newly created dollars into financial markets each month by purchasing Treasury bonds and government-backed packages of mortgages. The strategy is similar to “quantitative easing” programs put in place by the Fed during and after the 2008 financial crisis, when it bought bonds to inject money into the economy and spur expansion. – The New York Times, Market Edges Towards Euphoria, Despite Pandemic’s Toll, December 27,2020

Despite the tsunami-like explosion of money and credit, real economic activity did not respond. The velocity of money plunged, then flatlined.

Note: A persistently low velocity of Money leads to hyperdeflation where no amount of credit can induce sufficient economic growth for credit and debt markets to function.

Although the historic expansion of money and credit failed to revive growth, it caused speculative bubbles grew even larger.

… the Pandemic Housing Boom has sent U.S. home prices up a staggering 41.6% since January 2020… Over the past year, U.S. home prices have climbed 20.4% while private sector wages climbed 4.8%. – Fortune Magazine,  July 2, 2022,

On February 16, 2021, the price of bitcoin reached $53,292—269 % higher than its historic bubble in 2017.
 

In November 2021 the price of Bitcoin peaked at $67,566.83. The 2020 tsunami  of liquidity had ignited the crack-up boom, a speculative frenzy created by continually increasing credit creation by central banks; a boom in which markets rapidly rise higher and higher until the boom ends, bubbles burst and the economy collapses.

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. – Investopedia.com

The 2020 hyperinflationary expansion of money and credit also reawakened dangerous inflationary forces previously quiescent for decades, subdued by deflationary forces released after the collapse of the 1990 Japanese Nikkei bubble, the 2000 dotcom bubble and the 2008 real estate bubble.

US INFLATION

US inflation soared 7.9% in the past year [2021], a fresh 40-year high…“The numbers are eye-watering and there is more to come,” said Eric Winograd, senior economist as asset management firm AllianceBernstein. “The peak in inflation will be much higher than previously thought and will arrive later than previously expected.” – AP News, March 10, 2022

Central bankers know—but won’t acknowledge publicly—that if prices continually rise, inflation turns into hyperinflation where prices move upwards with greater and greater rapidity until fiat money becomes worthless.

We’re at more risk now than we’ve been in a generation…this could get out of control…One scenario would be…a new surprise…that we can’t anticipate…but we would have even more inflation – James Bullard, President St. Louis Federal Reserve, February 17, 2022 [i.e. Bullard was refering to hyperinflation]

Hyperinflation has been the downfall of fiat currencies since it’s invention in China in 1024. Ralph T. Foster in his seminal study of fiat money, Fiat Paper Money, The History and Evolution of Our Currency, wrote of China’s troubles with “the devil’s script’.

Over the course of 600 years, five dynasties had implemented paper money and all five made frequent use of the printing press to solve problems. Economic catastrophe and political chaos inevitably followed. Time and again, officials looked to paper money for instant liquidity and the immediate transfer of wealth. But its ostensible virtues could not withstand its tragic legacy: those who held it as a store of value found that in time all they held were worthless pieces of paper.

Central bankers are well aware that today’s fiat money is just as prone to hyperinflation as the fiat currencies issued by Chinese dynasties. Central bankers have only one way to contain inflation, i.e. raise interest rates.

Although raising interest rates would cause asset bubbles to collapse, rather than risk today’s inflationary spiral becoming tomorrow’s hyperinflationary nightmare, in 2021 the Fed announced it would begin raising interest rates.

Soon after the announcement, speculative bubbles began to deflate. Bitcoin fell from a high of $65,000 in November 2021 to $17,601 in June 2022. In January 2022, Nasdaq was 35,952. On July 5, 2022, it was 10,991.45.

On June 17, 2022, an article in the New York Times noted: 

The Stock Market Is Plummeting. Welcome to the End of the ‘Everything Bubble’. This week, the S&P 500 entered what analysts refer to as a bear market. The index has plunged around 22 percent from its most recent peak in January. Many growth stocks and crypto assets have crashed double or triple that amount…New home sales declined 17 percent in April, causing some analysts to argue that the housing market has peaked. And in response to rising inflation, the Federal Reserve just approved its largest interest rate increase since 1994, meaning asset prices could dip even lower.

In 2022,  Ludwig von Mises’ crackup boom peaked and hyperinflated asset bubbles are now deflating. Inflation is in motion as is deflation. Both hyperinflation and hyperdeflation are possibilities as well as their simultaneous occurrence. The collapse of fiat money is next.
 

In times of expansion, it is to the hare the prizes go. Quick, risk taking, and bold, his qualities are exactly suited to the times. In periods of contraction, the tortoise is favored. Slow and conservative, quick only to retract his vulnerable head and neck, his is the wisest bet when the slow and sure is preferable to the quick and easy.

Every so often, however, there comes a time when neither the hare nor the tortoise is the victor. This is when both the bear and the bull have been vanquished, when the pastures upon which the bull once grazed are long gone and the bear’s lair itself lies buried deep beneath the rubble of economic collapse.

This is the time of the vulture, for the vulture feeds neither upon the pastures of the bull nor the stored-up wealth of the bear. The vulture feeds instead upon the blind ignorance and denial of the ostrich. The time of the vulture is at hand.

The words describing The Time of the Vulture came to me in 1991. In 2022, The Time of the Vulture is beginning.

Buy gold, buy silver, have faith