How an Unsound Global Monetary System Creates Boom / Bust Cycles

Many times when I run into old friends after a while, in reference to past conversations we may have had regarding global capital markets, they tell me something to the effect of: “Everything you said that was going to happen happened exactly like you told me. How did you know?”

The key to my predictions is my understanding of the global monetary system. Often people ask me about questions beyond the realm of my expertise such as real estate. They inform me of countries where the real estate market still seems to be holding up well despite the global monetary crisis and ask me, “Do you think buying a house is a good investment right now in Country X (the name of a country with a healthy real estate market)?”

My answer is always the same. I answer their question with a question of my own. “What’s the key interest rate in Country X (the interest rate at which banks lend to each other)?” I ask. If their answer is any figure between 0.00% and 1.50% to 1.75%, as it often is, I tell them to wait for much lower prices that will be coming very soon. Even though I would never claim expertise in real estate markets, I can still provide my colleagues with solid forecasts based upon my understanding of the global monetary system.

If the key lending rate in Country X is extremely low, I know that the real estate market, despite appearances, is a grossly distorted bubble waiting to burst. In such a situation, the upside may be another 5% to 10% while the downside is likely 25% to 40%. And that is just not a good risk-reward setup to enter any type of market. With the assistance of a fraudulent monetary system, Central Banks create massive real estate and stock market bubbles by slashing interest rates so low that they induce their countrymen to massively borrow from banks.

When Central Banks, in essence, sucker their countrymen to borrow huge amounts of money with low interest rates, then much of this money is either re-invested back into (1) stock markets; or (2) real estate markets. Some may say that “sucker” is too harsh a word choice, but when a monetary policy can have no possible end but the bursting of a bubble, then “sucker” seems quite an apropos choice of words. Everyone always likes low interest rates, but this affinity for “free” money is very short-sighted as such monetary policies always have hugely negative consequences several years later.

Thus, when strong bull markets in stock markets or real estate markets are primarily driven by the implementation of easy money policies instituted by Central Banks, these bull markets never have sustainable legs. This is why the bubbles inevitably form and bubbles inevitably burst. Instead, the only thing easy money policies create are massively distorted prices in stock markets and real estate that would have never been attainable with the implementation of (1) sound money; or (2) the implementation of intelligent monetary policy.

Thus, in some hot spots in Asia where real estate markets have held up reasonably well during this crisis, I can guarantee that you will see real estate prices 25% to 30% lower than present values within approximately 18-months if the key interest rate established by the Central Banks in these markets are close to 1.00% or lower at the present time. In fact, come back here in 18-months and I’ll reveal what specific country I’m referring to, to prove my point.

Furthermore, if you take the time to understand which markets most of that nearly “free” money has been directed into, then it is even easier to understand how significant this drop will be. For example, if real estate markets are still relatively healthy in a country where key interest rates are near 1.00% or lower, and there has been virtually no capital inflow into stock markets for the past couple of years due to the underwhelming performance of global indexes, then you can be assured that the correction that will occur in such a real estate market in the near future will be quite painful.

When I inform people of my very simple way to assess the future direction of real estate markets based upon monetary policies being implemented in their country, they sometimes counter with the question, “What about the trillions upon trillions of currencies being injected into the EU countries, the U.S., and Japan to stimulate the economy? Won’t that cause real estate markets to keep rising?” Again I answer their question with a question of my own. I ask, “So what if these actions succeed in inflating and distorting markets even more. Do inflated asset prices truly create real wealth and is a bigger bubble really beneficial to you as an investor?”

Even if higher, inflated real estate prices and a greater bubble transpires as a result of irresponsible monetary policy, an inflated price of a real estate asset does not necessarily translate into an increase in real wealth. What matters to real wealth is simply the purchasing power of your money, not how much of it you have or how much an asset is worth. During periods of high inflation, an asset can grow quite significantly in monetary terms while simultaneously destroying one’s wealth in real terms.

So even if a bigger bubble does form as a result of loose monetary policy instituted by foolish Central Banks, it is still better to wait until the bubble bursts before you buy. In the end, understanding how money is created, and understanding that we have a broken monetary system today that has not worked for the last century is the key to understanding the future direction of stock markets and real estate markets.

Because this is such an easy concept to understand once properly explained, it also makes the failures of people like former Federal Reserve Chairman Alan Greenspan easier to understand. If one views Greenspan’s actions when he served as the Chairman of the Federal Reserve through the lens of special interest groups and the interests of the financial oligarchs, his actions are quite easy to understand. If you believe that Greenspan made his decisions with the interests of the American people at heart, then they become incredibly difficult to understand.

As long as the mechanisms of this fraudulent monetary system remain in place and as long as the masses remain uninformed, we will always experience huge boom / bust cycles in every capital market in the world. In addition, predicting long-term trends and reversals does not require much more skill other than understanding how money works. Predicting the short-term interim movements of capital markets, however, is much more difficult and requires a historical understanding of Central Bank and government interventions into free-markets.

I recently watched a fascinating documentary called “Secrecy” in which Melissa Boyle Mahle, a former U.S. intelligence officer and expert on the Middle East and Counterterrorism, stated in regard to terrorism, “You need to keep your enemy confused. You want them to be insecure, you want them to fear. If they know your game and they know your strategy and they know your tactics, you have so handicapped yourself that you will not win.”

This is quite a scary statement when you realize that Ms. Mahle’s statement could just as easily apply not to counterterrorism measures but to tactics the financial oligarchs employ against the people. The severe boom / bust cycles that all world economies experience from time to time are NOT natural economic cycles as the economists paid by the financial oligarchs mislead the masses to believe. Severe boom-bust cycles are entirely a man-made event created and precisely controlled by Central Bankers. Understand this, and you will ultimately remove a lot of the guesswork regarding long-term movements of capital markets and understand how to create wealth, even in the midst of crisis.

Comments

[Allan Frain:]

It is a stated policy goal to keep housing prices "from falling too far", by keeping interest rates low. Every potential buyer must recognize that the consequently "elevated" price contains this premium.

It may be difficult to see a "30% off" sale as "elevated", but if the market value is at 40% off a premium is being paid.

A 4% mortgage is quite attractive, but if a sale must be made in 5 years into a 8% mortgage market--equity will be lost.

Apr 21 12:50 PM

[PainfullyAware:]

Great Observation J. S Kim.

It is unfortunate that the general populous does not understand that by allowing Fractional Reserve Banking to exist they have given 9X the power of their dollars to a relatively small group to control as they see fit.

Yes, the manipulation of interest rates do create the massive swings in the Boom/Bust cycles. When the system was smaller, not so Globally Connected, the response to changes was easier to see and easier to "Control". Now that we have such a "Goliath Size" system the effects take longer to show up and have more momentum when they do.

The fact that an entire "Extra Financial System (Shadow Banking)" was allowed to exist to the point that it was the source for close to 40% of all money loaned, exacerbated the issue and it had no metrics in plain view to use as "Feedback" for control or warning.

We shall see how this all turns out.

The magnitude of this "Shadow Banking" catastrophe is staggering and is not done yet. You can use "Pretend Accounting" until default. Once Default Occurs The Pretend Must End.

Apr 21 01:06 PM

[morph366:]

"Severe boom-bust cycles are entirely a man-made event created and precisely controlled by Central Bankers."

Your thesis subscribes to the "conspiracy" view rather than the more mundane and more likely "cock-up" view

Even if one was to agree that boom and bust may be "created by" central bankers it could just as easily be claimed that it is a result of their screw ups rather than through any "precise control". In fact the notion that the central bankers precisely manipulate such events is in contradiction to the point being made about keeping your enemy confused. Precise control would leave footprints that smart market players would eventually recognize and be able to anticipate and that, in turn, would subvert the very control of events that you are alleging.

Apr 21 02:16 PM

[kimb:]

The trick is to know how much control they have in preventing a bust from occuring when you think the balloon can not stretch any more. I have been looking for a bust for 25 years.

Apr 21 04:20 PM

[PainfullyAware:]

All actions have unintended consequences. The "Magnitude" of the consequences would be less with Sound Money Principles. Without the means to "Create" money at whim the "Frenzy Before The Bust" would not be as great.

Humans Will Always "Game" The System. The Magnitude would be less if Fractional Reserve Banking was removed. The "Playing Field" Would Be More Equal.

Exponential Growth Is Not Infinite In Real World Systems.


On Apr 21 01:46 PM Cetin Hakimoglu wrote:

> Boom bust cycles are part of the ebbs and flows of the economy. Trying
> to limit lending and liquidity could have unintended consequences
> and impede economic growth & prosperity.

Apr 21 08:01 PM

[PainfullyAware:]

Not All The Powerful "Rig The System" For Nefarious Gain, But to conclude that none do would be wrong.

Why believe "Conspiracy" when "Idiots" would Suffice? I agree "Stupidity" is more probable to a point.

However, if looked at in a "System" context Collusion becomes more evident and Ignorance becomes less probable.

History shows many events that were not dubbed dubious at the time because of lack of knowledge of the players and their interactions.

No, Not all Conspiracy Theories are true. But to assume that none are, leaves the crimes undetected.

If one can not see the collusion between "Big Biz" and Congress through the K-Street Club, then they are living in "La La Land". The Central Banking System Is A Similar Set With Less Transparency.

The Fact That Money Flows Out Of The Treasury Without Congressional Implementation Should Pique All Citizens Interest In "Conspiracy Theories". The PPIP for securities is a Blatant Example of an attempt to continue fraudulent practices behind closed doors.

Successful "Conspiracies" are hidden by Complexity Or "Noise In The System".

Those Who Never Look Will Never See.




On Apr 21 02:16 PM morph366 wrote:

> "Severe boom-bust cycles are entirely a man-made event created and
> precisely controlled by Central Bankers."
>
> Your thesis subscribes to the "conspiracy" view rather than the more
> mundane and more likely "cock-up" view
>
> Even if one was to agree that boom and bust may be "created by" central
> bankers it could just as easily be claimed that it is a result of
> their screw ups rather than through any "precise control". In fact
> the notion that the central bankers precisely manipulate such events
> is in contradiction to the point being made about keeping your enemy
> confused. Precise control would leave footprints that smart market
> players would eventually recognize and be able to anticipate and
> that, in turn, would subvert the very control of events that you
> are alleging.

Apr 21 08:23 PM

[derryl:]

morph366 wrote, "Precise control would leave footprints that smart market players would eventually recognize and be able to anticipate and that, in turn, would subvert the very control of events that you are alleging."

It seems to me that Mr. Kim's article is identifying a footprint, which means the trail is being recognized. Most people choose to pooh-pooh this kind of evidence because the implications are too outlandish to be believable. But there it is. That's what is being done.

Apr 21 09:56 PM

[J. S. Kim:]

Precise has several meanings, one of which is "strictly conforming to a pattern, standard, or convention". I didn't mean to imply that Central Bankers control every nuance of all capital markets. However, the monetary policy Central Bankers execute is by far the single largest influential factor in creating bubbles that inevitably must burst.

Apr 22 01:03 PM

[inflate me:]

please read Theory of Austrian Business Cycle:
Mises, Rothbard and the rest appropriately point out that booms and busts are caused by expansion of credit. Leading to an unsustaibable period of growth from lower interest rates (this expansion of credit is often exagerated through fractional reserve banking), from the perceived profitablity of more capital intensive long term projects.

The bust comes in the form of a cluster of entreprenual errors who undertook such projects. and they fail as a result of necesary monetary contractions that overwhelm governmentalal attempts to continually inflate. This contraction or perceived credit crushes the entrepreuners financing (bank runs, foreclosures, increased time preference towards savings) and leads to the cluster of failures.

its not a consipracy theory, with central bankers "trying to screw the markets." Their success is measured in terms of election cycles. They are merely acting out of self interest. So the quick fixes of expanding credit suffice in 2/4 year cycles, but they sow the seeds of future busts from the accumulation of artificial credit creating a "savings-glut" in the loanable funds market. As the funds are loanded out as if society were saving at a higher rate than they actually are. Eventually the overhang becomes apparent to society, and LF will move to equilibrium, increasing IR

Apr 23 05:19 PM

[Jasper M:]

Many, many good thoughts here.
INflate me: Thank you, could not have said it better
I agree with Morph. Precise control is impossible in a chaotic system (= many independent actors, each with sensitive triggers)

Cetin: "Limits to lending and liquidity" would have been imposed by the markets themselves, WELL south of where we are now.
Let me come at this a different way.
I have read enough of your posts to know that you actually Do believe that, for example, some jobs/enterprises are less efficient, and should go. Well, that sort of inefficiency is Abetted by artificially easy credit - people throw money where they shouldn't.
This isn't just common sense, it is borne out by the Federal reserve's own research (see an article right here on SA on "Easy credit leads to crummy companies").
These crummy companies are less competitive, less likely to survive - and therefor less likely to repay their credit. This removes credit from the system. At that point, the business cycle cures itself.
But enter an artificial government attempt to keep the bad companies going, with even Easier credit, and the malinvestment get worse. Even more credit? Worse still.
Every attempt to "fix" the crisis with more credit just ensures a bigger wreck in the long run. And the credit expansion to date has been unprecedented.
These are the policies you are cheerleading.
Given the reckoning that is coming, a market rise of a day, a week, or even several months is not much of a comfort. Especially when it has all the earmarks of a bear market rally.

Apr 26 04:20 AM