'The 19th-century economist and social philosopher Henry George developed the theory of the business or trade cycle based on malspeculation in land value, although he did not use that term. Such malspeculation would not occur in a pure free market, thus the “business” cycle should more accurately be called "the interventionist cycle" or "the economic distortion cycle." There are two major interventions that cause malspeculation. First is an injection of money into the banking system, an increase in loanable funds not caused by higher savings but by money expansion. The resultant cheap credit fuels both malinvestment and malspeculation in real estate. When the money injections stop, interest rates rise back up, and such projects and purchases slow down and stop. When land values stop rising, speculators sell, and the fall in land values brings down the financial sector that provided the mortgages. Malspeculation carries land values beyond that warranted by the rents. Henry George called this a lockout of labor and capital. With the use of real estate now unprofitable and unaffordable, land values crash. -- The boom-bust real estate and economic distortion cycles have repeated for that past 200 years, yet the 2008 crash surprised not just malspeculators but also economists, financial analysts, and governmental officials. The reason the cycle recurs is that, as the philosopher Hegel observed, people do not learn from history. Or they learn the wrong lessons. They shun Georgist theory, and thus become mal-economists, mal-financiers, and mal-authorities. Add “malspeculation” to your dictionary. Malspeculation is a vital concept that curiously has not had a name, because the role of land in the boom-bust cycle has not been appreciated. The Crash of 2008 was caused by malspeculation, and so the word will find the light of day.'

'Like all cartels, the unconscious combination of land speculators creates a "price umbrella" under which new resources enter the market. Students of cartels recognize a "price-umbrella syndrome". Cartels create an artificial scarcity of a resource or product and an artificially high "price umbrella" to shelter new competitors who come from outside the cartel. Previously marginal or untapped resources enter the market, often irreversibly. In urban growth, the cycle periodically thus creates an artificial surplus of half-developed land (graded, perhaps, roaded, platted, but lacking buildings). Other new land is even less than half-developed: accessed by new freeways, state highways, or county roads, but not even subdivided. At the same time, the lavish use of durable capital to bring settlers to all this marginal land creates a shortage of liquid capital, a shortage of loanable and investible funds, a rise of interest rates and a tightening of credit. The writer has analyzed elsewhere this lavish, irreversible misallocation of capital (Gaffney, 1976). Austrian cycle theorists have dwelt on this tilting of what they call "the structure of production", with too much capital getting sunk irrecoverably in what they call "higher order" goods. Well and good, they are onto something big and vital. Unfortunately, though, they find its cause solely in "forced saving" from bank expansion, with no reference at all to its "geo-economic" roots, and the role of inflated land collateral enabling bank expansion. Worst of all, they see no remedy except forcing down wage rates. -- Skeptics will wonder how we can take more taxes from rents when they are falling. Here is the key: the effect of untaxing trade, capital formation, enterprise, labor, and production is to raise and sustain land and resource rents as a tax base. This does not work through raising asking and holdout prices, but rather by raising bid prices, activating the market.'

'Socio-economics recognizes that the market process includes both competition and cooperation. It encompasses institutions as well as individual behavior, and recognizes sympathy with others as an important human motivator along with self-interest. Socio-economics views rationality more broadly than the narrow rational-expectations approach of neoclassical economics. Socio-economics encompasses both economic reality (positive economics) and social justice (normative economics). The moral dimension of socio-economics is in tune with the geoclassical economics of Henry George, who melded economics and ethics. To George, there is a harmony between morality and economic efficiency, since the policy that maximizes productivity is also morally just. That geoist policy is the full ownership of wages by the worker and the equal distribution of land rent either as dividends or for public revenue. A key interest of socio-economists such as Robert Ashford has been the failure of economics to perform to their maximum productive capacity, with unutilized labor and underutilized land and capital goods. Georgist economics explains why this occurs. Land speculation, pricing land at expected higher future values, prices land too high for current investment, causing investment to slump. Secondly, taxes on labor and enterprise create an excess burden of misallocated resources. Third, central-bank-distorted interest rates create artificial stimuli that create the waste of unprofitable real-estate development. All these distortions prevent the full use of labor and other resources.'

'The geo-economic remedy for the cycle is the public collection of rent (PCR), also known as land-value taxation (LVT). When future rents are collected, the profit is taken away from real-estate speculation. The Austrian remedy for credit manipulation is free banking (Selgin, 1988), a banking system without a central bank, with unrestricted branches and with competitive private bank notes ("money substitutes" redeemable into base money such as gold or a frozen quantity of federal reserve notes). Hence, the geo-Austrian policy to eliminate the major business cycle would be the combination of PCR/LVT and free banking. The collection of the land rent by governments or by voluntary civic associations (Foldvary, 1994) would also provide revenue without interfering with price and profit signals, and without hampering the entrepreneurs who, in Austrian theory, play a key role in economic advancement. -- The 18-year cycle in the US and similar cycles in other countries gives the geo-Austrian cycle theory predictive power: the next major bust, 18 years after the 1990 downturn, will be around 2008, if there is no major interruption such as a global war.'

'On your territory, only you are permitted to produce money. But that is not sufficient. Because as long as money is a regular good that must be expensively produced, there is nothing in it for you except expenses. More importantly, then, you must use your monopoly position in order to lower the production cost and the quality of money as close as possible to zero. Instead of costly quality money such as gold or silver, you must see to it that worthless pieces of paper that can be produced at practically zero cost will become money. Because you can create paper money out of thin air, you can also create credit out of thin air. In fact, because you can create credit out of nothing (without any savings on your part), you can offer loans at cheaper rates than anyone else, even at an interest rate as low as zero (or even at a negative rate). With this ability, not only is your former dependency on banks and the banking industry eliminated; you can, moreover, make banks dependent on you, and you can forge a permanent alliance and complicity between banks and state. You don't even have to become involved in the business of investing the credit yourself. That task, and the risk involved in it, you can safely leave to commercial banks. What you, your central bank, need to do is only this: You create credit out of thin air and then loan this money, at below-market interest rates, to commercial banks. Instead of you paying interest to banks, banks now pay interest to you. And the banks in turn loan out your newly created easy credit to their business friends at somewhat higher but still submarket interest rates (to earn from the interest differential). In addition, to make the banks especially keen on working with you, you may permit the banks to create a certain amount of their own new credit (of checkbook money) in addition and on top of the credit that you have created (fractional-reserve banking).'

'Almost no modern advisers will admit that central banks fix the price of "money"... Central banking blows up economies regularly, and during economic contractions the middle class becomes increasingly unprosperous while more and more wealth is centralized in the hands of great Anglosphere banking families. These families then use their wealth to create dominant social themes – fear-based promotions featuring scarcity memes – that are intended to push Western middle classes into surrendering wealth and power to the globalist solutions (UN, IMF, WHO, etc.) that the familial elites have already prepared. One of the dominant social themes that was remarkable successful in America during the late 20th Century was the idea that various forces were conspiring to erode middle class wealth. The only way to address this potential ruination was through "investing" in a menu of pre-prepared investment solutions featuring rigid, fragile and highly controlled "public" money pools.'

'Mike Maloney is the author of the world's best selling book on precious metals investing. Since 2003 he has been advocating gold and silver as the ultimate means of protecting wealth from the games played by our governments and banking sector. In this 90 minute presentation he lays down his 'most likely' scenario for the global economy over the next decade... short term deflation, followed by big or even hyperinflation. Here you will learn the true definitions of inflation/deflation, the difference between currency and money, price vs value, 'Wealth Cycles', gold and silver accounting for the expansion of fiat currency, gold and silver supply and demand, the differences between the today's bull market and that of the 1970s, The Debt Collapse, and more.' -- "Voodoo, hocus-pocus scheme."

'Land is a creation of nature, not human action, and its value comes from natural features and the population, commerce, and public works of the community. Land rent is a pure surplus that mother nature offers to us as a gift by which to finance the public goods provided by government. But you have rejected mama’s natural offer. Instead, you, by voting for the status quo governmental chiefs, you attack the earnings of labor, and with that loot, you provide public goods that pump up land rent and land value. Yes, you, the voter! What happens then is that rent absorbs much of the gain from economic expansion and progress. Speculators jump in to leverage profit from the land-value rise. Landowners buy land with borrowed funds, so they engage their partners, the banks and other financiers. Speculation raises land values to peaks unaffordable for actual use, and then land values plunge, and the leveraged mortgages and derivatives crash. That is the source of panics and depressions.'

'There is a structure of capital goods from rapid turnover such as inventory to slowly maturing such as shopping centers. When interest rates are low, there is more investment in the slowly maturing capital goods. An expansion of money temporarily reduces interest rates, leading to more construction and other long-lasting investments, but rising prices later make these turn out to be bad investments. Land speculation sets in to take advantage of rising land prices. High prices and rising interest rates reduce profits, so investment slows down, leading to a recession. To reduce poverty, promote growth and efficiency, and eliminate depressions, eliminate taxation and generate public revenue from land rent and pollution charges. Switch from central banking and government fiat money to gold or private currency, with free-market banking. Free banking and the public collection of rent are the macroeconomic policies that promote smooth growth, full employment, and economic justice.'

'As an economy recovers from a depression, more and more enterprises and households buy and rent real estate. Construction accelerates as rents and land values rise. Speculators then come in to buy real estate, hoping to sell at higher prices later. Much of the gain is not a pure market outcome, but the result of subsidies by government in the form of more streets, schools, and other goods that service commerce and residents, paid for by taxes on labor. The problem is both too much and too little construction. There is too much speculative construction of hotels, office buildings, shopping centers, apartments, and houses, much of this in the wrong places, creating sprawl, as speculators hold off lots from construction pending higher prices and more intensive uses of land. Much of this speculative buying and building is fueled by easy credit as the central bank expands the money supply to stimulate the economy. This expansion of money lowers interest rates...'

'Do you price 'stuff' in 'stuff' or in Printed-Out-Of-Thin-Air-Stealing-Your-Wealth-Every-Second-Of-Every-Day-Counterfe­it-Fiat currency? Have you ever valued your house in gold or silver?'

'Dominant Social Theme: Invest wisely and well. – Let's try to put this long-running power elite promotion into perspective. We don't agree with the LA Time's perspective (see article excerpt above). It's not nest-egg versus Social Security (which the US cannot afford, especially because there are no SS funds, only fancy IOUs). There is a third way, which is to get rid of central banking entirely and let tortured Western economies gradually deflate. As economies undistort without the endless goad of monetary stimulation, people would gradually begin to be self-sufficient again. Nuclear families would collapse and extended families would reappear; this is the logical solution to old age, not frantic investing leading to the selection of an old-age home where one is likely to be abused before dying. ...the dollar-reserve system died in 2008, along with the popular belief that one could count on "investing" for retirement. It was never a reality; it was fiction.'

'The public school system in the West is deliberately positioned to produce dumbed-down graduates. Industry in Western countries is so hamstrung by various regulations and tax provisions that those participating are actually helping to make them uncompetitive. Those who work in the public sector are also helping destroy the fabric ... that has nurtured their families in the past. The Anglosphere's organization of society has acquired the unwilling cooperation of the citizenry. People tend to believe that modern, Western cultures have evolved the way they have naturally. In fact, they have not. It is not normal for societies to have 30 percent unemployment. It is not normal for older people to find that their skills are unmarketable because they have "too much" experience. These deviant experiences are the hallmarks of a central banking economy that values destructive centralization over dynamic entrepreneurship and mindless production over creative profit-seeking problem-solving.'

'Nations engage in manic economic and political projects to get a "dopamine rush" that counters the depression and guilt about their success. Political paranoia and slow ego disintegration are seen in conspiratorial group-fantasies, fears of femininity [countered by persecution of homosexuals], imaginary humiliations by other nations [countered by a search for external enemies as grandiosity fails and Poison Alerts and sacrificial group-fantasies proliferate] [and Purity Crusades multiply as anti-modern and anti-child (Bad Boy) movements]. These are countered in the economic sphere by manic overinvestment, risky ventures, excess money supply growth, soaring debt and stock market speculations, and in the political sphere by jingoistic nationalism, expansionist ventures, military buildups and belligerent, insulting foreign affair behavior. As in drug addiction, each dopamine rush leaves a dopamine hangover that requires an even larger manic activity to overcome the resulting depression.'

'This is how Western capitalism operates after all. Too little is made of the connection between stock exchanges and central banking, though much is made of the connection between central banking and the graduated income tax which is seen as necessary to pay off the interest of the debt that the larger government accumulates. But in fact stock exchanges along Western (American) lines are part of the process of managing the booms and busts that central banks inevitably generate. Because too few people understand the inevitability of booms and busts, nor the connections between central banks and exchanges, the middle class is inevitably damaged by market downturns. Only those who have some understanding of Austrian economics have a chance, in our view, of participating in the stock market on equal footing with market pros. ...understanding macro-economic forces are perhaps the most efficient for people who don't want to spend all their spare time involved in market analysis.'

'Doug Casey: Well interest rates are suppressed all over the world by these governments who think that they need low interest rates to stimulate their economies. People want to save, but they're afraid to save in the form of paper currency. So they get into stocks and real estate. The stock market fluctuates erratically in an environment like that, and stocks are really just paper, at least fro one point of view. So many people are more comfortable with real estate, in that it has use value. As a result there's been massive construction in China, financed heavily with bank loans, and that's going to be a disaster. The consequences for these banks and the Chinese national currency can't be good. The two trillion dollars in foreign exchange reserves that they have could dry up and blow away if the government tries to bailout the real estate market. Assuming they're not inflated out of existence by the US first...'

'...reinflation is failing. What is the elite to do? Ordinarily, the elite would turn to war. And not just any war. War that involves and convulses the entire society. War that so pervades the hearts and minds of individuals that there is no intellectual alternative to the action-elements that the state is demanding. But ... it is almost impossible to engage in old-fashioned world wars. This is a problem. The Internet itself provides another problem in this day and age. Never before has humankind created a wideband broadcast that provides the minutest details of individual issues. The result has been an explosion of knowledge, and nowhere has the knowledge had more of an effect than on the political economy. In the midst of an epochal economic downturn, the Western power elite thus finds itself bereft of its two best managerial weapons – war and control of information, and the results will be unpredictable.'

'The root causes and only solution for what we all face.' -- "You have to stop listening to people who tell you that the problem is the free-market – the free-market is simply private property and the non-initiation of force. This is kindergarten philosophy: Your stuff is your stuff and don't hit people." -- "Will you see reason before it's too late?"

'When the tide is going out, there are regular intervals when water seems to be advancing... Over a period of decades, fiat-money works in a similar manner. Industrial economies are hollowed out by the combination of inflation and progressive taxation. Every recession, more small businesses are lost. Every recession, additional industry flees to safer havens. Because the process is gradual, and because the mainstream media refuses to recognize it, people living within the system may continue to believe the tide is coming in, when it is actually headed in the other direction. Eventually, there comes a tremendous crash that reveals the true nature of the system. People suddenly see how many jobs are gone, how much entrepreneurial energy has been diminished, how much of the beach has been denuded. When this happens, no amount of happy talk about a "service economy" or capitalism's "creative destruction" can compensate for the reality that has been revealed.'

'...incessant credit stimulation has so distorted Western economies that even after two years, these economies have not yet returned to a point where banks and other investors can tell the difference between a legitimate opportunity and one that has been kept alive by various forms of governmental chicanery. This is why "stimulus" and "bailouts" are ultimately so counter-productive. They actually retard economic recovery. For monetarists – and other types of non-free-market economic-oriented journalists inhabiting the mainstream media the inability of banks to lend and the subsequent shrinkage of the money supply is cause for alarm. It is actually the most natural thing in the world. What many economists and financial journalists are calling for in the midst of a downturn is for the printing presses to reignite and for yet more faux-money to enter the economy in order to reinflate.'

'...how do you fix America's and the West's financial system? Get rid of central banks and allow the economy to purge itself of inefficient investment and commercial financial entities. This would take a year or so and then the pain—rather than lingering as it does now—would dissipate and the economic distortions (which rob the West of millions of jobs and their productive wealth) would be alleviated. Regulation is a dominant social theme—a promotion, in that regulation can never be anything but a distortive price fix. If one is looking to reduce business initiatives and centralize industrial power in the fewest hands, one could not do better than design the West's current financial structure. The financial disaster has taken place, whipping out much of the West's business vitality. Now the regulatory shoe seems set to drop, tightening credit and reducing the ability of lending institutions to take even reasonable risks.'

'The power elite that organized the current Western monetary system was successful back in the 1930s in creating a narrative that blamed the financial industry (Wall Street, etc.) for the crash and subsequent Depression. As books like the Creature From Jekyll Island have shown us, it was the formation of a modern central bank, in tandem with modern regulatory democracy that caused the monetary failures that led to the Great Depression. It was inevitable that the elite would again try to shape the narrative of the modern money crisis, and in the largest sense, we think the Goldman lawsuit is part of the process. We are not necessarily implying, by the way, that the powers-that-be sat down in a conference room and decided to blame Goldman for everything. But just as the Western mercantilist money system itself eventually yields up chaos, so the system, with its farcical and dysfunctional regulatory apparatus, eventually yields up culprits. And it has been designed that way.'

'...this latest Great Unraveling when combined with the power of the truth to flourish on the Internet – which has educated people about the reality of this sick system – may spell the end of 20th century-style fiat-capitalism – a system that has been draining the wealth and productivity of the American people, as well as those in other nations, for far too long now. The power elite no doubt means for the current fiat collapse and crisis to give rise to a more seamless global financial regime supervising regional currencies along with an ever-increasing authoritarian state to keep dissidents in check. -- We are not so sure the elite will achieve its goal this time around, not even if it is successful in starting a war with Iran. The elite's dominant social themes are colliding with the relentless education, reporting and truth-telling of the Internet. The longer this state of affairs persists, the more tenuous the elite's fear-based promotions become.'

Gisted -- Harrison breaks the cycle down into 5 phases: #1 RECOVERY (7 yrs): After the previous crash, optimism returns. #2 MINI-RECESSION (A few months): Will typically bring calls for lower rates and tax cuts. #3 EXPLOSIVE (7 yrs): Low rates, mortgage tax breaks and loose lending terms combine to fuel speculation. Greed eventually overwhelms fear of being left off the property ladder. People con themselves into believing houses are an 'investment' rather than just a place to live. #4 WINNERS CURSE (The last 2 yrs): Wild enthusiasm for capital gains. Property must be acquired at any price cursing everyone with unsustainably high valuations. #5 CORRECTION (3–5 yrs): Mortgages default. Risk is perceived again. Banks tighten up; liquidity/credit/money dries up. Banks sell repossessed inventory at low prices. Prices are driven down. Mortgage holders who bought during the bubble now expect capital losses. Renters switch from renting into buying setting the stage for the next recovery.

"How does Harrison do it? Well, he uses an 18 year cycle. He has traced and verified the length of this cycle going all the way back to 1700. For Harrison, the length of the cycle arises partly from how homes are financed. He points out that 5% has been a normal mortgage interest rate for much of Britain's past and that 5% compounded will double in almost exactly 14 years. After a period of 14 years, property prices reach a level where prices are too high and rental yields are too low. When banks have exhausted all their tricks in finding ways to make prices look affordable, the high valuations choke off demand and once the peak is in place, the 3–5 year slide begins which brings prices back down to earth. The timeframe for the downturn is shorter because it operates on fear rather than greed. After the turn, increasing fear and bank tightening of lending terms destroys excessive valuations faster than greed built them up."

'Hedge funds are not seeking to dictate economic affairs. Rather we are preoccupied by price. A market-based economy requires a pricing mechanism to allocate resources and ensure that we all prosper. [W]e believe that recurring and periodic recessions reveal the economy's winners and losers. And through our endeavours, hedge funds attempt to discover the identity and inadequacies of the poor businesses. Fearing that the huge scale of reckless bets within the banking system threatened another depression, our politicians have used public funds to bail out the economy's losers. [I]n doing so they run the danger of creating a plutocracy: a society ruled by the wealthy. We need to stop this socialisation of risk taking. [T]hose in power would rather use the subterfuge of inflation to hide the enormous public subsidy. But we are intelligent, well-funded and willing to vociferously challenge public decisions. Most importantly, we are on your side.' -- The parasite on my parasite is my friend?

'Public interest is inevitably stimulated by the great amounts of money that can be made during an inflationary fiat-money boom, and this is one of the reasons that stock markets have flourished. But just because people invest in equity markets and reap gains during certain parts of the business cycle does not mean that stock markets are in any sense a mechanism that can predictably provide for one's retirement. ...buy and hold strategies are merely massaged, numerical promotions intended to fool people into thinking markets are something they are not. In the 21st century, we believe that business cycle investing - to the degree that it ever worked for the private investor - is going to be increasingly problematic. This is because the entire mercantilistic central banking economy is beginning to break down. The Internet itself is putting tremendous pressure on central banking as a dominant social theme and as a result, the predictable ebb and surge of equity markets may be disrupted.'

'Wherever fiat money travels it brings tremendous euphoria in its wake, though only to begin with. Cities are energized with false booms. Farm children flock to the urban environment to take jobs in factories producing ephemeral goods or work at useless government jobs - that are created from tax revenues during the boom time. Initially, because fiat money inevitably has a relationship to government, much of the perfection of society is attributed to a wise, fair-minded bureaucracy. The bureaucracy, by the way, believes it. -- But today, dear reader, we would propose that the West, and the entire globe, is living through a fiat money collapse. Economies all over the world have been inflated to their fullest and people can buy no more useless gadgets and work at no more superfluous jobs. Too many useful endeavors have been marginalized and phony ones have been elevated. An implosion is taking place. The world is reverting to a kind of mathematical practicality.'

by/via: High Alert: How the Internet and the Global Power Elite are Causing a Financial Hurricane by Anthony Wile (PDF) -- bit.ly/7tTFKN

'Free-market thinkers are a relatively new phenomenon, one that Western public schooling, and the “group think” it fosters had nearly snuffed out late in the 20th century. Education is obviously part of what constitutes the power elite’s “information lever”— and is still an effective way of dumbing down children who go into school eager to learn but are soon discouraged by the factory-like atmosphere, the lack of creativity and a rising tide of peer pressure. Into this environment has come the Internet, and with it the first stirrings of change. On the ‘Net, most anything can be located and children are far more apt to find it — truthful substantiations of history, especially — than most adults. The true impact of the ‘Net has yet to be felt, but it is certainly possible that many of the individuals going forward — characterized herein as two percenters —will be free-market thinkers over time. The “greatest generation” is yet to come.'

'Some recent reading has got me thinking as to whether the US and UK central banks were actively complicit in an aggressive re-distributive policy benefiting the very rich. Indeed, it has been amazing how little political backlash there has been against the stagnation of ordinary people's earnings in the US and UK. Did central banks, in creating housing bubbles, help distract middle class attention from this re-distributive policy by allowing them to keep consuming via equity extraction? The emergence of extreme inequality might never otherwise have been tolerated by the electorate (see chart below). And now the bubbles have burst, along with central banks' credibility, what now?' -- Comment: Anonymous: 'Welcome to Austrian economics.'

Bumped for the clearest explanation of the fraud of central banking yet -- 'Central banks create inflation. That's what they've been put in place to do. Inflation supercharges economies, leading to all sorts of beneficial effects for those at the very top. Stock markets boom. Valuations rise sky high. And when the inevitable bust comes, those who are the most powerfully solvent are in the position to pick up the pieces, thus leading to ever-greater consolidation and control.'

Hypothetical illustration: 'Production has been stimulated to some extent by lowering the reserve requirement [by 50%]; but production cannot be increased nearly as fast as credit can be. So as a result of increasing the credit supply, most prices have practically doubled. Twice the credit does not "do twice the work" as before, because each monetary unit now does, so to speak, only half the work it did before.' -- On credit inflation: '...a fractional-reserve gold system must periodically bring about business and political pressure for a further reduction of the fractional reserve required [where] a central bank, a government and a public opinion eager to keep expanding credit to start a "full employment" boom or to keep it going brings about what is known as the business cycle, that periodic oscillation of boom and bust that socialists and communists attribute, not to the monetary and credit system and central banking, but to some inherent tendency in the capitalist system itself.'