The Flight Into Fake Values

TrumpCoin, and "Everyone Is Getting Hilariously Rich And You’re Not"

Frontispiece of Arlequin Actionist (Amsterdam, 1720). A contemporary scatological portrayal of John Law—the naked character on the platform—being fed hard money and then passing paper money out the other end.

I have always regarded the German inflation as a kind of mirage, a witches’ sabbath, that vanished, leaving nothing behind it but headaches and regrets. In the summer of 1923 the Inflation, like the legendary witches’ dance, became wilder and wilder, the figures rose faster and faster. Then suddenly the cock crowed, the night was over, and the witch, exhausted and disillusioned, found herself back in her old kitchen.

—Thomas Mann

Inflation: The Witches Sabbath. Full article via

Rudy Havenstein

here; PDF version here

We originally penned this in early January 2018—at the height of what was then considered a historic cryptocurrency mania—as part of a broader analysis that we later developed into the Sorcerer’s Apprentice in January 2021. We republish this excerpt today—almost exactly 7 years later—in honor of President-elect Trump's official $TRUMP "meme coin", which achieved a $32 billion market cap within hours of launch and generated $25 billion in paper wealth overnight for his organization.

Source: Eric Trump

The $TRUMP coin comes on the heels of HawkTuah coin and Truth Terminal—an AI bot turned meme coin creator with a net worth well on its way to $100 million. Together these memecoins represent the quintessence of modern markets: a recursive interplay between loose monetary policy, AI, social media, algorithms, memes, and human speculation that increasingly divorces markets from economic reality and synthesizes a Financial Matrix. The hyperreality we identified and analyzed in 2018 has not only persisted but intensified dramatically after Mr. Market’s Schizophrenic Break of 2020—reaching a scale we could scarcely have imagined.

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The Markets Are One Giant Bet That Central Banks Control Rates & Volatility

As we showed in Volmageddon & The Ant Death Spiral, the global market boom post-2008 has been driven by two interrelated sources. First, trillions of QE dollars directly inflated global markets. Second, leveraged speculation—partly based on the (so-far) accurate perception that unlimited QE is available to backstop markets regardless of the amount of speculative mania it engenders—exacerbated QE’s liquidity excesses:

Source: FT, Algebris

The entire investing world post-2008 has essentially become one gigantic, levered, self-reinforcing speculative bet that central banks control interest rate levels and volatility. The incoming Fed chair’s statements in the recently-released 2012 Fed minutes essentially admitted to this:

I think we are actually at a point of encouraging risk-taking…Investors really do understand now that we will be there to prevent serious losses…they have every incentive to take more risk, and they are doing so. Meanwhile, we look like we are blowing a fixed-income duration bubble right across the credit spectrum that will result in big losses when rates come up down the road. You can almost say that that is our strategy… So I think it’s really a central bank stepping in and cutting off tail risk.

Last month, the St. Louis Fed echoed incoming Chairman Powell:

Source: St. Louis Fed

We are well and truly through the looking glass here. Central bankers are publicly boasting about purposefully creating the greatest monetary inflation and mispricing of financial assets in human history.

The closest historical precedent was John Law’s Mississippi Bubble in France. As

Douglas French

and others showed, the Mississippi Bubble infected nearby Britain, creating an intertwined, parallel South Sea bubble. The twin bubbles—which pale in comparison to today’s global “everything bubble”—triggered a speculative frenzy whose collapse later plunged France and Europe into a severe economic depression and helped pave the way for the French Revolution and the French hyperinflation.

The Breakdown Of Bretton Woods II

We clearly have a front row seat for the greatest fiat and credit-driven bubble in world history; the past year, however, has made us seriously consider for the first time whether a far more insidious and dangerous factor is at work. Have we now reached the critical point where people are beginning to realize—albeit unconsciously—that the Bretton Woods II monetary system itself is terminal, and are therefore attempting to protect themselves from central bank-induced financial repression by hiding in any and every “asset”, unhampered by such pesky contrivances as “fundamentals” or “valuations”?

The lifecycle of major inflations typically follows three distinct stages: first, the initial "prosperity" phase as money flows freely and without negative apparent consequence; second, the growing instability as malinvestment accumulates; and finally, the terminal phase of collapse. As Henry Hazlitt noted, the initial stage of a monetary inflation generates an artificial boom and illusory prosperity:

The broad pattern of all [money and credit] inflations, historical and modern, is the same. The first result is commonly the ‘recovery’ that the inflationists…are seeking.

It is not until later that its disappointing and poisonous effects become apparent... This is because the kind of production stimulated by inflation even at the beginning is an unbalanced production (owing to the money illusions that inflation creates) and because inflation finally encourages merely malinvestment, thriftlessness, speculation, and gambling at the expense of production itself.

Ultimately, as Ludwig von Mises famously pointed out, central banks are caught between Scylla and Charybdis:

Either the banks continue the credit expansion [inflation] without restriction and thus cause constantly mounting price increases and an ever-growing orgy of speculation – which, as in all other cases of unlimited inflation, ends in a “crack-up boom” and in a collapse of the money and credit system. Or the banks stop before this point is reached, voluntarily renounce further credit expansion, and thus bring about the crisis. The depression follows in both instances.

Crack-Up Booms & CryptoKitties

Post-2008, the central banks have plainly chosen the path of unchecked credit expansion; observing the past year in the markets has made us wonder if we are nearing Mises’ Scylla and Charybdis moment. If the central banks choose to continue their current policy from this point, it seems that we are fated to enter the terminal stage of the inflationary process, when:

… 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.

This phenomenon was, in the great European inflations of the [1920’s], called the crack-up boom (Katastrophenhausse)…

One of the actions people undertook to save their assets was the Flucht in die Sachwerte, the flight into “real values,” into tangible assets, everything from real estate to art collections. Nevertheless, the collapse of money’s asset function resulted in vast redistribution of wealth, especially among the middle class…[6]

The “crack-up boom” occurs when the public realizes that inflation is destroying their money and attempt to protect their wealth using any means at their disposal.

Venezuelan Stocks: Bubble? Currency Collapse? Both?

Source: Vice, Factset

The “flight into real values” refers to the frantic rush to spend all monetary savings and other available cash (sometimes even borrowed cash), buying goods (whether needed or not) and speculating on “assets” to avoid holding—even for a short time—any amount of a rapidly depreciating currency.

We now bear witness to the modern spectacle of the flight into fake (and virtual) values such as cryptokitties and dogecoin, the cryptocurrency that was conceived as a joke and was briefly valued at $1.6bil (Ed: $59bil in Jan 2025).

Everyone Is Getting Hilariously Rich And You’re Not

Over the years, we have occasionally contemplated how a crack-up boom would unfold amid advanced digital technology and our modern monetary system. Events in 2017—and in particular the behavior described in the New York Times (NYT) article published this past week titled “Everyone Is Getting Hilariously Rich And You’re Not” about crypto-millionaires—make us concerned that we are witnessing an early glimpse of what such a phenomenon might look like in the future.

Hyperinflation & Hyperreality

The NYT piece eerily echoes Paul Cantor's “Hyperinflation and Hyperreality,” a work that's stayed with us ever since we first read it over a decade ago [Ed: and served as the inspiration for our Sorcerer’s Apprentice series]. Cantor examines a Thomas Mann short story about the Weimar period, showing how hyperinflation didn't just destroy Germany's currency—it unraveled the entire social fabric of society and destabilized fundamental notions of reality itself. The parallels to our own hyperreality make this analysis more urgent than ever. We strongly urge our readers to read Cantor’s piece in its entirety:

The story charts the dissolution of authority, as we watch a social order breaking down and see the confusions that result…The world...has become so confusing that it is difficult for the characters simply to tell what is real anymore. Mann creates a pervasive sense of inauthenticity in the story; the modern world is a counterfeit world…

The NYT article shows that society today suffers from a similar inability to distinguish real from counterfeit:

“Nothing feels real, it doesn’t feel real,” [Mr. Gardner] said.

“When I meet people in the normal world now, I get bored,” Mr. Hummer said. “It’s just a different level of consciousness.”

Nearby is a building residents call the Crypto Crackhouse. “My neurons are fried from all the volatility,” Mr. Hummer said. “I don’t even care at this point. I’m numb to it. I’ll lose a million dollars in a day and I’m like, O.K.”

Mann chose an actor to highlight the societal inauthenticity engendered by the Weimar inflation:

When an actor named Ivan Herzl shows up at the party in heavy makeup, he provokes Cornelius into thinking about how people no longer are what they seem: "You would think a man would be one thing or the other-not melancholic and use face paint at the same time"…In choosing an actor as his model, Bert ends up imitating an imitator, and thus threatens to become a mere simulacrum of a human being. What strikes Cornelius about Herzl is his total lack of authenticity; as an actor, he always seems to be putting on a show, and hence not to have any reality of his own: It all, no doubt, comes from his heart, but he is so addicted to theatrical methods of making an impression and getting an effect that both words and behavior ring frightfully false.

Today, instead of an actor we have CoinDaddy the cryptocurrency rapper:

He pointed to his outfit — a long white fake mink coat, gold-heeled shoes — and said, “It’s gold, right? It’s gold. It’s a niche, and I’m going to fill it.”

CoinDaddy. Source: NYT Everyone Is Getting Hilariously Rich And You’re Not

When Money Dies: The Dissolution of Reality During Inflation

Mann shows that “everything threatens to become unreal once money ceases to be real”:

Mann suggests that if we seek an explanation of the dissolution of authority in the world he is portraying, we should look to the monetary madness of the Weimar Republic. As he shows, inflation eats away at more than people's pocketbooks; it fundamentally changes the way they view the world, ultimately weakening even their sense of reality. In short Mann suggests a connection between hyperinflation and what is often called hyperreality...

A strong sense of counterfeit reality prevails in "Disorder and Early Sorrow." That fact is ultimately to be traced to the biggest counterfeiter of them all the government and its printing presses. Hyperinflation occurs when a government starts printing all the money it wants, that is to say, when the government becomes a counterfeiter. Inflation is that moment when as a result of government action the distinction between real money and fake money begins to dissolve.

That is why inflation has such a corrosive effect on society. Money is … the principal repository of value. As such, money is a central source of stability, continuity, and coherence in any community…To tamper with the basic money supply is to tamper with a community's sense of value. By making money worthless, inflation threatens to undermine and dissolve all sense of value in a society.

This perfectly describes the world today: the distinction between real money and fake money has begun to dissolve. Central banks have so corrupted money and the financial markets that the world was forced to create a parallel, virtual set of digital currencies such as those seen in video games.

Inflation Profiteers

One effect of the Weimar inflation was the creation of “inflation profiteers”, as described by Mises:

One of the reasons why public opinion [at the time] misconstrued the economic consequences of the German inflation was the emergence of a class of inflation profiteers. The profiteers were those speculators who were quicker to realize the true meaning of the inflationary boom than were the managers of the banks… No matter what stock he bought, the speculator netted a gross profit which exceeded by far the interest he had to pay to the lending bank. As long as the inflation went on there was no risk for him in embarking upon bull transactions with borrowed money… The inflation favored the debtors at the expense of the creditors. It made a very small group of smart speculators rich. It impoverished the immense majority of the nation.

The same phenomenon was described in “Hyperinflation and Hyperreality”:

Those who know how to exploit an inflationary situation can gain as much as others lose. As a result, inflation creates a topsy-turvy world. The fact that people are losing and making fortunes overnight is responsible for all the social confusions in "Disorder and Early Sorrow"…

Youth, Chaos, and Fortune: Inflation Rewrites Generational Rules

We would argue that the same is true today (in crypto and many other “assets”). In the Weimar—as in current events—it is the youth who are the most successful inflation profiteers:

This effect of inflation explains why youth has come to dominate the world of "Disorder and Early Sorrow"… The young are more adaptable to changing conditions, while the old are set in their ways. Hence the young cope better with inflation…[Inflation] alters the dynamic between the generations in society, giving the young a huge advantage over the old. Not having experienced economic stability, the youth of Germany are more able to go with the inflationary flow…It is not simply a matter of the old losing their economic advantage over the young. In an inflationary environment, all the normal virtues of the old suddenly start to work against them, while all the normal vices of the young suddenly seem to look like wisdom. Conservatism and a sense of tradition make it impossible to respond to rapidly changing economic conditions, while the profligacy of youth becomes paradoxically a kind of prudence in an inflationary environment.

The NYT highlights this “youth as inflation profiteer” phenomenon:

There’s an actual house called the Crypto Castle, and the king is Jeremy Gardner, 25, a rakish young investor with a hedge fund who has become the de facto tour guide for crypto newcomers… People had begun making pilgrimages to the Crypto Castle, knocking on the door, hoping Mr. Gardner could help them invest.

The NYT brings into stark relief the modern upheaval between the generations also witnessed in the Weimar:

Now, with a fortune he says is in the hundreds of millions, his parents have retired and sent his younger sister to live with him. “I’m taking over her education,” Mr. Fickel said, sitting on a white leather sofa, Mr. Bigglesworth asleep in his impossibly skinny arms.

We then are introduced to a middle-aged housekeeper who has turned to the younger generation for inflation profiteering advice:

Maria Lomeli, 56, came to the party to find the people she had put a lot of trust in. A housekeeper from Pacifica, Calif., she said she had invested $12,000 in cryptocurrencies over the last few weeks after reading about it in the news. “And maybe I’m going to lose it,” she said. “Maybe I’m going to keep cleaning houses. But something is telling me I can trust this generation. My instinct is telling me this is the future.”

YOLO

The Mann story illustrates something that Austrian economists have long known—that inflation distorts society’s “time preference”:

As he shows, inflation fundamentally changes the way people think, forcing them to live for the moment. There is no use planning for the future, since inflation, especially hyperinflation, makes future conditions uncertain and unpredictable…Thus inflation works to shorten everyone's time horizons, destroying precisely those attitudes and habits that normally make the middle class hard workers and prudent investors, those forces that lead them to restrict their present consumption for the sake of increasing future production…

We would be hard-pressed to invent a better word to describe this phenomenon than the millennial meme/catchphrase “YOLO” (“you only live once”):

James Fickel, 26, lives in a high-rise with a Russian blue cat called Mr. Bigglesworth. Mr. Fickel is known in the community for “going full YOLO” and investing $400,000 when Ethereum was at 80 cents.

Conclusion

The conditions that created Mann's "Witches' Sabbath" now combine with Money’s Metamorphosis and digital technology to accelerate the corruption of money, markets, and society. We will examine their interplay and consequences in the chapters ahead.