Back in April, we took our first look at the idea of a “Crack-up Boom”. It’s originally known as “Katastrophenhausse” in German, which literally means “catastrophe-boom”.
I had completely forgotten about the discussion. But in a world of shortages, spiking and plunging commodity prices, energy crises, wild monetary policies, wild fiscal policies, inflation and general chaos… well, the Katastrophenhausse theory is looking a little prophetic, to be honest. Especially given it was conceived about 70 years ago.
I mean, consider how Investopedia sums up the theory, with my emphasis added:
Understanding a Crack-Up Boom
The crack-up boom develops out the same process of credit expansion and the resulting distortion of the economy that occurs during the normal boom phase of Austrian business cycle theory. 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.
In Austrian business cycle theory, in the normal course of an economic boom driven by the expansion of money and credit, the structure of the economy becomes distorted in ways that eventually result in shortages of various commodities and types of labor, which then lead to increasing consumer price inflation.
Investopedia goes on to explain what happens next in this process. But consider just how spot on the description is so far…
Central banks are continuing extremely loose monetary policy “without regard to consequences, such as inflation and asset price bubbles”. That’s precisely what’s happening.
Inflation rates in key economies around the world are multiples of inflation targets, but the quantitative easing (QE – the creation of money by central banks for the purchase of bonds) and zero per cent interest rates persist.
Even central bankers are warning about asset price bubbles. But are they tightening policy to stop them?
Similarly, government spending continues to veer out of control.
Who would’ve thought that the United States would engage in a $1.9 trillion stimulus package while inflation is running at 6%, unemployment at 4.2% and GDP growth expected at 4.8% for the current quarter of 2021? It’s madness.
The distortions of the Crack-up Boom theory are what we’ve been puzzling over in 2021. Such as the price of lumber going berserk, the same for coffee and a growing list of other commodities. We’ve had goods shortages, with computer chips getting all the attention, and an energy crisis too. This was after the oil price went negative. And used cars are selling for more than the same model new, because of the waiting time.
None of it makes sense, unless you understand the Crack-up Boom theory, which is all about the structure of the economy and how prices lead to decision making. Muck with prices, as governments and central banks do, and you get chaos.
Stories about labour shortages are another key issue because of how the Crack-up Boom shifts incentives for people. They take on speculation as their pastime, instead of working, as asset prices are bid up while wages stagnate in real terms. Meanwhile, some businesses are forced to offer extreme pay rises, like Amazon’s $3,000 signing bonus for warehouse workers.
It’s truly remarkable how well the idea of a Crack-up Boom conforms to our present plight.
But what does it tell us will happen next?
The Austrian Economist Ludwig von Mises explained that there is no escape from the pain. It’s just a question of when, and how, society is willing to take it:
There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.
What does that pain look like? Well, given how well we’ve conformed to Investopedia’s description so far, let’s find out from them:
The rising prices and limited availability of necessary inputs and labor put pressure on businesses and causes a rash of failures of various investment projects and business bankruptcies. In ABCT this is known as the real resource crunch, which triggers the turning point in the economy from boom to bust.
What could be the signs of a real resource crunch, then? Examples include:
- Those energy companies going bust because they can’t acquire gas at prices they’re committed to selling at?
- Evergrande’s property crisis?
- The businesses that have had to close because they can’t find workers?
That’s just the beginning.
What are the policy options?
Option one is basically the recession which we saw in the early 1980s in the UK and United States, when monetary policy was tightened to rein in inflation, despite the economic damage.
This time, the same cure would likely taste a lot worse given how much more debt we’re in, making interest rate hikes all the more painful.
Option two is hyperinflation, of the sort that Mises lived through in the 1920s. That’s what happens when governments and central banks do not rein in their excesses and try to keep the party going with ever more money, often to try and fund the government.
Once people realise this symbiotic relationship between central bank and government, known by economists as “fiscal dominance”, they also realise that the inflationary policies will continue. And that’s when inflation really takes off.
For now, we’re stuck in the confusion and misallocation phase. But be careful what you wish for. What comes next could be worse!
Or better, if you’re positioned to profit from the Crack-up Boom.
Investing and managing your wealth is, after all, a game of alternatives. You’ve got to hold something, even if it’s cash.
But what if your plan for opting out of a crumbling monetary system also has the potential to double your initial stake? And then double it again. And then again. And then three more times. Plus a little more.
That’s what my friend Sam Volkering anticipates. And he’s willing to share how he plans to do it, here.
Editor, Fortune & Freedom