boneyard bill
Veteran Member
Ludwig Von Mises, the famous Austrian School economist described what he called a "crack-up" boom. We all know that when governments expand the money supply it creates inflation. This is not hotly debated among economists. There are limits to how much and how long governments can intervene to expand credit and money creation without suffering serious consequences. Nonetheless, governments are greatly tempted to do this because such policies create a short-boom in the economy and this is especially helpful if you are a president and can bring it about at re-election time. (Ref: George W. Bush, 2004).
But a crack-up boom is different. A crack-up boom is ultimately caused by monetary expansion, but the immediate cause is a loss in public confidence in the currency. When people come to expect prices to rise rapidly, they tend to spend their money more quickly. So regular monetary expansion then becomes supplemented by an increase in money velocity. This leads to even higher levels of inflation until you finally reach the point where confidence in the currency in completely lost, and you get very high inflation or even hyper-inflation.
In Weimar Germany you got hyper-inflation. In Argentina and Brazil we saw very high inflation for most of the second half of the 20th Century. Brazil has mostly solved here problem but Argentina has returned to this path, and Venezuela has been pursuing it ever since Chavez got elected. The U.S. came very close to this in the 1970's as the consumer price index reached over 20% at one point and led President Carter to dump his Fed Chairman, William Miller, and appoint Paul Volcker as his replacement.
Today doesn't seem to be so serious. The inflation rate is low. But that is deceiving. First of all, by '70 accounting methods, the CPI would be in high single digits. But the CPI only measures consumer price inflation. It doesn't measure asset price inflation. Asset price inflation is what we call a "bubble," and we are currently experiences bubbles in the stock market, the bond market, and real estate.
But what is worrisome is not just the situation in the US. The rest of world is in much the same situation. Money is created when banks lend, and debt, both public and private, is at all time highs in the developed and much of the developing world. But the US, Europe, and Japan seem to be in the worst shape. Greece is just the tip of the ice berg. This debt can only be serviced by creating more money. Internal economic growth is insufficient and higher taxes would cut growth even more. Slashes in government spending would have to be huge and would create humanitarian problems. Besides, cutting the welfare state dramatically is simply not possible politically.
So the US, Europe, and Japan at the very least, seem to be headed toward a crack-up boom. They can only service their debt creating money, and that money must ultimately produce an increase in consumer prices which will then accelerate money velocity and ultimately create a crisis of confidence their currencies. When confidence in a fiat currency is lost, the end result is a collapse in the currency altogether.
Of course, we may never reach that point. We could see a major collapse of the Western economies due to the collapse of the bubbles they have created. In other worlds asset price inflation may wreck the world economy before consumer price inflation gets a chance. In this case the currency would actually gain value as money and debt disappear due to bankruptcies and defaults. But given the biases of the majority of economists, not to mention the interests of politicians, the likely reaction to bursting bubbles would be more money creation which would ultimately lead to consumer price inflation with an ultimately loss in confidence in the currency anyway.
At present, it looks like bubbles are going to start to burst very soon. In fact, we're already seeing one in the Chinese stock market, but the Chinese government has put their finger in dike for the moment. However, bad as the Chinese situation looks, circumstances in the US, Europe, and Japan look far worse in their fundamentals.
We are headed for hard times ahead. Bursting bubbles could tank the world economy at any time. If those somehow hold off, however, would could still be looking at a crack-up boom not much farther down the road. Of course, because the whole thing depends on confidence in the major currencies, it is impossible to predict a time-frame with any certainty.
But a crack-up boom is different. A crack-up boom is ultimately caused by monetary expansion, but the immediate cause is a loss in public confidence in the currency. When people come to expect prices to rise rapidly, they tend to spend their money more quickly. So regular monetary expansion then becomes supplemented by an increase in money velocity. This leads to even higher levels of inflation until you finally reach the point where confidence in the currency in completely lost, and you get very high inflation or even hyper-inflation.
In Weimar Germany you got hyper-inflation. In Argentina and Brazil we saw very high inflation for most of the second half of the 20th Century. Brazil has mostly solved here problem but Argentina has returned to this path, and Venezuela has been pursuing it ever since Chavez got elected. The U.S. came very close to this in the 1970's as the consumer price index reached over 20% at one point and led President Carter to dump his Fed Chairman, William Miller, and appoint Paul Volcker as his replacement.
Today doesn't seem to be so serious. The inflation rate is low. But that is deceiving. First of all, by '70 accounting methods, the CPI would be in high single digits. But the CPI only measures consumer price inflation. It doesn't measure asset price inflation. Asset price inflation is what we call a "bubble," and we are currently experiences bubbles in the stock market, the bond market, and real estate.
But what is worrisome is not just the situation in the US. The rest of world is in much the same situation. Money is created when banks lend, and debt, both public and private, is at all time highs in the developed and much of the developing world. But the US, Europe, and Japan seem to be in the worst shape. Greece is just the tip of the ice berg. This debt can only be serviced by creating more money. Internal economic growth is insufficient and higher taxes would cut growth even more. Slashes in government spending would have to be huge and would create humanitarian problems. Besides, cutting the welfare state dramatically is simply not possible politically.
So the US, Europe, and Japan at the very least, seem to be headed toward a crack-up boom. They can only service their debt creating money, and that money must ultimately produce an increase in consumer prices which will then accelerate money velocity and ultimately create a crisis of confidence their currencies. When confidence in a fiat currency is lost, the end result is a collapse in the currency altogether.
Of course, we may never reach that point. We could see a major collapse of the Western economies due to the collapse of the bubbles they have created. In other worlds asset price inflation may wreck the world economy before consumer price inflation gets a chance. In this case the currency would actually gain value as money and debt disappear due to bankruptcies and defaults. But given the biases of the majority of economists, not to mention the interests of politicians, the likely reaction to bursting bubbles would be more money creation which would ultimately lead to consumer price inflation with an ultimately loss in confidence in the currency anyway.
At present, it looks like bubbles are going to start to burst very soon. In fact, we're already seeing one in the Chinese stock market, but the Chinese government has put their finger in dike for the moment. However, bad as the Chinese situation looks, circumstances in the US, Europe, and Japan look far worse in their fundamentals.
We are headed for hard times ahead. Bursting bubbles could tank the world economy at any time. If those somehow hold off, however, would could still be looking at a crack-up boom not much farther down the road. Of course, because the whole thing depends on confidence in the major currencies, it is impossible to predict a time-frame with any certainty.
