Crack-up Boom?

Are we approaching a “Crack-up Boom?” For those who may not have heard this term before, it is a concept from the Austrian school of economics as discussed by Ludwig von Mises, one of the best-known Austrian school economists. A crack-up boom is the crash of the credit and monetary system due to continual credit expansion and price increases that cannot be sustained long-term. In the face of excessive credit expansion, consumers’ inflation expectations accelerate to the point that money becomes worthless and the economic system crashes.

It most certainly seems as though the western world, led by the U.S., has kicked the can down the road so far that finally it seems the Fed and other central banks have run out of roadway. Nor does it seem possible that there can be any soft landing upon which to restore a free market economy. The only hope is that the existing financial infrastructure is so destroyed that saner minds will start over again with a realization that a hands-off free market capitalism is the only system that not only can optimize economic wellbeing but also do so in the most egalitarian way ever known to humankind.

This past week on my radio show, Doug Noland said he thinks Chairman Powell really does want to kill consumer inflation, as Paul Volcker did in 1980 but that he will find it impossible to do. Doug noted that private and public debt is far greater now than it was in 1980. But beyond that, the present-day economy is so far removed from the banking system than it was in Volcker’s day that even if Powell had the intestinal fortitude to send the U.S. economy into a gut-wrenching depression by choking off credit, there are now massive derivatives, hedge funds, and ETFs that the Fed has no control over. In other words, there are bound to be systemic failures that send markets cascading downward like so many dominoes knocking each other in a total perhaps global chain reaction. To the extent a systemic failure is recognized before the entire system tips over, you can bet your bottom dollar that the printing presses will be cranked up again!

Assuming as I do that inflation will continue to be a problem for at least a couple more years for a host of reasons, interest rates will continue to rise, exposing mal investments, and a growing number of insolvent banks will seek bailouts from central banks. Initially central banks will bail out member banks, engage in more QE, and employ Treasury yield controls. But as investors begin to realize that holding financial assets is a losing proposition because of inflation, they will begin to ditch financial assets in favor of tangible assets. That process is now already starting as oil and to a lesser extent gold is holding value vis-à-vis incredibly overinflated financial assets.

About Jay Taylor

Jay Taylor is editor of J Taylor's Gold, Energy & Tech Stocks newsletter. His interest in the role gold has played in U.S. monetary history led him to research gold and into analyzing and investing in junior gold shares. Currently he also hosts his own one-hour weekly radio show Turning Hard Times Into Good Times,” which features high profile guests who discuss leading economic issues of our day. The show also discusses investment opportunities primarily in the precious metals mining sector. He has been a guest on CNBC, Fox, Bloomberg and BNN and many mining conferences.