A crack up boom is the last stage of a fiat currency before it dies. During this stage a government is not able to balance the budget and there is severe debasement (money printing). As a result there is hyperinflation of the currency and drastically higher prices for everyday goods. Society is destroyed with hunger, disease and death.
How it Looks from the Outside
From the outside things look fine, almost great if you had to look exclusively at charts. However being on the ground gives an entirely different picture on what is truly going on. It looks good because everyone is buying and selling, it gives the illusion of prosperity and a booming economy.
This couldn’t be further from the truth. The economic activity is not for production which would imply a healthy economy. The population would be buying and selling basic goods like food to survive. This is really uneconomic activity.
How Long Does it Take to Happen?
A crack up boom does not just happen overnight, it can take years or even decades to get to the point where there is suspicion of its beginnings. It only happens to fiat currencies when they are not anchored to anything like for example a gold standard. There is no record of a fiat currency ever surviving.
Additionally governments and central banks work together and set out executing some ill-conceived financial decisions that ultimately lead to a currency’s demise. One of the warning signs of an imminent crack up boom is when a country’s dept goes above and beyond the GDP numbers.
A crack up boom is not necessarily linear, but there could be short time frames when there is some relief from the high inflation. The first part of the boom starts to happen slowly until the last stage where inflation goes parabolic. For example Weimar Germany’s hyperinflation spanned 10 years from 1913 to 1923. The worst of it was in the last 2 years.
Sourced from Wikipedia
The Societal Effects of a Crack up Boom
There are sever consequence due to money printing. You can get a good idea of how bad it can get from expertly documented book called when money dies by Adam Ferguson. If you are interested you can read the review of when money dies and also buy it here.
Adam Ferguson wrote the book to document the hyperinflation Weimar Germany experienced during a 10 year period which lead to the Marks death in 1923. During this time there was severe starvation, anxiety and anger amongst other things. The hyperinflation the population experienced was brutal and destroyed society.
Are We in a Crack up Boom?
All the world will experience high inflation at the very least as admitted by Bank of America who issued a statement. Note that inflation is never transitory. Additionally, in the bell curve of probabilities hyperinflation is increasingly becoming a likely scenario.
All countries will experience it because all currencies are tied to the dollar as the world reserve currency. People around the world are experiencing food inflation and perhaps noticed other items or services that have inflated as well. So the signs listed here are for everyone to take note of.
Price inflation between 2019 and 2021
Sourced from the Financial Times
Usually there are signs of the beginning stages of a crack up boom. There is usually a mania where rationality gets thrown overboard and assets are bought up for insane prices.
Some signs we are in a crack up boom
- Collectables are sky rocketing. For example this article on BBC talking about the insane money in trading collectable cards
- Stocks go up due to stimulus and not sound economic factors, for example Dow soars 2,100 points, biggest jump in 80 years on CNBC
- Larger portions of the population are trading the stock market. For example this CNBC article about apps like Robinhood are having a moment.
Other signs and signals
Historically gold would increase in price on signs of inflation, hence why it is called an inflation hedge. However the system is broken because banks like JP Morgan have been manipulating the gold market. So there has been no true price discovery for gold.
As a side note – this is about the change thanks to new rules which are coming into effect. As mentioned by Alasdair Macleod a financial and economic expert the Bank of International Settlements (BIS) are implementing new rules called the Net Stable Funding Requirement.
These rules will come into effect by the end of June 2021 for Europe, Switzerland and the US and by the end of 2021 for the UK. Hopefully the rules will be applied as planned and will not be postponed. The UK is where the London Bullion Market Association (LBMA) which is the largest over the counter derivatives market in gold is located.
The LBMA itself admitted that the new rules are going to put them out of business. As a result it will put an end to gold manipulation. Gold will finally be allowed to go up and down as determined by the free market. It will likely rise considerably to reflect financial risk and inflation in the markets.
Meanwhile because Bitcoin is not controlled by banks and is also sound money with a limited supply, it took the place of gold during this interim period and is clearly showing signs of inflation.
Sourced from CoinMarketCap
How Did We Get Here?
It has taken a long time to get to this point. Unfortunately there have been a series of mistakes by bearcats that can be attributed to removing regulation that was set in place precisely to stop any future large scale financial crisis from happening after the 1930s. The 1930s crash came after the swinging 20s that experienced a financial bubble.
There were a lot of rule changes some of the most important are:
- President Nixon removing the US dollar off the gold standard in 1971. To clarify since all world currencies are pegged to the dollar all the currencies are also not on a sound money system.
- The Glass Steagall act got repealed. This act separated investment and commercial banks. It was important because it prevented banks gambling with client funds like a casino.
- Allowing risky derivative trading. Derivatives are being removed to avoid another Lehman crisis by the Bank of International Settlements (BIS) implementing new rules called the Net Stable Funding. The rules are not limited to gold trading, but includes silver, commodities and any derivatives trading.
Other current and future contributing factors
1. Government debt
Subsequently because no currency is tied a sound money system, government debt is soaring higher and higher.
Sourced from HowMuch which shows debt-to-GDP ratios using International Monetary Fund (IMF) data as of April 2021.
As mentioned before, banks admitted there is going to be ‘transitory inflation’ even though inflation is never transitory, it will become permanent inflation unless central banks change their policies. However this will not be the case, central banks coordinate with one another and are calling for more inflation.
For example Janet Yellen the previous fed chair who is now the treasury secretary said Biden must ‘act big’ now to save the economy, worry about debt later.
3. Zero interest rate policy (ZIRP) and negative interest rate policy (NIRP)
Apart from contributing to the Cantillon effect these policies are in place because governments have so much debt that they cannot afford to pay it off. This is even if the interest rate is only just slightly higher. A lot of countries are bankrupt, but governments will not admit it.
As a result of the lower interest rates banks issue more loans adding to the overall debt in the system. In contrast higher interest rates would encourage more savings which would reduce debt.
4. Universal basic income (UBI)
Biden might give UBI a chance and implement this policy. The concept of UBI is not so fringe as it once was, it is a serious discussion point proposed to help low income earners and those affected by hard times.
Stimulus checks due to the faltering economy were sent out in the US even to those that did not need the money. This is a form of helicopter money. To clarify the problem with UBI is that it will only contribute to a less productive society and more inflation in the long run.
5. Yield curve control (YYC)
As if it was not bad enough having ZIRP and NIRP, central banks are also talking about yield curve control. What is yield curve control? In short it is more central bank manipulation of the interest rates that continues to build on ZIRP and NIRP.
Can a Reserve Currency Hyper-inflate?
Certainly this seems to be the case. Initially when the United States started to experience inflation President Clinton opened up its economy and exported Americas inflation to China. Shifting manufacturing jobs to China helped the Chinese economy to grow which was positive for them.
It also lead to things becoming more expensive in China since America was exporting its inflation. As a result sweat shops and cheap labour are not so much of an issue any more and China has a flourishing middle class.
However China cannot take on more inflation and the inflation is getting trapped in the US economy. The dollars that America exported are being traded for other currencies and starting to go back to the US. The dollars and are going to flood the US economy with currency and is currency substitution inflation.
This is why goods are going up in price. Additionally the US is not going to default on its debt obligations like it did in 1971 when Nixon took the US off the gold standard. Defaulting is a more honest way of dealing with the problem. Defaulting is not a nice scenario to think about, but it is much better than continuing with the current policies since the repercussions are going to be even worse.
Why a crack up boom in a reserve currency is worse
The problem with having a reserve currency that hyperinflates just makes things that much worse than having just the one country that destroys its own currency. It will affect everyone around the world as a lot of countries own dollars.
All central banks own dollars, so do some countries who use the US dollar as legal tender and citizens of countries that have lost faith in their own countries currency. When the dollar gets destroyed it will be catastrophic. It will wipe out all the assets and institutions that hold them. The solution would be to ditch the dollar and exchange it for something tangible for example stocks, agricultural land, real estate, gold or Bitcoin.
Inflation is Psychological
Inflation is a monetary event, but it has a strong psychological elements. At some point people will expect higher prices and instead of keeping back they will pay higher prices.
This psychological phenomenon is dangerous during the crack up boom phase. As a result money velocity will increase dramatically; that is money will change hands much more rapidly. People will recognise that the currency is losing value and it will become like a hot potato where no one would want to keep it, but rather exchange it for something tangible.
The currency will become distrusted and with it the credibility of the institutions managing it. Prices of basic needs will go up sky high. However the additional currency will be used to buy tangible assets and fuel more speculation in those assets making it a very difficult vicious cycle to break.
How to Get Out of a Crack up Boom
The solution to hyperinflation in the crack up boom stage is to not have so much central bank intervention. Central bankers do not know what their role should involve in the economy anymore. They should not be controlling the market to the point where there is no true price discovery.
In short societies need to go back to a sound money system. This would mean that there should be particular regulations set in place to protect the economy, no money printing and no control over interest rates amongst other things mentioned in this article.
A change in psychology would need to happen abruptly to encourage savings instead of spending. Subsequently this could include placing the US dollar on a gold standard again and raising the price of gold.
However, knowing that governments will always end up making the same mistakes then perhaps this is not the option. It is why there are so many advocates of Bitcoin and the cryptocurrency space because they want to separate government from money altogether.
If we adopt Bitcoin or another cryptocurrency as a basis for a new sound money system it would create an economic boom the likes of which we will never have seen. It will help in building a prosperous future for all.
Perhaps we should not wait for governments to figure out what to do in this situation, but vote with our wallets and adopt a new sound money system ourselves by shifting onto cryptocurrencies.
If you would like to counter government and central bank policies you can check out the article on protect yourself against inflation.
Disclaimer: This article contains research that should not be taken as investment advice.