Crack up boom is an economic term that describes a situation where people lose trust in the value of money and start buying other assets, such as gold, land or commodities. This leads to a sudden increase in economic activity that is not sustainable and eventually results in hyperinflation and the collapse of the monetary system.
The term crack up boom was coined by Ludwig von Mises, a member of the Austrian School of Economics, who witnessed the hyperinflation in Austria and Germany in the 1920s. He explained it as follows:
\"The wavelike movement affecting the economic system, the recurrence of periods of boom which are followed by periods of depression, is the unavoidable outcome of the attempts, repeated again and again, to lower the gross market rate of interest by means of credit expansion. 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 a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.\"
In this article, we will explain what causes a crack up boom, how it works, and some examples of historical and recent cases.
Causes of a Crack Up Boom
A crack up boom is caused by excessive credit expansion (money printing) by the government and the central bank. This creates an artificial boom in the economy that is not based on real savings and investment, but on cheap and easy money. This leads to malinvestment, or the misallocation of resources into unprofitable and unsustainable projects.
As the credit expansion continues, inflation starts to rise. Inflation is the general increase in the prices of goods and services over time. It erodes the purchasing power of money and reduces its value. People start to notice that their money can buy less and less each day.
At some point, people lose confidence in the currency and expect it to lose value even faster in the future. They try to get rid of their money as soon as possible and exchange it for other assets that can retain or increase their value. These assets can be anything from gold, silver, stocks, real estate, art, collectibles, or even foreign currencies.
This creates a frenzy of buying and selling that boosts economic activity temporarily. However, this is not a real boom, but a crack up boom. It is based on fear and panic, not on rational calculation and production. It is doomed to end in disaster.
How a Crack Up Boom Works
A crack up boom works like this:
The government and the central bank expand the money supply and lower interest rates to stimulate the economy.
This creates an artificial boom that encourages borrowing, spending, and investing.
This also distorts the structure of production and consumption in the economy. Resources are diverted from more productive uses to less productive ones.
Inflation starts to rise as more money chases fewer goods and services.
People start to lose confidence in the currency and expect it to depreciate further.
They try to escape from money by hoarding other assets that can preserve or increase their value.
This creates a surge in demand for these assets, which drives up their prices even more.
This also creates a shortage of money for normal transactions, which drives up its velocity (the speed at which money changes hands).
This leads to hyperinflation, or an extremely rapid and uncontrollable rise in prices.
The currency becomes worthless and people abandon it altogether.
The monetary system collapses and the economy enters a depression.
Examples of Crack Up Booms
There have been many examples of crack up booms throughout history. Some of them are:
The Weimar Republic (1921-1923)
The Weimar Republic was the name given to Germany after World War I. The war had left Germany with huge debts and reparations to pay to its enemies. To finance these obligations, the government resorted to printing money massively. This led to hyperinflation that reached astronomical levels. At its peak, one US dollar was worth 4.2 trillion marks. 06063cd7f5