When Boom Turns Into Crack-Up Boom

Naturally, fraud is inherent to this central planner directed process. And as credit expansion pumps money through the economy, wild and unpredictable things happen. Austrian economist Ludwig von Mises, in his work, Socialism: An Economic and Sociological Analysis, explained:

“Credit expansion can bring about a temporary boom.  But such a fictitious prosperity must end in a general depression of trade, a slump.”

But what happens if a credit expansion is followed with an additional expansion of credit? Does the debt ever have to be repaid? With enough credit-based money, can’t the economic depression be postponed forever?

Again, we turn to Mises, this time his economic treatise, Human Action, for edification:

“If the credit expansion is not stopped in time, the boom turns into the crack-up boom; the flight into real values begins, and the whole monetary system founders.”

The boom brought about by credit expansion at the beginning of the new millennium ended in 2008 with a massive financial crisis and economic recession. The mammoth credit expansion that followed, floated the economy up on a rising tide of debt. But it was not self-sustaining.

More and more credit has been needed to merely prop up GDP. Economic growth’s dependent on greater and greater issuances of credit. Without it a general economic depression would occur.

Perversely, the stability of the debt structure depends on additional credit and rising asset prices. These, of course, ultimately make things more unstable.  Nevertheless, even with massive inflation of the money supply, central bankers are worried about deflation…not inflation.

Prices – including stocks, real estate, and college tuition – levitated by earlier credit expansions want to come down. Central bankers want to push them up.

When central planners shut down the economy last year to bend the coronavirus transmission curve they succeeded in collapsing the debt structure.  Putting moratoriums on evictions and foreclosures and placing a hold on student loan payments doesn’t solve this. Nor does printing up trillions after trillions of dollars and pumping it into the economy as a ‘stimulus’ to counteract the collapse.

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