A crack-up boom is when credit expansion leads to hyperinflation and people abandon the monetary system as a result. If a crack-up boom occurs, people will seek alternative currency to hold because they don’t want to hold paper money with rapidly declining value.
Let’s take a closer look at what crack-up boom means in economics and the potential consequences.
Definition and Examples of a Crack-Up Boom
A crack-up boom is when there is significant credit expansion that results in rapid inflation, or hyperinflation, that leads to a collapse of the monetary system. Essentially, people look for alternatives to government-issued currency because they anticipate ongoing depreciation as well as increasing consumer prices.
Dr. Ludwig von Mises, renowned for his work on business cycles, coined this term as part of his Austrian business cycle theory (ABCT). Von Mises used historical references, such as the hyperinflation in Austria and Germany in the 1920s, to support his theory.
The concept behind crack-up booms is that if people expect the money supply to increase without control, and their current government-issued currency continues to decline in value, they’ll abandon it.
Instead, with inflation, a population turns to tangible goods that they expect to increase in value. Essentially, it is when hyperinflation and increasing money supply destroys a monetary system.
In contrast, when people believe—based on government and central bank actions—that any future rise in the money supply will remain within an acceptable limit, then the monetary system will persist.
With a crack-up boom, the masses expect an ongoing rise in the money supply and in inflation trends, and the result is a scramble to buy goods simply to get rid of money and have a tangible item of rising value. Within a short period of time, even a few weeks or days, a medium of exchange can become obsolete, with currency bills becoming scrap paper.
How Does a Crack-Up Boom in Economics Work?
A crack-up boom is caused by the expansion of money supply and credit in an economy amid rapidly rising cost of goods, or hyperinflation.
In a crack-up boom, people suddenly no longer trust the monetary system, so they get rid of paper money to obtain physical goods they believe will continue to increase in value.
Examples of Crack-Up Booms
A crack-up boom can occur if there is too much credit expansion caused by governments and central banks. That credit expansion can result in an increase in consumer spending that, in turn, would cause prices to rise rapidly. Essentially, when people lose faith in the monetary system, it can collapse and be replaced by a system focused on other forms of currency, such as tangible goods.
Expansionary monetary policy can trigger inflation because it increases the money supply available to the public to purchase goods and services, and lowers interest rates. Accelerating inflation can also occur when the federal government sets expansionary fiscal policy, which can include an increase in government spending, reduction in taxes, or a combination of the two.
As people have more money to buy more goods and services, the prices rise if the supply of goods and services does not increase to match demand. If inflation gets out of hand, people will abandon the monetary system, buy real goods, and seek alternative sources of money.
In recent decades, several countries have seen their economies collapse after a period of money supply expansion and hyperinflation, including China, the former Yugoslavia, Brazil, Argentina, Russia, and Zimbabwe.
From about 2006 to 2009, Zimbabwe’s government began to print money to support its obligations, which increased the money supply, causing the currency to lose value and hyperinflation rates to accelerate. Hyperinflation in the country was so bad that the government issued a Z$100 trillion note in 2009. Hyperinflation destroyed the monetary system and trust in the Zimbabwean dollar. As a result, Zimbabweans embraced the U.S. dollar as their primary monetary unit.
In the U.S., the Federal Reserve aims for an inflation target rate of 2% as it sets its monetary policy. If inflation gets too high, the Fed can actively decrease the rate of money supply, reduce its purchases of Treasuries and mortgage-backed securities, or raise the interest rates.
The Fed issues forward guidance to set market expectations on inflation and to help consumers and businesses plan for the future.
- A crack-up boom occurs when there is credit expansion that results in hyperinflation, or the rapidly rising cost of goods and services.
- A crack-up boom will involve the collapse of the monetary system and people choosing alternative sources of money.
- In recent decades, crack-up booms have occurred in Zimbabwe, China, Argentina, and Brazil, among others.