In this article we discuss the concept of a Crack Up Boom, inflation and hyperinflation. In addition, we talk about how the crack up boom applies to our current economy and provide some solutions regarding things you can do to fight back against inflation.
What is a Crack Up Boom?
One of the most famous economists of the 1920s, Ludwig von Mises, came up with the term. Mises witnessed the events that occurred in Weimar Germany in the early 20th century, including hyperinflation and the destruction of the economy. Mises was a member of the Austrian School of Economics.
A crack up boom is when an economy or government begins a financial melt down because of excessive money printing and rising prices. There are two key features of a crackup boom: excessive money printing by a government and continually rising prices that lead to inflation or hyperinflation. As prices of goods rise, people realize that the cash they hold is losing value quickly. The result is that citizens suffer the consequences of hyperinflation, being unable to buy normal items because of spiraling prices. As a result, hyperinflation in the crack up boom causes people to get rid of cash as quickly as possible. Furthermore, this feeds the hyperinflation cycle as people flee cash and seek out assets, which hold value.
Mises Institute: Crack Up Boom
“If once public opinion is convinced that the increase in the quantity of money will continue and never come to an end, and that consequently the prices of all commodities and services will not cease to rise, everybody becomes eager to buy as much as possible and to restrict his cash holding to a minimum size. For under these circumstances the regular costs incurred by holding cash are increased by the losses caused by the progressive fall in purchasing power. The advantages of holding cash must be paid for by sacrifices which are deemed unreasonably burdensome. This phenomenon was, in the great European inflations of the ‘twenties, called flight into real goods (Flucht in die Sachwerte) or crack-up boom (Katastrophenhausse).” – Hyperinflation, Money Demand and The Crack Up Boom, Mises Institute
What is inflation?
“Inflation is the decline of purchasing power of a given currency over time. A quantitative estimate of the rate at which the decline in purchasing power occurs can be reflected in the increase of an average price level of a basket of selected goods and services in an economy over some period of time. The rise in the general level of prices, often expressed as a percentage means that a unit of currency effectively buys less than it did in prior periods.” –Investopedia
Could a Crack Up Boom Happen in the US?
Well, hyperinflation has famously happened in other places in the world in the recent past. For example, hyperinflation famously struck Weimar Germany in the 1920s. Hyperinflation has also occurred in Zimbabwe, Argentina and Venezuela. Furthermore, hyperinflation has occurred quite a lot throughout history. As a result, all of the aforementioned places experienced a crack up boom.
You have probably heard famous stories of citizens pushing wheelbarrows full of cash to the bakery to buy a loaf of bread.
Hyperinflation in Argentina
Argentina is frequently studied as a case history for inflation problems. Since Argentina became an independent country in 1816, it has defaulted on its debt nine times over the years. Many of these defaults lead to hyperinflation and economic destruction for Argentinians. Furthermore, the debt defaults have caused currency devaluations (money becomes worth less). In addition, inflation in the country has reached levels as high as 5,000%!
Argentina was known as the Switzerland of South America throughout the 20th century. It is a large, independent country with significant natural resources, a delightful climate and strong historical economic growth. However, beginning in the 1980s, increased debt and import issues caused the country to see excessive inflation of the currency. Later, Argentina staked the Argentine Peso to the US Dollar in hopes of economic recovery. However, a recession led to a default on debt and inflation hit again.
As the currency in a country like Argentina loses buying power, more currency is required to pay for the same things. For example, one day groceries may cost $50; however, during hyperinflation, you might return to the grocery store the following day and spend $100 to buy the same groceries that cost only $50 the day before. This behavior ultimately led to a crack up boom in the Argentine economy.
What is Hyperinflation?
“Hyperinflation is a term to describe rapid, excessive, and out-of-control general price increases in an economy. While inflation is a measure of the pace of rising prices for goods and services, hyperinflation is rapidly rising inflation, typically measuring more than 50% per month.” –Investopedia
One thing that significantly affects inflation and purchasing power is money printing. When the US Treasury and the Federal Reserve Bank coordinate to print large amounts of money, it causes inflation. Inflation is simply an increase in the money supply. The bigger the money supply, the less the money in your wallet is worth. Moreover, inflation is a hidden tax. As a result, money you have in your bank account loses purchasing power when money is printed by the government.
On March 23, 2020, it was announced that the US Government would be giving out stimulus checks to Americans. In addition, they planned to give money and loans to businesses hurt by the COVID-19 epidemic. Almost overnight, approximately $2 Trillion in loans and grants were printed out of thin air. As a result, the internet went viral in creating money printing memes. One of those memes was the now infamous “money printer go brrrr” meme. Additionally, this could be the start of hyperinflation and a crack up boom in the United States.
Consumer Price Index
According to the US Bureau of Labor Statistics, the consumer price index has increased 1.3% in the past 12 months (before seasonal adjustment).
“The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. Indexes are available for the U.S. and various geographic areas. Average price data for select utility, automotive fuel, and food items are also available.”
-The US Bureau of Labor Statistics, Definition of Consumer Price Index (CPI)
A consumer price index value of 1.3% seems reasonable for 2019-2020. If inflation or the CPI were only 1% per year, that means that in 100 years one US Dollar would lose about half its purchasing power. For example, $100 in 1920 would only purchase $50 worth of goods in 2020. However, real inflation for items we buy every day is much higher. In addition, we’ll soon see what the real inflation values are, and they are not pretty. As a result, this may be the beginning of hyperinflation in the United States.
The United States Federal Reserve Bank Aims For 2% Inflation
The Federal Reserve Bank believes that we must have inflation to promote stability and predictability in the economy. Their goal is to have 2% inflation each year.
The Federal Open Market Committee (FOMC) judges that inflation of 2 percent over the longer run, as measured by the annual change in the price index for personal consumption expenditures, is most consistent with the Federal Reserve’s mandate for maximum employment and price stability. When households and businesses can reasonably expect inflation to remain low and stable, they are able to make sound decisions regarding saving, borrowing, and investment, which contributes to a well-functioning economy. – Federal Reserve Website
However, despite the inflation values touted by the Federal Reserve Bank, real inflation is likely much higher. Consumers are aware of the difference when buying groceries, paying for items or buying a car. Prices are clearly increasing significantly each year. But is this the start of hyperinflation and a crack up boom in the United States?
The Federal Reserve’s Tools of Inflation: Money Printing and Interest Rates
The Federal Reserve Bank’s most powerful tool for creating inflation is a two-pronged approach. First, they have the power to raise and lower interest rates. Increasing or decreasing interest rates has the effect of accelerating or decelerating the American economy. If they raise interest rates, people tend to borrow less and it becomes more expensive to do business. As a result, there is a chilling effect on the economy; however, if the Federal Reserve lowers interest rates, individuals (and businesses) find it easier to get capital to do business, and the economic machine is powered up, so to speak.
The other powerful tool that the Federal Reserve has is to print money. Typically, when they print more money, there is more money in the economy. The velocity of money increases and people tend to have more money. With more money in the system, the economy is stimulated. As a result, policies that involve greater and greater money printing can easily cause hyperinflation in the United States. As you can see, the scene is set for a crack up boom here in the United States.
The US Dollar Has Declined in Purchasing Power Since 1913; The Stated CPI Does Not Reflect Real Price Increases
In addition, the US Bureau of Labor Statistics provides a handy Inflation Calculator. Using their calculator, you can estimate what purchasing power (based upon inflation) is today compared with years past. For example, $10 in 1960 is equal to $88.71 today. That means that in the 60 years prior to 2020, the dollar has suffered 887% inflation over time.
Since the Federal Reserve Bank was formed in 1913, the dollar has been in steady decline. The dollar’s purchasing power has decreased dramatically since 1913. Using the US Bureau of Labor Statistics CPI calculator, the US Dollar has lost approximately 96% of its purchasing power since 1913. This is an alarming statistic that may be a harbinger of hyperinflation in the United States.
How Inflation is Measured by You
Sometimes when we think about inflation, we think of what can be purchased directly with our national currency. For example, we might notice that last week fuel cost only $3/gallon, whereas, this week a gallon of fuel increased to $3.50. This is how consumers most often notice inflation. However, don’t get too caught up in measuring inflation by just using currency.
How to Survive a Crack Up Boom in the United States
Seek Shelter in Deflationary Assets Such as Gold, Silver, Bitcoin and Real Estate.
There are some investments and things that you can own that hedge against inflation and hyperinflation in the United States. For example, for hundreds of years, owning gold and silver has been a method for how to survive inflation. Gold and silver both have a long history of maintaining their value when currencies became inflated.
Gold and Silver: Assets That Hedge Against Inflation
Real money assets are resistant to inflationary forces and maintain a value that is based on demand. First, silver and gold have a long history of maintaining their value against the currency of the day. No matter what the value of a dollar is, a one-ounce silver coin is always equal in value to one ounce of silver. In addition, silver and gold maintain a special balance with the value of gold, which fluctuates.
Silver and gold are real money, which is tangible and is backed by something of value. Moreover, you can hold it in your hand. Silver and gold cannot be taken from your bank account, like cash. In addition, hackers cannot steal silver from your computer, like Bitcoin. Finally, silver and gold can be kept safely and privately in a secure location. In many cases, real assets are a true defense against a crack up boom.
Another alternative to gold and silver that many consider inflation-proof is Bitcoin. In the past few years, many have begun to use bitcoin like gold – a store of value. In fact, Bitcoin has many of the positive properties that gold has. It is a store of value, it can be a medium of exchange, it can be a unit of account, there’s a limited supply, it is uniform, acceptable, divisible and portable, etc. As a result, Bitcoin may be a great way for how to survive inflation.
Both Bitcoin and gold have a finite, limited supply. As a result, this means that they cannot be subject to inflation. If there is only so much gold, silver and bitcoin, it is by definition, deflationary. Being deflationary means that as the supply of the commodity dwindles, the value and demand for each increase. This is not true of currencies like the US Dollar.
Even something like real estate can have a deflationary affect when compared to US Dollars. Real estate has a long history of maintaining its value over time as compared to the Dollar. However, choose wisely; many believe that there is currently a bubble in the United States real estate market. Prices for real estate in many cities today are considered to be over-priced and inflated. Owning real estate is a great way for how to survive inflation. Furthermore, it can be a source of passive income for you.
This may be counterintuitive, but owning equities such as stocks can be a way on how to survive inflation. With the current trend in the United States of printing money and handing it out to individuals through stimulus checks, obviously inflation is rising. Many people are spending the stimulus money quickly. Furthermore, some people are taking their money and buying stocks or trading equities. As a result, the stock market has been trending higher. However, note that the rising stock market trend cannot last forever. In addition, when the market reverses, it may be ugly. At this point, a smart investor will move their money out of the stock market and into safer assets that can weather the storm.
There are many other examples of assets that can be a method for how to survive inflation. For example, owning art, vintage cars, collectibles, and high demand items that serve a purpose can all be hedges against inflation. When buying assets, stick to what you know. Furthermore, if you know a lot about vintage baseball cards, then buy those with currency. In addition, try to own assets that have liquidity, meaning you can buy and sell them on the market easily. An example of an illiquid asset would be buying a Picasso painting. A Picasso may be a good store of value over time, but you may have to wait for years until you can sell it in a special auction.
Final Thoughts on Inflation and a Crack Up Boom in the United States
As you can see, inflation and hyperinflation are real phenomenon that can affect your personal finances. Additionally, the seeds have been sewn for a potential crack up boom. Currently, inflation is quietly stealing money from your savings. In addition, if hyperinflation occurs, significant destruction of the economy can occur. As a result, it is important to have a plan to address inflation and a place to invest to fight back against the types of inflation.
It is important to note that Piggy Bank Coins does not provide financial advice. We don’t endorse or recommend any financial investments. Instead, we provide information for educational purposes to those seeking knowledge regarding personal finance. However, in the spirit of transparency, note that the author is an investor in cryptocurrencies, precious metals and some equities.
In addition, The Federal Trade Commission (FTC) requires that Piggy Bank Coins disclose to readers that we may receive commissions when you click our links and make purchases. However, this does not impact our reviews and comparisons. Moreover, we try our best to keep things fair and balanced, to help you make the best choice for you.