Years ago, I first read the term “crack-up boom” in an essay by the brilliant Austrian School economist Ludwig von Mises. The crack-up boom happens when inflation becomes so bad in a country that the populace will no longer hold onto the currency. They will spend it as fast as they get it because of its rapid depreciation. An actual crack-up boom took place in 1921 in Germany. Inflation kept worsening until the currency became worthless.
Could a crack-up boom take place in America? Although it’s not likely, it does depend on how severe inflation becomes. The economist John Williams argues that the current inflation rate is 11%, not 3%. The people will ultimately figure out if the government is fibbing. The question is how long would you keep your savings intact in the face of a severe inflation? If the inflation rate were to rise as high as 20%, would you spend your dollars or continue to hold them? At what inflation rate would you spend your savings on tangibles?
Once people begin to spend most of their money rather than hold it, the crack-up boom begins in earnest. The $200 item in the morning is $1,000 in the afternoon. Savings, insurance and bonds see their values destroyed. If inflation were ever to reach 20% annually, the risk of a crack-up boom would cause people to buy tangible assets to get rid of dollars. Even at today’s inflation rate, holding dollars can be a worry. Inflation may never get bad enough to start a crack-up boom, but with runaway government spending, unmanageable debt, and relentless money printing, anything is possible.