Does anyone on here understand Mises' Crack-Up Boom and how exactly it works? I've been trying to learn a bit more about it but have had trouble fully getting it through my mind. Here are some quotes from it:"'This first stage of the inflationary process may last for many years. While it lasts, the prices of many goods and services are not yet adjusted to the altered money relation. There are still people in the country who have not yet become aware of the fact that they are confronted with a price revolution which will finally result in a considerable rise of all prices, although the extent of this rise will not be the same in the various commodities and services. These people still believe that prices one day will drop. Waiting for this day, they restrict their purchases and concomitantly increase their cash holdings. As long as such ideas are still held by public opinion, it is not yet too late for the government to abandon its inflationary policy.'"But then, finally, the masses wake up. They become suddenly aware of the fact that inflation is a deliberate policy and will go on endlessly. A breakdown occurs. The crack-up boom appears. Everybody is anxious to swap his money against 'real' goods, no matter whether he needs them or not, no matter how much money he has to pay for them. Within a very short time, within a few weeks or even days, the things which were used as money are no longer used as media of exchange. They become scrap paper. Nobody wants to give away anything against them."As well as...."It was this that happened with the Continental currency in America in 1781, with the French mandats territoriaux in 1796, and with the German mark in 1923. It will happen again whenever the same conditions appear. If a thing has to be used as a medium of exchange, public opinion must not believe that the quantity of this thing will increase beyond all bounds. Inflation is a policy that cannot last."Some of the points I'm not getting are things like "public opinion must not believe that the quantity of this thing will increase beyond all bounds". What causes the public opinion to think that the quantity will increase so much? Why would those who control the money supply do such a thing as well, for surely they would see that confidence in their system would be lost?Is Mises saying in essence that all fiat regimes will end in hyperinflation? Because if that is the case, I don't quite see the logic that is used to justify that.
Thanks in advance for the responses.
DPatty:Is Mises saying in essence that all fiat regimes will end in hyperinflation? Because if that is the case, I don't quite see the logic that is used to justify that.
All monetary regimes that follow a policy of inflation are eventually presented with a choice between one of two alternatives:
When inflation persists under condition (2) above, people's expectations with regards to inflation change: they eventually realize that the money they receive today will be worth substantially less (in terms of purchasing power) next month, next week, or tomorrow (as in the case of Germany during the interwar period). When this happens, there is a rush to spend money as soon as it is received, for something, anything tangible. The Germans, it was documented, resorted often to burning their cash reserves in their stoves in lieu of firewood, which was harder to come by.
Needless to say, when the effects of inflation run this full course, money ceases functioning as either a store of value or a practical medium of exchange.
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David Z
"The issue is always the same, the government or the market. There is no third solution."
Thanks for the explanation. I am however a bit confused as surely those who control the money supply know this, so why on earth would they go the route of hyperinflation and then lose their power over the money supply? It doesn't seem to make any sense.
Because 1) is perceived as undesirable and can destabilize the system too. It certainly is politically unpopular, and will often get politicians who go that route labelled as partaking of "do-nothing" type government.
To darkness I condemn you...
But seeing as 2) clearly ends in hyperinflation, which ends their party, why wouldn't the Fed simply shut off the printing presses and suffer through scenario 1)? Sure it might be painful, but it seems that it would be worth it to maintain a monopoly of the money supply.
Because 2) will only take place in the more distant future, meaning those in charge today can avoid taking the blame for their actions. I also think there's the genuine belief that the Fed can indefinitely forestall recessions.
David Z:
I just don't see why the money supply must be increased at an accelerating pace? Why not increase it at just a constant pace?
David_Z,
You also said that:
"When inflation persists under condition (2) above, people's expectations with regards to inflation change: they eventually realize that the money they receive today will be worth substantially less (in terms of purchasing power) next month, next week, or tomorrow (as in the case of Germany during the interwar period). When this happens, there is a rush to spend money as soon as it is received, for something, anything tangible."
I just don't quite get this as if I recall inflation in the USA was running at nearly 20% in the late 70's or early 80's. Surely that is a sizeable "chunk" of purchasing power lost in that sort of scenario, so why didn't the currency collapse then as it would obvioulsy be a good idea to buy tangible assets.
Thanks in advance for the help. I'm just trying to get all this sorted out in my mind.
DPatty:I just don't see why the money supply must be increased at an accelerating pace? Why not increase it at just a constant pace?
With constant increases the interest rates would be maintained at the real rate of time preference. Then there would no longer be any profit from fractional reserve credit inflation.
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DPatty:I just don't quite get this as if I recall inflation in the USA was running at nearly 20% in the late 70's or early 80's. Surely that is a sizeable "chunk" of purchasing power lost in that sort of scenario, so why didn't the currency collapse then as it would obvioulsy be a good idea to buy tangible assets.
How are you defining "inflation"? If it's "rising prices" recall the supply shock caused by turmoil in the middle east and the oil embargo. This factor alone brought a lot of things to a standstill, like $9/gallon gas would majorly f**k things up for us, today. In comparison though, $140/bbl crude didn't make it any easier for us in 2008 :)
The Misery Index ( inflation + unemployment rate) topped out at about 22%. I think inflation officially peaked at around 11 or 12 percent in the early 1980s - although the Fed under Volcker had raised interest rates to extraordinary heights: 20% in 1980. In this period, the interest rate was high not because inflation was expected to continue apace, but because money wasn't available, Volcker was contracting the money supply, rather than continuing to inflate it. It was a politically unpopular move, but by 1983 the target rate was back below 4%. It worked.
Inflation of 8-10% a year is high, for sure, and of course there's no line in the sand, no number beyond which hyperinflation begins, but if you look at cases like Argentina or interwar Germany or Zimbabwe, you're seeing inflation of 8-10% a week or more.
Stranger:With constant increases the interest rates would be maintained at the real rate of time preference. Then there would no longer be any profit from fractional reserve credit inflation.
With no manipulation, the interest rates would reflect the real rate of time preference. No manipulation implies that credit inflation is nonexistent.
I'm not sure your statement is accurate.
david_z: Stranger:With constant increases the interest rates would be maintained at the real rate of time preference. Then there would no longer be any profit from fractional reserve credit inflation. With no manipulation, the interest rates would reflect the real rate of time preference. No manipulation implies that credit inflation is nonexistent. I'm not sure your statement is accurate.
A constant increase is not a manipulation as savers always expect the rate of inflation and take it into account when they loan their savings.
From all these posts so far it seems that the only problem is when the public loses confidence in the system, which probability is increased when the inflation rate is raised.
So why on earth would those who have a monopoly on the money supply tempt this level and risk losing all their power, and an awesome position of power at that?
Like If I had a monopoly over the money supply, I would just not exceed say 5% as that way I would surely not be taking too much wealth from individuals. I don't get though why we have case after case of hyperinflation then, as this is fairly obvious reasoning on the part of the monopoly owners. Surely all the cases of hyperinflation are not simply caused by those in charge of the system getting "careless". If they began increasing the money supply too quickly they would understand they have to slow down big time or else jeapordize their whole position.
This is what makes me think that a certain economic condition might come about where the HAVE to increase the money supply at an INCREASING rate. I just don't get what environment must be created to have this happen, or how this situation is essentially created.
Thanks again.
David_z,
You said above, "Volcker was contracting the money supply, rather than continuing to inflate it. It was a politically unpopular move, but by 1983 the target rate was back below 4%. It worked."
How is the money supply contracted in a debt-based currency system without a default in the currency? Every dollar that is created is LEANT into the system, so there will be no way for the interest to be paid for that leant dollar unless more are created...right? I have been told this is why in a debt-based currency the money supply MUST expand. This is because that when "x" dollars are created, the FED must then create "y" dollars which provide money in the system to pay for the interest payments on the "x". Of course the problem is now that there are no dollars in the system to pay for the interest on the "y" dollars, and so new dollars must be added to pay the interest for those...or dollars "z". It's a recurring pattern.
Thanks :)
DPatty:How is the money supply contracted in a debt-based currency system without a default in the currency?
Primarily by selling securities, historically, T-bills.
DPatty:Every dollar that is created is LEANT into the system, so there will be no way for the interest to be paid for that leant dollar unless more are created...right? I have been told this is why in a debt-based currency the money supply MUST expand.
If it doesn't expand, then debtors default. In the short run contraction is tolerable. If the debts aren't repaid, the creditors (who lent money into existence, out of thin f**king air, essentially) take ownership/title of collateralized assets (real estate, capital equipment, etc.) That's a pretty sweet deal, if you think about it.
In the long run it must expand in order to remain self-perpetuating. The Fed pays interest on Treasuries, and since that interest hasn't yet been created, it virtually guarantees more inflation, eventually.
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