The Boom and bust theory that does not crash

Once the additional credit and money injection have worked their way through the economic system affecting wages and goods prices, the market interest rate returns to its original level. Consumption declines, savings increase, and new investments turn out unprofitable – as entrepreneurs realise that their economic calculation had been corrupted by the artificial suppression of the market interest rate. It turns out that overconsumption and malinvestment are the consequences of the boom; that the production structure had been misguided – and must be corrected, which happens through the bust.

It is in this sense that the ABCT informs us that the boom must (sooner or later) end in a bust. Its reasoning, as irrefutably correct as it is in terms of the logic of human action, cannot be used without caveat to explain the real word, though. This is because the ABCT, like any other theory, holds true ceteris paribus, under the notion of other things being equal. To give a simple illustration: If the central bank injects new money into the economy through credit expansion, and if the free market is allowed to work, and if there are no other factors like increases in productivity, then the boom will turn into bust.

The real world, however, is a different pace. Not only do consumers and producers change their behaviour as time goes by, but there is also government action which affects the working of the economic system. Most importantly, government interference in the market place is on the rise. It clamps down on the very forces that can, and usually do, turn a boom into bust. After the latest financial and economic crisis, 2008/2009 central banks put a “safety net” under the financial markets and the economies: Businesses and investors can now assured that central banks, in time of need, will come to the rescue and bail them out.

The same has happened in late March 2020, when governments all over the world – as a reaction to the political decision to shut down economic activity – put together gigantic “bail-out” packages – meant to support credit markets and extending loans and unemployment benefits to struggling businesses and consumers. Of course, governments do not have all the money promised to the victims of the “lockdown” at hand. And the money cannot be obtained by raising taxes or by issuing new bonds in the capital markets without making interest rates go up.

Central banks have started doing the dirty work by rolling out the biggest “backstop” for financial markets and the economy ever. To prevent the bust, they manipulate the interest rates downwards and print up ever greater amounts of money if necessary. In particular, and most importantly, central banks have entered the corporate and bank credit markets. They have lowered the cost of credit and capital in general. The beneficiaries are big business, Wall Street and, of course, highly levered investors, banks, and the financial industry in general.

Does this not just postpone the inevitable bust, one may ask? The ABCT even helps to find an answer to this question. To start with, of course there would be a recession-depression like bust at some point if and when market forces have the space to restore the economy to equilibrium. However, neither politicians, bankers, entrepreneurs, nor employees want this to happen. This gives a Carte Blanche to governments and their central banks – supported by a public who is becoming increasingly fearful of job losses and personal ruin – to go ahead and do away with what little is left of the free market system. To escape the bust, the free market system is transformed into a Befehlswirtschaft: A system in which the means of production remain formally in private hands, but in which the state, and the special interest groups running the state, are really in the driver’s seat by dictating and controlling goods prices, interest rates and wages, labour conditions and incomes, and even nationalising and managing banks and entire industries etc. This was the model the German National Socialist erected in the late 1930s: The state dictated what was to be produced by whom, when and where, and at what costs.

History does not repeat itself, but sometimes, it rhymes. The Western world is increasingly, and quite rapidly so, bidding farewell to the idea of the free market system – driven by the attempt of fending off the inevitable bust as a consequence of a decade long debt binge caused and made possible by central banks’ fiat money regime. While this may indeed keep away the bust for quite some time, it will weaken output and employment gains. Peoples’ standard of living does no longer improve at an acceptable clip, or it may even decline; and with it comes impoverishment and perhaps even social unrest.

These are the very ingredients that facilitate the rise of the totalitarian state. So the unpalatable truth is that without allowing for a bust, a big crash, the fiat money system and with it all the forces working towards the aggrandisement of the state are here to stay and will predictably get worse. The hefty price of upholding the current boom and the economic and social structure it has brought about is the end of the free market society as we knew it. That said, one should be hesitant to find relief that central banks seem to have succeeded once again fighting the bust.

The ABCT in its traditional formulation enlightens us about the consequences of how the free market system turns an artificial fiat-money-induced boom into bust. It thereby also helps us to understand what actions will most likely be taken by those who want to prevent the boom from ending in a bust: The free society, the free market order, will become the victim. Fiat money – other things being equal – is a sure way of gradually, little by little, overthrowing the present order. In this sense, it is a tool of Marxists’ stealthy agitation, seek-ing to overthrow capitalism, the private property society.

In retrospect it was presumably premature to interpret the latest crash of stock prices – the S&P 500 stock market index shed 33 per cent from 12 February 2020 to its low on 24 March 2020 – as an indication of the approaching end of the fiat money regime. The power of governments and central banks over economic and societal affairs has not been broken. On the contrary. One must fear that it has gathered further strength in the course of the latest “lockdown”: More and stronger than ever, states and their central banks dismantle the free market system, cementing their fiat money and ultimately erecting the almighty state.

The ABCT is a boom and bust theory that does not crash. It offers timeless truths about the economic consequences if and when fiat money is injected into the economy. We know that a boom must result in a bust. But we do not and cannot forecast with certainty when it will occur. It all depends on the “special conditions” under which the fiat money regime operates. In a hampered market economy, the boom might very well last longer than one would expect. And the final crash might appear in a rather different format if and when governments increasingly shut down the free market system: namely tyranny.