Is the US heading for a crack up boom?
As I have said in the past it is important to define terms in order to understand ideas properly.
A crack up boom is defined by Investopedia as:
A crack-up boom is an economic crisis of that involves a recession in the real economy and a collapse of the monetary system due to continual credit expansion and resulting unsustainable, rapid price increases. This concept of a crack-up boom was developed by Austrian economist Ludwig von Mises as a part of Austrian business cycle theory (ABCT). The crack-up boom is characterized by two key features: 1) excessively expansionary monetary policy that, in addition to the normal consequences described in ABCT, leads to out-of-control inflation expectations and 2) a resulting bout of hyperinflation which ends in the abandonment of the currency by market participants and a simultaneous recession or depression.
The US and FED have embarked on a monetary experiment which I believe will end with terrible consequences for the people in the US and could even cause the destruction of the dollar and a political crisis.
The US economy is around $23 trillion dollars. Our policy makers are talking about injecting anywhere from $5-8 trillion dollars into that economy to ostensibly “fight Covid-19”.
This will come in the form of infrastructure spending, direct cash payments to citizens, bailouts of mismanaged cites and states, and other boondoggles.
The problem is the US does not have the money. In a normal economy trying to sell this amount of debt in the market would cause interest rates to soar. This cannot be allowed to happen due to the overwhelming amounts of debt that encumber our economy.
Therefore, the Treasury will issue the bonds and the FED will conjure new dollars to buy them.
Unlike in the recent past this money will be spent into the economy. The problem is that although this conjured money can be created as quickly as pressing the keys on a computer, real goods and services cannot be created this quickly.
A large supply of money encountering a lack of production will result in higher prices.
If and when the markets wake up to the realities of what is occurring there could a cataclysmic shift in bond and stock markets as investors realize that the government is basically monetizing debt issuance and has no constraints on its spending.
I am of the view that we will see the attitude of this admisntration to open up the economy and downplay COVID-19 as a way to try and take credit for a booming economy that will initially take place if that kind of stimulus is applied.
I believe that this will lead to a boom in resource stocks and commodity prices.
This will all feel good at first and then the ugly part; rising prices will run into further loose money policies. The FED will be left with the choice as to whether to raise rates and cause a crash and deflation or continue to inflate.
Either outcome is bad but this is what decades of monetary chicanery has led us too. Enjoy the boom but prepare for the bust.
Grant Williams had investing legend Paul Singer on his podcast to discuss this theme. I highly suggest you give it a listen.