Is the Global Economy Heading Towards a Crack-up Boom?


Assets are growing at pace, yet some commentators are sounding warning bells with increasing vigor. Is the global economy really in danger of going to pieces? Columnist Les Nemethy looks at what a “crack-up boom” is, and ponders whether we are heading towards one now.

According to Ludwig von Mises, founder of the Austrian School of Economics: “There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion or later as the final and total collapse of the currency itself.”

In other words, according to von Mises, governments can turn off the lending spigots and prick the debt bubble, causing a recession or depression, but if they pass a certain point of no return, a currency collapse becomes inevitable.

This may sound a little dramatic. Is there any possibility that we are heading towards a crack-up boom? 

Numerous indicators point towards the most serious debt balloon faced simultaneously by virtually all economies of the modern world :

• Global debt has skyrocketed to more than USD 280 trillion, some 355% of global GDP;

• U.S. debt has surpassed USD 80 tln, some 400% of GDP (of which government debt has reached USD 30 tln);

• Government debt in Japan exceeds 220% of GDP.

The world has never been more awash with debt and in the future, there is even more in the offing:

• In the United States, there is also more than USD 100 tln of unfunded pension and medical liabilities of the government;

• The fiscal deficit of the U.S. Government is entering into double-digit percentages of GDP;

• The U.S. Government plans another USD 4 tln infrastructure stimulus program, in addition to the trillions it has already spent on stimulus.

Evidence of prices on the rise is everywhere. Commodity prices (metals, agriculture, etc.) are rising dramatically (lumber is up 400% in a year). Real estate prices in the United States, Canada, and other major economies are seeing double-digit percentage annual price rises. Capacity shortages, from computer chips to shipping services, are driving up prices.

It is only a matter of time before all of the above starts feeding into the Consumer Price Index. Meanwhile, global stock markets have reached a new high (their capitalization has surpassed 200% of global GDP) and cryptocurrencies are going crazy. We have an “everything boom.” Well, almost everything.

The U.S. Federal Reserve has admitted that we will experience some inflation but insists that this will be of a temporary nature only. The majority of the world seems to believe this assertion today because it is on the good authority of the Fed. 

But then again, in 2008 the Fed adopted the unorthodox monetary policy of Quantitative Easing (QE), and to allay market concerns, told the world that this was purely temporary. A subsequent brief attempt by the Fed to reverse QE in 2013 resulted in a “taper tantrum,” a surge in U.S. Treasury yields.

Today QE is going stronger than ever. The U.S. Fed and the European Central Bank have each accumulated more than USD 7 tln of assets on their balance sheet and are still growing strong. 

My opinion, for what it’s worth, is that this upcoming bout of “temporary” inflation will be about as temporary as QE has proven to be. 

Market Psychology

Inflation is very much a function of market psychology. Once people expect inflation, velocity increases because people want to buy or invest their cash before it loses its purchasing power. At that point the genie is out of the bottle; there is a natural tendency towards inflation accelerating.

We all know that for years the Venezuelan economy has been heading towards disaster and hyperinflation. Notice in the graph to the left how the Venezuelan stock exchange index is going vertical.

By the end of 2020, the Venezuelan exchange ended up with a market capitalization of 1,270,229,028,210,000 bolivars. Due to inflation, that was a mere USD 1.3 billion, the Financial Times says.  

Based on historical examples, Austrian economists tell us that the first phases of the crack-up boom can feel quite good: assets are going up, and people who have assets are feeling richer until the currency collapses. (Some say it’s like sex; it feels best just before the end). 

The currency collapse drives home the real value of assets. (At times of currency collapse, it is typically gold that best holds its value. In 1923, at the height of hyperinflation during the Weimar Republic, you could buy a large bungalow in the luxurious suburb of Berlin for eight ounces of gold).

It seems we are already in the early phases of a crack-up boom. That is not to say the crack-up is inevitable. We will move to mid-stage once a majority conclude that inflation is not temporary, at which point inflation will tend to accelerate. As momentum picks up towards indebtedness and inflation, it will prove ever more difficult for governments to step off the path to currency collapse.  

Many of us share a sense that while markets are booming, they are also increasingly volatile and dangerous, which is why the concept of a “crack-up boom” has merit and provides a cautionary message.

Les Nemethy is CEO of Euro-Phoenix Financial Advisers Ltd. (, a Central European corporate finance firm. A former World Banker, he is author of Business Exit Planning ( and a past president of the American Chamber of Commerce in Hungary.

This article was first published in the Budapest Business Journal print issue of  May 7, 2021.

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