What is a Crack-Up Boom? The Mises Institute defines it thus; ‘A crack-up boom is an economic crisis 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.’
Massive credit expansion with attendant debt infestation of economies is the modus operandi of late modernity. All countries, without exception, subscribe to this unsustainable financial regime. Even in poor countries like ours, where the economy is not deeply monetized, rudimentary crack-up boom still exist. In fact, it is now threatening to derail Africa’s current real economy, which is still based on primary production, agriculture, extraction, etc. Ethiopia’s development of the last three decades involves, amongst other things, the superficial financialization of the economy. This infatuation is concretized by the massive amount of credit creation, or put another way, by the creation of phony money out of thin air. FIRE (finance, insurance, real estate) remains the guiding light of the economy. The government is the major culprit in this undertaking. Excessive expenditures of the state that cannot be matched by direct government revenues need to be financed. By and large, deficit financing is the very act of printing money. This act is operationalized by the state owned central bank, in our case, the National Bank of Ethiopia. The deceitful process of trying to fill the gap between government revenues and expenditures is one of the major causes of inflation!
The business of commercial banks is to lend money. For the most part, this money is printed out of thin air. Deposits are actually decoys/gimmicks to goad the unsuspecting sheeple into thinking that banks serve as intermediaries, i.e., taking deposits from the public and lending it to businesses. This of course is a farce. Commercial banks can create plenty of money out of thin air without having adequate deposits. This is the core of ‘fractional reserve banking’ or as we call it: the non-violent crime of the millennium! The only real restraints imposed on commercial banks originate only from the central bank. Even then, commercial banks will try to find ways to create more money than is actually needed by the economy. After all; it is by availing credit/indebting others, banks make their profits. To a large extent, the frightening mal-investment across the planet is the direct result of such a lopsided global financial regime. By incentivizing waste and useless projects, banks are the main culprits behind the planet’s environmental destruction and social polarization. As we have been saying repeatedly, money created out of thin air almost always go to the connected cronies of the state, usually for no good use! When the massive credit creation by commercial banks combined with the deficit financing of the state are put together, the result is massive inflation that afflicts the masses!
What are the repercussions of inflation? Initially, people will refuse to hold onto cash, as its depreciation/declining purchasing power becomes apparent. Thereafter, long-term commitments or substantive financial transactions will shy away from using/quoting the local currency. Finally, during the stage of hyperinflation, prices skyrocket and the exchange rate of the currency becomes ridiculous, like when one USD becomes equivalent to one billion Zimbabwe dollars, etc. At this phase, prices are adjusted upwards several times a day. Soon, either bartering or the use of alternative currencies will be widely used, despite the protestation of the state. At this point, the state exists only in name. The collapsed economy leads the country into chaos resulting in another ‘failed state’.
Ethiopia’s crack-up boom is now unwinding. Only two decades after Ethiopia was sanctified by the global power that be (debt cancellation, peace dividend, etc.), conditions have become unsettling. Leadership in its infinite wisdom, brought back the country into the world of debt slavery and conflicts, which are now threatening fragmentation. The reign is like a ghetto boy who makes it big in professional sport only to lose it all before he reaches his thirtieth birthday! We don’t think this is an unreasonable hyperbole! The leadership trusted only its political cadres. Complex issues/projects were assigned to these cadres, even when there is/was no visible capacity and competence. In fact, competence was incriminated to make room for incompetence. Justice became a weapon of political scorekeeping and outright looting. Probity gave way to grand political corruption. Integrity was so hated by the status quo, all efforts to bring about good governance was intentionally shot down. Parasitic oligarchs were cuddled and unashamedly favored over the working stiff, including genuine entrepreneurs, etc., etc.! Unless there is an open confrontation and a transparent showdown with the sordid practices of our recent past, the future will only be a continuum of the same old wash, rinse and repeat!