What is a Crack-Up Boom
A crack-up boom is the crash of the credit and monetary system due to continual credit expansion and price increases that cannot be sustained long-term. Often, banks will attempt to prevent a crack-up boom by halting credit expansion, which ends up backfiring and yielding the same results that the boom would have caused. Both scenarios result in an economic depression when the bubble finally bursts and the economic system crashes.
BREAKING DOWN Crack-Up Boom
When the economy is down, one way to give it a temporary revival is to feed extra money into the system — AKA economic stimulus. Providing people with credit makes them feel richer and more inclined to spend their money, which in turn feeds more money into the system. When people spend money, they tend to want to continue this trend and continue to buy, despite the fact that their extra cash isn't coming from actual savings. The problem comes when the government continuously pours more and more money into the system and the actual economy beneath the false expansion cannot keep up.
Feeding money into the economy is a quick way to give it a short-term boost, but this practice isn't sustainable over the long term. If credit expansion continues without limit, prices continue to rise until they reach the point at which the entire system collapses because it can no longer sustain itself. People can no longer afford the high prices, so credit must expand even more to accommodate these prices, which pushes them even higher.
What Type of Economy Can Be Hit by a Crack-Up Boom?
A crack-up boom is something that can only happen in an economy that relies on paper money rather than the gold standard, or electronic systems of monetary transaction rather than physical. In a gold standard economy, interest rates cap out at around 3 to 6%, since credit is based on actual saved money, instead of being adjustable depending on the circumstances. However, in a system that revolves around paper money, more cash can be printed at any time and introduced into the system. This affects the value of each dollar and affects the prices of market commodities. When the government introduces into the economy money that doesn't really exist (in the form of false credit), it's only a matter of time before the economy is damaged, even if the original intention was to boost it.