Stylized Facts, Public Policy and the "Crack Up Boom"
When I was an undergraduate perhaps the most repeated lecture of Dr. Hans Sennholz was the one on the various stages of inflation and economic crises. Even the housewives, Sennholz would declare in his characteristic manner, become aware of the depreciation of the purchasing power of money during the last stage of the inflation.
Sennholz's lectures are embedded in my brain, and I have all his books on my shelves. But while these resources are there and in fact are part of my "DNA" as an economist, I often do not access them for a variety of reasons. But as we entered the 2000s, I was drawn back to Sennholz's writings again and again, and his lecturers continually are accessed from deep in my memory to think about the pieces of news concerning the financial crisis we are treated to daily.
Sennholz's The Age of Inflation and Money and Freedom along with Murray Rothbard's What Has Government Done to Our Money are about as readable as any treatment of monetary policy one can read. And in the context of the broad brush strokes they both paint with, the picture they paint is about as good as you are going to get concerning the destructive consequences of inflation, and the intimate connection between government spending, and government monopoly control over the money supply, and inflation.
But reading Sennholz and Rothbard leads one quickly back to Mises, as both derive their approach from Mises. In reading Mises I am always struck by how fresh he still reads, and how relevant his analysis of contemporary policy in the first half of the 20th century still is relevant for us at the beginning of the 21st century. Of course, there is the enduring insights that transcend time and place --- Mises is the master communicator of the inexorable laws of economics. But he is also full of practical applications of economics to matters of public policy.
One of those issues is his analysis of the "crack up boom" (see Human Action, 426-428). As I re-read those pages tonight while working on a paper dealing with the financial crisis since 2008, I am left wondering why this explanation hasn't been applied in the discussions we have had on the blog about monetary policy. At the risk of going out on a limb, let me say that I have become convinced that the nominal income targeting position staked out by Scott Sumner (and endorsed in varying degrees by Selgin, White and Horwitz) is mistaking the data that would result from the Mises stages of inflation approach with data that would result in a toy economy were a debt-deflation downward spiral was taking place. What if what we are seeing is the beginning of a "crack up" boom, rather than a deflationary spiral caused by monetary policy mistakes? If that is right, then efforts to ease monetary policy to off-set a collapse will not be the solution to our economic woes. Instead, we need to think through the specifics of the "crack up" boom and the institutional environment within which decisions are being made today. It is important to point out contra Cowen and Caplan (and others who buy the supposed rational expectations critique of ABCT) that Mises's section on the "crack up" boom is entitled "The Anticipation of Expected Changes in Purchasing Power". The argument Mises provides is in my reading consistent with a non-mechanical interpretation of rational expectations, and it is consistent with the stylized facts of the credit transmission mechanism locking up while the supply of credit was plentiful.
When I do a google scholar search of "crack up boom", I don't see any discussion about the idea among monetary theorists such as Selgin, White or Horwitz. There is a discussion among hard money folks on the internet, and in some journal articles by Cochrane, Carden, Salerno and Huelsman. But the idea isn't even really applied in those writings to address our current situation. I am wondering why? Am I reading too much into Mises's discussion of expectations and the demand for money? Doesn't Mises's theory explain the stylized facts of our day in a way that is consistent with economic theory?
Why is the "crack up boom" not discussed more in the journals and on the shelves?