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 a final and total catastrophe of the currency system involved.
— Ludwig von Mises 1881-1973
The so-called Austrian School of Economics came up in the early 20th century with an interesting theory on boom and busts driven by savings glut, fiat money and central banks expansionary monetary policies. If it sounds familiar, it’s because we are going through that right now …
Read Austrian Business Cycle Theory and you will be amazed.
The boom-bust cycle of generalised malinvestment is generated by centralised monetary intervention in the market - specifically, by excessive and unsustainable credit expansion to businesses and individual borrowers by the banks.[15] This over-encouragement to borrow and lend is caused by the mispricing of borrowed money via the central bank’s attempt to centralise control over interest rates and protect banks from periodic bank runs (which Austrian economists believe then causes interest rates to be set too low for too long when compared to the rates that would prevail in a genuine non-central bank dominated free market).
And here is what is ahead:
The “crisis” (or “credit crunch”) arrives when the consumers come to reestablish their desired allocation of saving and consumption at prevailing interest rates. The “recession” or “depression” is actually the process by which the economy adjusts to the wastes and errors of the monetary boom, and reestablishes efficient service of sustainable consumer desires.
The monetary boom ends when bank credit expansion finally stops - when no further investments can be found which provide adequate returns for speculative borrowers at prevailing interest rates. Evidently, the longer the “false” monetary boom goes on, the bigger and more speculative the borrowing, the more wasteful the errors committed and the longer and more severe will be the necessary bankruptcies, foreclosures and depression readjustment.
