The Year of the Crack-up Boom

The Financial Times reported the following today in their article titled, “Boom in blank-cheque deals fuels bumper season for global M&A”:

Global dealmaking had its strongest start to the year in four decades, fuelled by a flurry of US acquisitions and Spac mergers, even as the global economy reels from the impact of lockdowns and coronavirus restrictions.

Deals worth $1.3tn were agreed in the three months to March 30, more than any first quarter since at least 1980 and topping even the heady levels of the dot-com boom at the turn of the millennium, according to Refinitiv.

This time period of Quantitative Easing (a fancy name given to describe money printing) by the Central Bankers, combined with a low interest rate environment, has ignited all kinds of speculative endeavors and giving rise to a perceived economic boom. 

The great economist Ludwig von Mises described this perceived economic boom as a crack-up boom: a period of time where Central Bank intervention by way of interest rates suppression and money printing leads people to making wrong decision in terms of capital/investment allocation. Why? Because the market prices discovery mechanism is distorted by the intervention and leads people to misread these price signals – which end up causing money to go into investments that would not have occurred apart from intervention. This scenario is what has been happening over the last year, and the longer it continues means that economic errors are accumulating. At some point this trend will reverse, and when that happens, we will have the inversion of the crack-up boom: financial ruin!