Boom Bust History Repeating

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The Austrian theory of the business cycle describes how booms and busts are caused by central bank manipulation of money and credit.  We’re currently at the point in the cycle where the boom is ending and bust is beginning.  It is feared that this bust has the potential to be much worse than those in recent memory due to the extent to which the US central bank has distorted markets, and because many countries around the world have been engaging in similarly reckless central bank interference.

Looking at the S&P 500 from 1975 to the present, it is readily apparent that, starting in 1995, there have been quite pronounced booms and busts occurring. S&P 500 1975-2015

Naturally, the curious mind wonders what changed in 1995.  The Austrian theory of the business cycle points us to the Federal Reserve.  In a 2006 article, Dr. Ron Paul described M3, an empirical measure of the money supply in the US, as “the most helpful statistic to track Fed activity.”

M3

You’ll note that there is a marked increase in the rate of growth of the money supply beginning in 1995, especially when compared to the period up to 1990, or the 1990-1995 plateau.  The difference is more pronounced if the slopes are viewed side by side as below.

1995 Slopes

This data is all relatively recent.  FRED unemployment data goes back all the way to 1948.

civilian unemployment 1950-2015

This data shows the same boom/bust pattern over and over.  At present, we find ourselves in a deep trough of low unemployment, a condition which historically precedes recession.

August and September have seen the US stock market, which has been hovering at record heights for nearly all of 2015, enter correction territory.  As past performance is the best predictor of future results, it is certainly plausible to think that the stock market levels will be cut in half and unemployment levels will double by the time we reach the bottom of the coming bust.  Further, the multinational scope of the central bank interference, coupled with the unprecedented severity of that interference, could spell even worse conditions by the time the bottom is reached.

So long as policy-makers continue down the same path of central bank manipulation that has brought us here, we can expect boom/bust history to repeat itself.  The upshot is that because we know what is coming, we can take steps to avoid personal losses or even profit from the coming collapse.

Investors concerned over a collapse of the financial house of cards may be interested in an investment strategy designed with theses concerns in mind, such as that described in Crash Proof 2.0: How to Profit From the Economic Collapse by Peter Schiff.

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