The Crystal Meth Economy

As I see it, booms and busts are a natural part of human social behavior. Cycles appear throughout history and are part of the dynamism of humanity of which Butler Shaffer so eloquently writes. If this is so, then what role do central banks play in the modern world?

The magic of central and fractional reserve banking, fiat money and deposit insurance artificially enables improvident rationalizations about credit and debt, and generates false price signals throughout an economy.

By definition, in a fractional reserve system a small amount of debt is pyramided into vast purchasing power, driving up prices for goods and services and/or assets. When it flows into assets it is not generally recognized as inflation and is initially applauded as people feel wealthier, until optimism peaks, only after which is the bubble recognized.

Some have likened the Fed to supplying the punchbowl at the party, but this is the wrong analogy. The party and hangover would occur with or without the Fed; the Fed’s role is to supply methamphetamines whenever the revelers appear to be running out of energy, staving off the hangover and near-term sobriety. This prevents periodic economic readjustments and creates the illusion of "full employment" and "economic stability" over longer periods of time.

Is it not obvious where this leads?

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Without the pyramiding of nominal values, waves of "irrational exuberance" would be limited in scope. Asset values would reach apogee earlier and the establishment of entire industries to serve irrational consumption would be limited. Economic activity would grow organically, visibly connected to prior production, and economic activity would hew closer to a balance between serving immediate consumption and the maintenance and growth of capital for future production.

Instead, after a century of central bank dominance and 70-plus years without a deflationary bleeding of the excess gas in the bubble, we have had more than enough time for entire industries to flourish under false assumptions. Huge industries employing tens of millions now cater to the welfare/warfare state on the "guns" side, and to consumers’ vice of living beyond their means on the "butter" side. Optimism was given free rein to establish an entire hallucination economy, one based on ever-rising asset values pushed higher by ever-rising credit availability, itself a product of pyramiding values on spiraling government debt, laundered through a public treasury that strip-mined the savings of three generations.

If the USA was a single small town and the local bank had pyramided the extension of credit on previous borrowing in collusion with the town’s selectmen, how might things appear after a few decades?

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The town would be drowning in municipal debt, with ornate street lamps lining picturesque boulevards in every selectman’s district; masses of municipal police, firefighters, road crews and administrative officials would clog street intersections, and a host of businesses would arise to cater to the one buyer larger than all others combined: the town’s political establishment.

The bank would sit on a big chunk of this municipal debt, exhorting everyone to borrow and spend because 70% of the town’s businesses (and jobs) now depend on consumption.

Retailers would hawk luxuries on every street corner, and each business would offer its own special credit card in partnership with the bank. Every third business would serve the swimming pool industry and every family be encouraged to buy a newly-constructed home and every home, new and old, be offered a new swimming pool, no money down, no interest for two years, no payments for six months. Once everyone had a house, they would be encouraged to buy another!

Think about it. How many jobs in this little town would exist only because of the willingness of most people to indenture themselves to the bank while the few thrifty citizens loaned ever more money to the selectmen? Once the optimism finally peaked and receded, could the bank induce more borrowing to sustain things?


Once the contraction begins in earnest, a fact revealed by asset devaluation, the social psychology that sustained the entire mania is over. Instead of a small, painful economic readjustment from a short-lived boom, the little town’s industries are slaughtered as waves of default, unemployment, and credit contraction drown each neighborhood and industrial park. Half the townspeople are expert at tasks for which there is almost zero demand, with enough extra swimming pools and luxury goods to last years, even decades.

This is exactly where the USA (and much of the world) stands today. Half the white collar middle class is highly skilled in occupations for which there’s about to be almost no demand, because the credit pushers running the U.S. government and the central bank gave the public what it wanted…crystal meth credit. Now the economy it created teeters on the brink of exhaustion and their single ability is to cook up more drugs, lowering the price to zero. It won’t work, though; the addicts know they can’t take another hit.

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Withdrawal is going to be ugly. Getting clean will take a generation (or much more, if our society has periodic relapses into credit intoxication as we might expect).

For now, residual optimism still generates flashback hallucinations of hope that we can return to the bubble years. Belief in the twin central planners of government and banking has yet to erode significantly, but cracks are appearing in the faith. The first indication that faith is collapsing will be a resumption of significant declines in the major U.S. stock indexes.

When that time comes, look out. Bank runs can’t be far behind.

The debt pyramid will crumble, as will faith, one brick at a time. Ironically, the last stone to fall is likely to be treasury debt, for its collapse will signal an end to the worship of the myth of American Exceptionalism, at least for a time. Since this is the one religion nearly all Americans share, it will be the last vestige of national identity to succumb.

In the meantime, try listing all of the crystal meth—addicted occupations that depend on central bank—induced "private" credit availability and on government debt—supported spending. Start with jobs in the military-industrial-complex, jobs in "public works," jobs in the sciences supported by research grants, jobs in education supported by government grants, and jobs providing medical services and in industries supported by Medicare and Medicaid spending. Don’t forget jobs sustained by credit-based over-consumption like those in the restaurant and leisure industries, and jobs providing myriad middle-class status symbols such as fancy cars, tony fashions and McMansions.

It’s a long list. I recognized years ago that my job was on it.

Is yours?

David Calderwood [send him mail] a businessman, artist, and author of the novel Revolutionary Language, selected January 2000 Freedom Book of the Month at

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