The Africonomics Theory of Economic Cycles

[Editor’s note: This article is a section of The Fiat Dollar Standard: Its Uncivilized and Destructive Nature. This version has been expanded]

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Another form of economic instability caused by fiat monetary practices is boom and bust cycles, also known as economic or business cycles. Boom and bust cycles are a structural form of economic instability characterized by more extended, cyclical economic fluctuations that comprise periods of artificial expansion, peak, contraction, and recovery. These cycles begin with artificially induced booms that eventually become destructive busts, resulting in an economic recession or, in worse cases, a depression. Depending on the severity of the crisis, boom and bust cycles can have devastating and lasting effects on society, often leading to increased poverty, social unrest, and other issues.

For instance, the Occupy Wall Street protests in the United States, triggered by government bailouts for large, failing corporations following the 2008 financial crisis, illustrate the detrimental economic, sociological, and political consequences that boom and bust cycles can have on society. This section presents the initial version of the Africonomics Theory of Economic Cycles (ATEC), which Africonomics scholars will further develop.

The economic fluctuations—cyclical economic instability marked by boom-bust cycles—that continue to afflict modern economies are not accidental occurrences or inherent features of market economies. They are destructive consequences of fiat monetary practices, the core of which is monetary inflation (credit creation and currency printing), carried out by fractional reserve commercial banks and central banks within statist systems, not capitalist ones. It is essential to understand that contemporary nation-states, including the United States, widely known as the stronghold of free-market capitalism, are statist economies closer to a socialist system than a free-market capitalist one. This has been demonstrated in The Scale of Statism.

The essence of ATEC is as follows:

A currency is a form of money. Money is the lifeblood of the economy, as it plays the essential and interconnected roles of storing purchasing power, setting the standard of account, and being the medium of exchange. Succinctly, money is a tool that facilitates economic activities and human collaboration within and among societies. This makes money the cornerstone of indirect exchange societies and the fundamental good in the economy—as it represents purchasing power, intermediates economic transactions, and communicates crucial information, incentives, and disincentives that coordinate economic decision-making and the economy.

Money prices facilitate this decentralized and dynamic process of voluntary economic activity, commerce, and social cooperation. The reliably efficient price mechanism—also known as the price system—underscores money’s central role in enabling economic decision-making and activities, with savings, credit, and investment being crucial economic activities. Money is not neutral as the fundamental good and lifeblood of the economy. Distortions of the currency and credit supply, like those resulting from a policy of monetary inflation (credit creation and currency printing), have destabilizing and destructive effects on the economy.

Money, as the lifeblood of the economy, is inherently non-neutral. Consequently, manipulations of the credit and currency supply and the benchmark interest rate ripple through the economy, creating distortions that adversely impact economic decision-making and activities. Recurrent boom-bust cycles are a structural and ruinous distortion caused by fiat monetary practices, particularly credit creation, which artificially expands credit availability. These cycles involve periods of artificially induced economic expansion (the boom phase) that eventually peak and result in economic contraction (the bust phase), manifested as economic recessions or depressions. Various factors, such as a sharp increase in the benchmark interest rate, a rise in defaults, or other related catalysts, can trigger the bust, revealing a destructive economic downturn.

Fractional reserve banks and central banks (or, in the contemporary world, coordinated policy actions between central banks and fractional reserve commercial banking systems) instigate artificial economic booms and cause boom-and-bust cycles by engaging in the fiat practices of artificially inflating the credit supply and lowering the benchmark interest rate. This economic boom is based on distorted signals that incentivize market participants, particularly investors, entrepreneurs, and speculators to take new and high-risk steps.

Artificially low interest rates lead investors, entrepreneurs, and other market participants to raise capital through cheaper loans to expand their enterprises and activities. In this context, economic decisions and investments tend to be unsound and more speculative, as they are influenced by the now prevailing, more accessible credit environment and the lower capital costs resulting from the artificially low benchmark interest rate. It is pertinent to reiterate that the benchmark interest rate, known as the federal funds rate in the United States and the policy rate in other countries, is artificially lowered through the practice of monetary inflation.

This contrasts with naturally low interest rates, typically resulting from increased available loanable funds due to higher savings. Fiat monetary practices distort economic reality and send misleading signals to the market, leading participants to make faulty economic decisions and engage in unsound activities. This monetarily distorted environment fosters excessive risk-taking, speculative investments, and misguided economic activities that would likely not occur in an economy without fiat monetary practices and with undistorted (artificially low) interest rates. This leads to the misallocation of capital (funds, labor, and other resources) that insidiously impoverishes society and harms lives.

Artificially lower interest rates reduce the cost and risk associated with borrowing money, encouraging consumers, businesses, investors, and the government to take out loans to purchase products or expand their operations and projects. These activities would not have been feasible in an environment with naturally higher interest rates due to increased costs. Whether individual loans, mortgages, business loans, or government borrowing, an artificially accommodative credit environment lowers the cost of capital and reduces the risks of taking on debt to finance various initiatives. This instigates an artificial economic expansion by enabling unsound and speculative economic activities, proliferating risky ventures that lack a solid economic basis.

The Great Recession (2007-09), marked by the 2008 global financial crisis, was a severe economic downturn and a notable example of the destructive consequences of fiat monetary practices and boom-bust cycles. While the financial crisis and subsequent recession were related to the U.S. residential real estate sector, which collapsed due to the bursting of the subprime mortgage lending bubble, the effects were felt throughout the United States, Europe, and worldwide.

The real estate bubble had been fueled by a policy of artificially low interest rates set by the Federal Reserve, the central bank of the United States and the world’s leading central bank, following the Dotcom bubble burst. This policy instigated an artificial expansion in housing credit, construction, and prices—and related industries. The resulting economic boom also led to a proliferation of highly speculative and risky mortgage-related financial instruments, including Collateralized Debt Obligations (CDOs) and Credit Default Swaps (CDSs). The Dotcom bubble, which burst in 2001/02, is another example of an artificially induced economic boom caused by fiat monetary practices. This boom-bust cycle primarily involved the venture capital and startup sectors.

The economy becomes distorted, unstable, and troubled when the national currency and credit supply are manipulated through fiat monetary practices. These practices, which primarily involve artificially inflating the credit and currency supply, distort the benchmark interest rate and cause many other economic distortions, such as asset price inflation, that destabilize and damage the economy. Fiat monetary practices debilitate savings, distort credit markets, alter capital costs and risk perceptions, and encourage unsound economic decisions, activities, and projects. When the dust settles, society is left more impoverished and distressed.

Interest rates, particularly the benchmark interest rate, are pivotal in coordinating savings, credit, investment, and, thus, the overall economy. When interest rates are kept artificially low and credit conditions are artificially accessible, this instigates a series of faulty, speculative, and risky economic decisions, activities, and projects whose otherwise higher associated costs and risks are now artificially lowered. While boom and bust cycles destabilize and impoverish society, hurting the many, they benefit the few; a small group of individuals and institutions gain handsomely from monetary inflation, financial market volatility, and economic fluctuations.

Figure 1: A visualization of the Africonomics Theory of Economic Cycles (ATEC).

1. Expansion (Boom Phase)

From the Mississippi Bubble in 18th-century France (1715 to 1722) to the 2008 Global Financial crisis triggered by the bursting of the U.S. residential real estate bubble in 2007 and existing economic bubbles that are yet to burst, boom and bust cycles are instigated and inflated by fiat monetary practices, primarily bank credit creation, that caused financial bubbles to form and unsound economic expansions to occur.

During the boom phase of the economic cycle, artificial economic expansion is often characterized by excessive financial investment speculation and misguided economic activities. This includes the launch of new entrepreneurial ventures and the expansion of established businesses fueled by artificially low interest rates and easy access to credit. Key characteristics of the boom phase include low or declining interest rates, substantial growth in credit and currency supply, increasing debt levels, rising prices of financial assets—especially stocks and bonds—growing wages, and higher employment rates. These conditions contribute to noticeable improvements in key economic growth indicators such as GDP (Gross Domestic Product) and national income and output.

The boom phase is usually accompanied by widespread optimism, expectations of ongoing growth, and, at times, a financial asset frenzy. As a result, some artificial economic booms are deliberately created historically and contemporarily as political leaders and other state officials, among other reasons, benefit from higher approval ratings during periods of economic growth and an increased sense of prosperity. A notable example is the Mississippi Bubble, orchestrated by John Law mainly to solve France's dire fiscal situation after King Louis XIV's death in 1715, when the French government was effectively insolvent.

2. Peak

Artificially induced economic booms and financial bubbles eventually end. As noted, various factors can trigger this event, such as a sharp increase in benchmark interest rates, tightening of bank credit, a rise in defaults, bank failure, political or geopolitical factors, shifts in market sentiment, or other catalysts. When an artificial economic boom peaks, it transitions to an economic contraction phase, resulting in a recession or, in rare and more severe cases, an economic depression.

For instance, the subprime mortgage lending bubble peaked in 2007, when losses from subprime loans triggered a panic. This marked the beginning of the contraction phase. The ensuing crisis exposed many risky loans, highly speculative investments, and inflated prices of financial assets. This bubble burst led to the 2008 global financial crisis and a severe economic recession known as the Great Recession (2007-09), whose detrimental consequences still affect many economies today.

As the name denotes, the peak represents the highest point of the economic expansion phase. At this stage, leading indicators—such as GDP, labor market trends, and financial market indexes—begin to display signs of stress and start to decline. The peak contrasts with the trough, the lowest point of the economic cycle, where the contraction reaches its bottom and the recovery phase begins.

3. Contraction (Bust Phase)

Artificial credit expansion, distorted market signals, misguided incentives and expectations, elevated risk appetite, excessive borrowing, increased speculation, misdirected investment, wasteful spending, and other detrimental activities characterize the boom phase of economic cycles. As the boom continues, it eventually transitions into a bust phase, which occurs when credit conditions tighten, capital flows dwindle, defaults emerge, or other catalysts trigger the decline of an artificially driven economic boom. This decline leads to a bust, typically in the form of a financial crisis, recession, or worse.

Financial crises and economic busts are times of widespread hardship that can lead to social unrest and political upheaval, especially during severe crises. In this phase, investment enthusiasm declines, and businesses lacking a solid foundation struggle to survive while others go out of business entirely. Economic output contracts, leading to decreased employment and income and defaults, often including bank failures and a shift toward safer assets. The bursting of a financial bubble typically exposes the weaknesses of the preceding artificial economic expansion, which have been unsound and, in some cases, deliberately orchestrated.

While most people experience hardship during economic downturns, a select few, including wealthy investors, prominent investment firms, and many corporations, profit greatly by acquiring businesses and financial assets at lower, deflated prices. Boom and bust cycles cause debilitating economic instability and contribute to wealth disparity, impoverishment, and distress in modern societies. Fiat monetary practices and the resulting boom and bust cycles facilitate wealth transfer and exacerbate economic inequality. This occurs through the debasement of the national currency, which results in a continuous loss of purchasing power for the majority, alongside cycles of economic booms and busts that typically benefit the state, the affluent, corporations, and their affiliates while harming the general populace.

4. Recovery Phase

Economic recovery begins when an economic cycle reaches its lowest point, or trough, and transitions into a new expansion phase. The phases of boom and bust cycles vary significantly based on the economy's characteristics and the cycle's nature. In existing economies with fiat monetary systems, government officials implement fiscal measures, and central banks take monetary policy actions to stimulate the economy and foster recovery. However, top-down measures intended to engineer a recovery and expedite economic growth lay the foundation for the next artificial economic boom, ending in another destructive bust.

Due to fiat monetary practices, the recovery phase of contemporary economies usually involves a new, artificially driven economic expansion after reaching the trough. This often leads to larger bubbles or the formation of new ones in different sectors, perpetuating the destabilizing, destructive, and unjust cycle of booms and busts. In an economy without fiat monetary practices, the recovery would occur more naturally, propelled by savings, investments, and the prevalence of natural (undistorted) interest rates. This approach would enable a true recovery, sounder economic activity, and growth.

Fiat monetary practices carried out by fractional reserve commercial banks and central banks and, in contemporary statist economies, coordinated policy actions between these institutions cause boom-bust cycles, a structural and cyclical form of economic instability with harmful and impoverishing consequences. Due to money’s crucial functions and far-reaching implications in human society, the monetary system must be as honest and reliable as possible to ensure a stable, sound, and thriving economy. More significantly, upholding the universal moral principles of truth, justice, and nonaggression and fostering economic prosperity, peaceful human relations, and civilization requires a sound monetary system.

Fiat monetary practices, primarily based on monetary inflation through credit creation and currency printing, cause recurrent economic fluctuations, more commonly referred to as boom and bust cycles. These cycles result in financial crises, bank failures, bank runs, economic downturns, and other detrimental issues that lead to societal impoverishment and distress. Only fiat monetary practices can cause recurrent boom and bust cycles.

While economies without fiat monetary practices could experience a boom and bust, they cannot experience recurrent boom-and-bust cycles. A sudden and considerable influx of gold from abroad can potentially instigate an artificial economic boom, but such occurrences are exceedingly rare due to the costs associated with gold production and related activities.

One remarkable event that stands out in recorded history is the pilgrimage of Mansa (King) Musa I of Mali (who reigned around 1312 to 1337) to Mecca, during which he made a stop in Egypt. Musa I’s extravagant distribution of gold showcased his immense wealth and generosity. It also led to a significant devaluation of gold in Egypt and subsequent price increases across the economy. Still, events of this scale are exceptionally uncommon and singular, meaning they cannot cause recurring boom and bust cycles. While Mansa Musa’s generosity resulted in a structural economic fluctuation and broad price increases, only fiat monetary practices can cause recurrent boom-bust cycles and chronic economic instability.

More centralized, less diversified, and commodity-dependent economies, such as oil-exporting nations like some Arab countries, Venezuela, Nigeria, Angola, and others, cannot experience recurrent boom-bust cycles unrelated to fiat monetary practices. These economies are indeed more vulnerable to external shocks, which can lead to economic downturns when there is a sharp decline in oil prices and a subsequent reduction in oil revenue, on which they primarily depend. Nonetheless, recurrent boom and bust cycles can only be caused by fiat monetary practices, as they are instigated by artificial credit cycles. Economic cycles can also be called credit cycles, as the fluctuations between economic booms and busts are driven by cycles of artificial credit expansion and contraction.

Angola provides an excellent case study in economic cycles for Africonomics scholars to research and document how funds flowing into an economy from foreign credit lines can cause a boom and bust cycle. The nation has experienced a severe and prolonged economic downturn that can more appropriately be categorized as a depression rather than a recession, triggered by the steep drop in oil prices in mid-2014. This downturn ended the country’s artificially driven economic expansion, fueled by oil revenues and a substantial influx of foreign capital, mostly from Chinese loans directed mainly to construction projects.

The Angolan case demonstrates how a significant inflow of foreign capital obtained through credit can lead to a boom-and-bust cycle. Nevertheless, this observation does not negate the statement that recurrent economic boom-and-bust cycles can only be caused by fiat monetary practices. It is also relevant to note that China, the source of the funds that fueled the artificial economic boom in Angola, is a heavily indebted (and troubled) economy with a fiat monetary system.

Moreover, fiat monetary practices are not without their ethical flaws. In his elucidating work on fractional reserve banking, Fractional Reserve Banking Is Fraudulent and Ruinous, the social philosopher and economist Manuel Tacanho points out:

Fractional reserve banking is a doubly fraudulent commercial banking model. It is fraudulent when banks use funds from non-interest-bearing accounts to issue loans, make investments, or deposit them at an interest-paying central bank facility, as this practice constitutes an infringement of property ownership rights. It is more egregiously fraudulent when commercial banks create (non-currency) money, meaning they conjure up purchasing power by lending it into existence. Therefore, the interest payments gained over the loan’s duration are partially or entirely fraudulent. A society with a fractional reserve commercial banking system and a central bank has a triply fraudulent monetary system. A monetary system that constitutes a confiscatory structural injustice and leads to ruinous consequences.

In his subsequent paper, The Fraudulent and Ruinous Nature of Fiat Monetary Systems, Tacanho expands his analysis of the ethics and nature of fiat monetary practices, consolidating that fiat monetary systems are unethical, fraudulent, destabilizing, and destructive. Tacanho remarks:

Existing monetary systems feature a fiat national currency and fractional reserve commercial banking. Fiat currencies are an unsound form of money with an unlimited supply typically issued by a government. Fiat monetary systems involve artificially expanding the money and credit supply (monetary inflation) by the central bank and fractional reserve commercial banks. This practice is unethical and fraudulent because it deceives, distorts, defrauds, and destroys. Fiat monetary systems violate the universal moral principles of truth, justice, and nonaggression. They lead to ruinous consequences, such as price inflation, economic distortions, instability, crises, and other issues that undermine economic prosperity and social stability.

Existing statist economies are beset with chronic instability and distress. They face numerous issues, including rampant (monetary, asset, and price) inflation, crippling debt levels, bubbles, financial crises, boom-and-bust cycles, frequent recessions, widespread corruption, fraud, and wasteful spending. Many of these problems arise from or are exacerbated by fiat monetary systems operating under the fiat dollar standard. Boom and bust cycles are a destructive consequence of fiat monetary practices; therefore, establishing an entirely sound monetary system can eliminate continued economic instability, bubbles, and fluctuations.