Why do booms and busts repeat? The false prosperity created by artificial credit expansion.
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The Austrian Business Cycle Theory (ABCT), developed by Mises and Hayek, explains that the cause of boom-bust cycles lies in artificial credit expansion by central banks.
Rate Cut"] --> B["💰 Credit Expansion<br/>Loan Increase"] B --> C["📈 Artificial Boom<br/>Overinvestment"] C --> D["⚠️ Distortion<br/>Misallocation"] D --> E["💥 Bust<br/>Recession"] E --> F["🔄 Restructuring<br/>Reallocation"] F --> G["📊 Sound Recovery"] style A fill:#f85149,stroke:#f85149,color:#000 style C fill:#f7931a,stroke:#f7931a,color:#000 style E fill:#f85149,stroke:#f85149,color:#000 style G fill:#3fb950,stroke:#3fb950,color:#000`} />
Central banks lower interest rates below the market equilibrium level. This sends a false signal to the market that "savings have increased."
Deceived by low interest rates, businesses invest in long-term projects - real estate development, factory construction, startups, and more. In reality, there are insufficient real resources (savings) to complete these projects.
As credit expands, the economy appears to be thriving. Asset prices rise, unemployment falls, and everything looks good.
The projects initiated by false signals prove impossible to complete. Businesses fail, asset prices crash, and recession arrives.
The recession is not an illness but a healing process. Misallocated resources are redirected to their proper uses. Interference with this adjustment (additional credit expansion, bailouts) makes the problem worse.
In all cases, the pattern is identical: artificial credit expansion → false boom → inevitable collapse.
The ABCT cycle is unlikely to occur in a Bitcoin economy: