The Fed’s Dilemma: Why Rate Cuts Could Trigger a “Crack-Up Boom”

I’m Joe Tigay, portfolio manager of a volatility-hedged equity strategy at Rational Funds and a former VIX pit options market maker. I watch my kids play games, and one thing always happens when there’s a scarcity of resources—demand goes through the roof. Everyone wants what’s limited. From my years trading in the volatility pits, I’ve seen this same dynamic play out in markets countless times. This brings me to something economists call a “crack-up boom,” which works just like a game of musical chairs.

Picture this: The crack-up boom happens when everyone tries to get out of a losing currency and into “hard assets” like gold, real estate, and other real things. Think of musical chairs where the prize isn’t just a seat, but something with real, lasting value. The music plays (that’s the currency losing value), and everyone scrambles. The crack-up boom is the frenzy as the music speeds up and people get more frantic to grab a prize. They know that when the music stops, many people will hold nothing but paper money that’s worth less and less.

The Federal Reserve is preparing to cut interest rates, and we face a critical moment. The data tells us two different stories: jobs are disappearing fast, but prices keep rising. This mismatch creates the perfect setup for what Austrian economists warn about—market conditions where investors move away from cash and into hard assets. They see central banks destroying the value of their money. This isn’t just about America. Central banks worldwide face the same impossible choice, creating a global environment where paper money faces a coordinated attack.

Jobs Are Disappearing Fast

The job market shows clear warning signs that the economy is cooling faster than most people expected:

• August’s jobs report shocked everyone: Only 22,000 new jobs appeared, crushing what experts predicted. This brings the three-month average down to just 29,000 jobs per month.
• Unemployment jumped to 4.3%, the highest level since October 2021. This breaks what most consider full employment.
• Initial jobless claims hit 263,000, reaching four-year highs and showing the job market’s weakness speeds up instead of slowing down.

These numbers show an economy that desperately needs help. Normally, such data would give the Fed a clear reason to cut rates hard.

The Inflation Problem Won’t Go Away

But here’s where things get tricky. While jobs disappear, inflation stays high:

• Consumer prices rose 2.9% from last year in August, actually speeding up from July’s 2.7% reading. This sits well above the Fed’s 2% target.
• Core prices held steady at 3.1%, showing no progress on the basic inflation trend that removes volatile food and energy costs.
• The Producer Price Index tells a different story, dropping 0.1% in the latest report. This suggests businesses absorb cost pressures instead of passing them through—for now.

This creates an impossible problem: cut rates to help jobs and risk making inflation worse, or keep rates high and watch the job market fall apart.

The Market Already Decided

Markets show a 94.5% chance of a quarter-point cut. The market already priced in lower rates. The Fed finds itself trapped—if they don’t cut rates, they could trigger major market problems, regardless of inflation concerns.

This creates exactly what Austrian economists warn about when they discuss crack-up booms. When central banks must choose between supporting markets and stopping inflation, history shows they usually choose markets—and inflation follows.

The Gradual Erosion, Not the Dramatic Crash

This isn’t about predicting a bubble burst or a sudden crash higher in asset prices. Instead, we’re seeing something more dangerous: the steady, relentless decline in cash’s purchasing power that’s set to speed up this week.

The “crack-up boom” doesn’t happen overnight with dramatic market moves. It’s a gradual process where smart investors slowly but surely recognize that holding cash is a losing game. We’re not looking for fireworks—we’re watching the slow-motion destruction of money’s value.

The Coming Flight to Hard Assets

As rate cuts become reality and this gradual erosion continues, we’ll likely see investors increasingly abandon cash and bonds for real assets. The logic is simple: if the Fed cuts rates while inflation runs above target, real interest rates turn deeply negative. In this environment, holding cash becomes a guaranteed wealth destroyer—not through a dramatic crash, but through the steady grind of purchasing power loss.

Smart money will likely move into:

• Real estate and REITs as property becomes the classic inflation hedge
• Commodities and precious metals as stores of value independent of paper currency
• Stocks of companies with pricing power that can pass through inflation to consumers
• Bitcoin and cryptocurrency as alternative monetary systems

The Austrian Warning

The Austrian school of economics warned about this dynamic for decades. Ludwig von Mises created the term “crack-up boom” to describe the final phase of a currency crisis, where people lose faith in money itself and rush toward real goods. While we’re not necessarily headed for currency collapse, the basic mechanism is similar: when monetary policy becomes obviously inflationary, rational actors protect themselves by moving out of cash.

The danger isn’t a sudden market meltdown—it’s that this becomes a self-reinforcing grind. As more investors gradually flee cash for hard assets, asset prices rise steadily, creating the very inflation that justifies the flight from cash in the first place. This week’s expected rate cut will likely speed up this quiet but persistent trend.

What to Watch For

The key will be the Fed’s guidance and their updated projections. If they signal that rate cuts are just the beginning of an extended easing cycle, expect the rush to hard assets to speed up. If they emphasize that cuts are limited and depend on economic data, markets might maintain some confidence in the dollar.

But given the political pressures, market expectations, and the Fed’s historical tendency to choose accommodation, smart money already positions for a world where cash steadily loses its appeal.

The crack-up boom isn’t a dramatic event—it’s a process. And with this week’s expected rate cuts, that process is set to continue its methodical erosion of cash’s purchasing power. Investors would be wise to position accordingly, not for a crash, but for the slow grind that makes holding cash increasingly painful.