Credit
growth facilitates economic growth. When
credit is expanding consumers can now borrow more and invest more. Increasing consumption and investment creates
jobs and boost income and profits.
Credit expansion also causes asset prices to go up. These assets include stocks and
property. As net worth of the public
goes up the asset owners can now use what they own as collateral to borrow
more. This is a cycle that feeds on
itself and leads to increase spending, investment, job creation and
wealth. So long as the credit keeps
expanding, the party can continue.
Between mid
2008 and first quarter of 2011, the federal government expanded its debt by
$4.4 trillion. This helps to keep the
economy from breaking down when private sector became incapable of repaying its
debt. Before the crisis that erupt in
2008, every time the economy slowed or crisis erupted, the Fed will take steps
to encourage credit expansion and every time the economy reaccelerated. In actual fact, all the steps that the Fed
has taken simply caused the credit bubble to expand. Eventually, this credit bubble will have to
give way and the consequences will have to be bear by future generation. The past qualitative measures put forth by
the Fed have not brought much improvement in the economy. And the austerity measures that has or in the
process of being implemented in various parts of the world may be the catalyst
that causes the credit bubble to burst.
When credit stops expanding, we will see a greater slow down and may
eventually see the natural financial depression that should have happened back
in 2008 if the Fed did not intervene with its easing measures.
For those
that want to learn more about how the current measures are impacting the
economy and the likely outcome of such measures, you can read up on the
"The New Depression", a book written by Richard Duncan. It gives a clear explanation of how Fiat
money has impacted the economy and changed the way the world economy works.
