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If in doubt, blame the monetarist.
The Central Bank creates credit expansion via QE or lower base rates.
2. "Artificial Credit Expansion" takes place, effectively lowering the real interest rates.
According to the QTM (MV=PQ), an increase in Money Supply M will cause rGDP to boom! Good times!
3. Entrepreneurs are fooled by the cheap business loans and begin malinvesting in long-term, unproductive, unpromising businesses. Real GDP however, does indeed boom. Read More
"The artificial stimulus caused by bank lending causes a generalised speculative investment bubble which is not justified by the long-term factors of the market." Source
Some businesses become unproductive zombie firms, relying on cheap bank loans while de-facto making a loss.
Simultaneously, lower savings rates lead consumers to maintain high spending on late-stage consumer goods. Labor and raw material prices rise as early-stage and late-stage sectors compete for limited real resources.
Demand-pull inflation
4. Eventually, inflation rises, or central banks are forced to raise interest rates to curb monetary expansion. (Credit Crunch)
The illusion of cheap resource availability vanishes. Long-term projects reveal themselves as unprofitable (malinvestments).
Capital and resource constraints force businesses to halt unviable projects, leading to bankruptcies, asset price declines, and layoffs. Recession starts.
Austrian Economists see the recession as "the market's necessary corrective process".
5. Structural Reajustment and Liquidation. Unviable capital investments must be liquidated or repurposed. Labor and capital must reallocate from distorted early-stage industries back to areas driven by real consumer demand and genuine savings.
Why not though?
Why not though?
Modern economists argue that entrepreneurs would learn to recognize central bank intervention and would not repeatedly fall for "cheap credit" illusions without accounting for eventual rate hikes.
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