You have to separate the effects of debt from what a central bank or treasury does.
As an example, hyperinflation and currency collapse is a result of owing debts which are not denominated in your own currency. Within your own economy you can owe nearly infinite amounts of money, denominated in your own currency, and be fine.
There is one very unique quirk with banking . . . We're all familiar with the concept of supply and demand. If the demand for money goes up interest rates, which are the price of renting money, should go up.
This is not the case with a banking system.
When money is created through new debt to buy a home, fund a business or any other reason, this increases the amount of the money supply for the duration of the loan. When new loans are made, this increases the amount of money available - which in turn drives interest rates down.
As a result, without a central bank or activist treasury credit bubbles are self-reinforcing. More loans means both more demand and also lower interest rates. Only a treasury or central bank can damped this cycle by requiring banks to without an increasing amount of reserves from circulation.
When you take out a mortgage to buy a home, you're creating new money and creating inflation. This price inflation may remain restricted to the price of homes, or it may flow out to general prices. What happens depends entirely in the aggregate choices made by people like the guy who sold his house to you.
With the Baby Boom saving for retirement from their late 30s on, consumer inflation remained quite low while the money supply created by a massive increase in loans all went into asset purchases.
After 9/11 folks like Bush and Greenspan panicked, creating a real estate bubble by nearly eliminating prudent lending standards for making home loans. While this kept the economy strong while under attack, it ultimately created more financial damage than Osama bin Laden could have hoped to create on his own.
Some have suggested that attacks on your country have always been associated with real estate bubbles, like the home buying binge following Pearl Harbor, and the apartment speculation in Paris as Nazi troops marched closer to taking France. Of course none of these real estate bubbles actually occurred, which highlights the fact that the post-9/11 real estate bubble was not a natural occurrence. |
