In the previous blogs of this series, I have laid down some basic fundamental definitions for things such as assets and liabilities. In the second post in the series, we saw how the banks serve as the inflationary engines of society, but that their activity does not add to the fundamentals level of assets in a society. Instead, banks expand the monetary base by creating and loaning far more money into circulation that they could actually deliver were their depositors to demand it; banks thereby create situations whereby there are far more claims to the amount of real goods in society then there are actual goods which leads to inflation.
As banks create and loan out money the economy booms, but it is an unsustainable growth. It is caused because the market misinterprets the source of the amount of money flowing into their products and services as a genuine increase in demand as opposed to simply a credit induced event. This leads business to expand their operations in an effort to make more profit, but the problem is that they are responding to false/credit induced demand as opposed to genuine demand. Eventually things have to revert back to fundamentals, and that is when the bubble collapses.
Now lets take these tools and bring them to bear on our current situation. Continue reading Exploring the Myths of the Consumer Driven Economy: Part III