Short Term Debt Cycle
By Members Desk
March 31, 2022
0:00 / 2:39
Short Term Debt Cycle

Short term debt cycle. As economic activity increases, we see an expansion. The first phase of the short-term debt cycle spending continues to increase in prices. Start to rise. This happens because the increase in spending is fueled by credit, which can be created instantly out of thin. When the amount of spending and incomes grow faster than the production of goods, prices rise.

When prices rise, we call this inflation. The central bank doesn't want too much inflation because it causes problems. Seeing prices rise. It raises interest rates with higher interest rates. Fewer people can afford to borrow money and the cost of existing debts rises. Think about this as the monthly payments on your credit card going up because people borrow less and have higher debt repayments, they have less money left over despite.

So spending slows and since one person's spending is another person's income, income drops and so on and so forth. When people spend less prices go down, we call this deflation economic activity decreases, and we have a recession. If the recession becomes too severe and inflation is no longer a problem.

The central bank will lower interest rates to cause everything to pick up again with low interest rates, debt repayments are reduced and borrowing and spending pickup. And we see another expansion as you can see, the economy works like a machine in the short term debt cycle spending is constrained only by the willingness of lenders and borrowers to provide and receive credit.

When credit is easily available, there's an economic expansion. When credit isn't easily available, there's a recession and note that this cycle is controlled primarily by the central bank. The short-term debt cycle typically lasts five to eight years and happens over and over again for decades. But notice that the bottom and top of each cycle finish with more growth than the previous cycle and with more debt.

Why because people push it, they have an inclination to borrow and spend more instead of paying back debt it's human nature because of this over long periods of time, deaths rise faster than incomes creating the long-term debt cycle.