macro: The Boom & Bust on a Paper Napkin

Here’s David Gordon’s paper napkin version of the boom and bust cycle, sketched in a piece on the idea of a global reserve currency:

What happens when we expand the money supply? As Austrian school economists .. have explained, an expansion of bank credit will drive the money rate of interest below the “natural” rate, largely determined by people’s preference for present over future goods. When business people see that money is available at low interest, they will expand production. But the money rate of interest rises after the expansion ceases, because people’s actual preferences for present goods over future goods have not decreased. The businesses that expanded based on these lower rates now must liquidate their enterprises. This liquidation is what constitutes a recession or depression.

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