Here's What a Credit-induced Boom Does
A credit-induced boom leads to a bust. When governments and central banks make credit easily available to their people, it leads to an increase in economic activity. Ireland is a good example of what happens as a result.
Basically, money is cheap to borrow and people borrow it because it's cheap. They don't necessarily think about whether the purpose of their borrowing the money makes much sense. For sure, all the activity shows up in economic reports as a boom. But if the money isn't being spent on things that make economic sense, that's known as "misallocation of capital." And that's what happened in Ireland.
Of course, for years Ireland was dubbed the "Celtic Tiger." After centuries of relative poverty (sometimes terrible poverty due to their oppression at the hands of the English), the Irish seemed to have woken up from an economic stupor and become super-charged with economic energy. Business boomed. But whether or not some of the Irish revival was based on sound economic activity or not, cheap credit was brought to bear and capital was misallocated:
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Basically, money is cheap to borrow and people borrow it because it's cheap. They don't necessarily think about whether the purpose of their borrowing the money makes much sense. For sure, all the activity shows up in economic reports as a boom. But if the money isn't being spent on things that make economic sense, that's known as "misallocation of capital." And that's what happened in Ireland.
Of course, for years Ireland was dubbed the "Celtic Tiger." After centuries of relative poverty (sometimes terrible poverty due to their oppression at the hands of the English), the Irish seemed to have woken up from an economic stupor and become super-charged with economic energy. Business boomed. But whether or not some of the Irish revival was based on sound economic activity or not, cheap credit was brought to bear and capital was misallocated:
(Reuters) - A hard-won bank debt deal has been hailed by the Irish government as an historic step towards recovery, but from the unemployment-scourged ghost estates of the midlands, the feted rebound feels more like a mirage.Now people are suffering the after-effects of a credit-induced boom. Notice "people" are suffering, as in regular folks. Bankers who were responsible, government officials who were responsible for the easy credit don't seem to be suffering much.
...for Moyagh Brophy, the agreement allowing Ireland far longer to repay a costly bank rescue adds up to very little when she can only speak to her husband via Skype each night after he joined a growing line of emigrants.But why should things be any different in Ireland than they are just about everywhere else you look?
"What difference does it make? People are emigrating and the rest of us struggle by. The country's a mess," Brophy said.
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