Business Cycle and Consumer Credit

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Smiling Dave replied on Wed, Mar 7 2012 4:42 AM

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P. S. de Soto in his book, Money, Bank Credit, and Economic Cycles, has a short chapter on your very question. Chapter 6, section 3. Language is a bit technical.

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Rodolphe Topffer replied on Wed, Mar 7 2012 5:51 AM

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Huerta de Soto, himself :

Second, in most cases consumer loans are granted to finance the purchase of durable consumer goods, which as we saw in previous sections, are ultimately comparable to capital goods maintained over a number of consecutive stages of production, while the durable consumer good’s capacity to provide services to its owner lasts. Under these circumstances, by far the most common, the economic effects of consumer loans, with respect to encouraging investment and lengthening productive stages, are identical to and indistinguishable from the effects of any increase in savings directly invested in the capital goods of any stage in the productive structure.  (p. 316)

Hence we have only to consider how to revise our theory of the business cycle if a significant portion of credit expansion is devoted (contrary to the usual practice) to financing not durable consumer goods, but the current consumption of each financial year (in the form of goods and services which directly satisfy human needs and are exhausted in the course of the period in question). Substantial modifications to our analysis are unnecessary in this case as well, since one of the following is true: either credit expansion satisfies a more or less constant demand for credit to finance existing direct consumption in the economic system, and given that credit markets are like “communicating vessels,” such expansion frees the capacity to grant loans in favor of the stages furthest from consumption, thus instigating the typical processes of expansion and recession we are familiar with; or the loans exert their impact on current consumption while no additional capacity is freed for granting loans to industries from the stages furthest from consumption.

 

Only in this second case, insignificant in practice, is there a direct effect on the monetary demand for consumer goods and services. Indeed the new money immediately pushes up the prices of consumer goods and diminishes, in relative terms, the prices of the factors of production. The “Ricardo Effect” is set in motion, and entrepreneurs begin to hire more workers, in relative terms, and substitute them for machinery. Thus a trend toward the flattening of the productive structure is established without a prior expansionary boom in the stages furthest from consumption. (p. 406-407)

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Gabriel Godinho replied on Fri, Mar 9 2012 9:18 PM

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Thank you guys =), Ill take a look at de Soto's writings