The illusion of lasting wealth in credit-driven cycles

The history of the economy is characterized by recurring cycles of euphoria and subsequent disillusionment. When money seems to flow in abundance and prices rise incessantly, society often loses sight of the real risks. A credit-driven upturn has an enormous pull effect that affects all areas of economic and social lifethis creates illusions of lasting wealth, which are ultimately built on sandy foundations.

The psychological contagion of apparent wealth

In such a phase of boundless confidence, every ordinary owner of a property turns into an enthusiastic advertiser for the great game of money multiplication. These people rarely strive for an immediate financial benefit, but are in a true state of intoxication and want to share their perceived happiness with the entire environment.contagious enthusiasm is carried away by the general euphoria of even the most cautious contemporaries, who are usually reluctant to give up their money. They experience a financial turning point that finally draws them into the market.

The positive effects on government budgets

This upswing is by no means limited to the personal balance sheets of citizens, but also covers the finances of the state and companies. In the case of government finances, the newly created loans have a significant impact on the larger political and fiscal cycle. All this new money created by the banking system to fuel the real estate boom,drives up the consumer spending of the population massively. Credit card limits are being raised and people feel richer because their wealth has risen on paper.

Increasing public revenues and employment

These increased expenditures drive up VAT and other indirect levies, increasing government revenues and reducing the budget deficit. This creates scope for tax cuts in the coming budgets, which in turn means a new injection of money for citizens. Since the construction industry is running at full speed and is labour-intensive, theUnemployment is noticeable. More people are finding new employment not only directly in construction, but also in real estate, banking and advertising.

The corporate strategies in a low-interest-rate environment

At the corporate level, brisk sales drive sales and trigger a wave of financial manipulation at low inflation. Firms that cannot expand fast enough on their own use leveraged mergers to increase their market share in these growing markets. The low interest rates mean low costs in the event ofa failure, so that companies invest in start-ups that might never have had a chance to succeed at higher interest rates. One can clearly see how cheap money finances fragile businesses or weak ideas that are only kept alive by the general money glut.

The Fate of Artificially Alive Companies

Old companies that have remained solvent due to too low interest rates will inevitably go bankrupt if interest rates rise. But so do new companies that burn their investors’ money without ever making a profit. These artificially kept alive and purely fictitious companies will be the first to implode as soon as interest rates rise again. Against this background, theturbulent 2000s, heavily wealthy real estate developers were treated with messianic respect in the financial press.

The social exhilaration and arrogance

While over-indebted banks won awards, their CEOs appeared on international forums and spoke out confidently on global issues. People were in an absolute high spirits, and nothing could tarnish that positive mood. Since governments were running budget surpluses for the first time, citizens only complained that theyWednesday night no longer got a table in the restaurant. The tabloids, meanwhile, reported on lavish celebrity weddings on exclusive islands.

The three categories of borrowers

In any credit-driven upswing, there are three types of borrowers with three different underlying balance sheets. The basic type is the hedging borrower, who has enough income to pay both the monthly interest payments and the annual repayment installments. Another type is the speculative borrower, who only pays interestand must extend its repayment installments. He hopes to sell the asset at a big profit in the end and only then pay off the capital.

The danger posed by speculative and fraudulent actors

The last type is the fraudulent borrower, who can neither pay his interest nor his capital from his income and is necessarily dependent on rising prices for repayment. He is on the market to resell the property to the next buyer, which makes the market financially nonsensical at these ridiculously high prices. In this phase, the entire building is onlymaintained by mass deception, this is where we hear stories about new models and new-fangled theories about valuations, prices, and money.

The moment of highest risk for market participants

This is the moment of highest risk and at the same time the moment when most amateurs get into the game. The illusion of secure profits blinds the last skeptical observers, who are now also throwing their fortunes into the market. When the tide of cheap credit finally recedes, the stark reality of inflated prices and unsustainable debt remainsthe inevitable hangover after the intoxication then strikes all who would not believe the warnings of reason.