The Trade Cycle | Why is there a Boom and Bust?

#economics #businesscycle #interestrates

The role of interest rates allocating resources is critical to the trade cycle. Booms and busts begin when interest is manipulated. Lowering the rate might stimulate the economy in the short run. This will give the appearance of profitability. However, the manipulation misallocated resources. Projects that wouldn’t have been undertaken under natural conditions are taken under the manipulated rates. An adjustment will happen eventually.

The upward movement of certain projects can’t continue. The upward trajectory can continue if the public thinks the rise of prices will stop. Panic sets in when they see they will not. Unjustified investments will come to a halt. This will cause the end of the boom. At most, the public will realize the currency is losing value and spend it while they can. This is just a crack up boom and can’t last either.

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