The formula behind economic expansion and economic decline

  In a previous article, it was discussed how managing the money supply can lead to employment or unemployment. And much the same way, the money supply can be manipulated to cause economic expansion or economic decline.

  When the central government increases the money supply or when private financial institutions increase the money supply. Public and Private spending increases as a result of these new grants and loans. Highways, Research and Development, Department Stores, and Super Markets get grants and loans to begin operation.

  When Financial institutions loan money for businesses, they are not necessarily using money they themselves possess. But the money they borrowed from the Central Government. If the Central Government loans 1 RMB to Private bank A at 2.5 percent interest rate. The Private Bank A cant loan to private citizens that same RMB for 2.5 percent interest rate. Bank A still needs to pay back the Central government its principle plus interest. If it fails, it risks getting seized by the Central Government. Thus Bank A must issue that loan at anything higher than 2.5 percent. It has its own operational costs to consider as well as the debt it owes to the Central Government.

  Free Market expansion occurs when these Private Banks become daring. They give out far more in loans than they had actually loaned from the Central Government. A fractional reserve lending process of 5 to 1 or 10 to 1 or whatever number they choose. This new money that enters the economy creates expansion and financial exhilaration. Financial markets boom, property prices boom, consumer prices boom, wages boom, the economy just looks unstoppable.

  A recession occurs when the Central government steps in to end the excitement. The Central Government enjoys the high levels of spending, but it does not enjoy seeing inflation since controlling inflation is one of its main pillars. As a result, the Central Government hikes interest rates to increase the price of borrowing money from the Central Government. And in turn, Private Banks hikes interest rates to increase the price of borrowing for its private citizens.

  Its easier to pay back a loan during periods of high lending because the money supply continues to expand just like more fish keep getting added to the sea. If a business takes out a 10 RMB loan to begin its start up, 10 consumers who each take out a 1 RMB loan to purchase products from that business will bring that business back to financial balance.

  However if the cost of lending increases and lending comes to a halt, then that business will never find the customers it needs to pay back its bank.

  Much like businesses are always in a scramble for Central Government Notes to pay back its bank, the Bank is always in a scramble for Central Government Notes to pay back the Central Government. The Bank does not want the business. It just wants its notes. It will confiscate the business and sell it at a loss just to come up with some notes. Because if they cant come up with the needed notes, the Central Government will come and possess the bank.

  The Central Government Bank is then able to control inflation by contracting or stagnating the money supply through these threats. 

  Of course this does not really apply to China since not only is the Chinese Central Bank owned by the Chinese government but so are its so called private lenders that loan directly to the Chinese citizenry.