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How Do Loans Affect Prices?

The impact of loans on consumer prices is a very difficult topic that cannot be dealt with in one short article, but I will try to give you insight into how credit can affect prices and whether more lending means higher prices? In order to be able to properly evaluate this issue at first, it is necessary to understand how the credit is created and then where the money is being generated.

 

When the Bank issues credit to you or someone else

When the Bank issues credit to you or someone else

It does so by attracting investors and making money for those investors when you make a loan. But the ratio of bank lending is definitely not 1: 1, but more 10: 1 , which means that for every Euro you deposit with the bank it can issue credits for 10 Euros. And in this way, money is basically made out of nothing, because you can borrow with these 10 Euros, but in reality no one created this money, but the bank created it from that ratio. The real money that you received came from a number of such deposits or from the fact that people in the bank account have unnecessary money.

And that means that if all the people suddenly want to withdraw their bank money, then it wouldn’t be possible because the bank doesn’t have as much cash and virtual money to pay all the money to all its customers. Well, when we understand how money is made with the help of credit then we can get on with how this money really affects prices . Basically, it is assumed in the economy that the higher the turnover of money and the amount of money in circulation in an economic region, the higher the prices will be, as simply more banknotes will catch the same goods and services. In this way, inflation also arises and, if banks already make virtual money by issuing loans, then in theory the prices of various goods and services should also climb.

 

There were no quick credit or other credit

There were no quick credit or other credit

And basically this happens, although it must be said that credit is not the only cause of such a price increase and the people themselves, and their greed also plays a big role, but if there were no quick credit or other credit, the price rises and falls would be organic rather than puffed up from empty air. That is why, for example, housing prices before the 2008 crisis began to rise at a dizzying pace, as banks and private creditors then also issued more and more credits, which then led to demand growth and supply shrinkage, and price increases were inevitable. The greater the volume of lending, the greater the circulation of money in the country, and this in turn creates the illusion that the economy is growing all the time, but in fact, this growth is based on credit and it will definitely reduce the pace or stop at all when suddenly all of them will have to pay back credits.

In all sectors, loans do not affect prices in the same way , and people are unlikely to start buying more bread suddenly when issuing loans, but looking directly at luxury goods is how the loans are, which also allows consumers to make unscheduled and irrational purchases and then slowly. pay back this money, not try it right away, which would be much more difficult and then hardly any purchases that are not really needed, but which are just luxury goods or desire rather than necessity!

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