Source: De Monie, G. J-P Rodrigue and T. Notteboom (2010) “Economic Cycles in Maritime Shipping and Ports: The Path to the Crisis of 2008” in P.V. Hall, B. McCalla, C. Comtois and B. Slack (eds) Integrating Seaports and Trade Corridors. Surrey: Ashgate.
Fractional reserve banking and central banks can have substantial negative impacts on business cycles since they tend to distort growth opportunities and capital accumulation. By opting for strategies that tend to mitigate recessionary cycles (often of their own doing), central banks, under the pressure of governments and financial institutions, issue massive amounts of credit, leading to a credit driven-boom. Since debt can be defined as present consumption at the expense of future consumption, a debt-based bubble “steals” a large amount of consumption from the future and compresses it in a short lapse of time. Bubbles, which are nothing more than credit-driven booms and the unintended consequences of central banks’ policies, thus give wrong signals to the economy by misguiding investment and capital accumulation processes. More capital than required accumulates in activities related to the bubble, creating overcapacity.
In North America and a number of European countries, in particular, the UK and Spain, the 2002-2006 credit bubble resulted in overcapacity in residential and commercial real estate and created an artificial level of consumption. For export-oriented economies, overcapacity took place in the setting of production and distribution assets incited by the debt-derived growth of consumption taking place because of asset inflation. Actors involved in international trade, such as maritime shipping companies and terminal operators, also responded to this credit driven-boom by substantial investments in additional capacity. They were extrapolating the credit-driven demand into the far future and making investments in additional capacity accordingly.
At some point, a credit-driven boom always collapses under its own weight as the weakest and most leveraged actors start to default. The resulting credit-driven bust removes a substantial amount of capacity, leaving the sector(s) in which it took place in a weaker position than before the boom started. The credit-driven bust can also be exacerbated by various bailout schemes where politically connected firms receive some financial aid (moral hazard) and punishing prudent strategies. The outcome is an economic system that is weaker, corrupt (preferential access to capital), and prone to additional misallocations. Another paradoxical outcome of a credit-driven bust is the potential for higher prices as producers cut production capacity and restrain from new investments, mainly because capital is scarce. Supply could drop below demand, particularly in the early stages of the next growth phase.