The final outcome of the credit expansion is general impoverishment.

What did Ludwig von Mises mean by:

The final outcome of the credit expansion is general impoverishment.

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The quote "The final outcome of the credit expansion is general impoverishment" refers to the idea that an excessive increase in credit or loans within an economy, in the long run, will lead to a decrease in overall wealth. This is based on the understanding that credit expansion is not real growth but an artificial one, as it’s based on borrowed funds and not on actual resources or productivity.

To break it down, when credit is expanded, more money is pumped into the economy. This initially leads to an economic boom as businesses invest and consumers spend. However, as this money is essentially borrowed, it needs to be paid back with interest. Over time, the debt accumulates, and the repayments start to outweigh the economic growth, leading to a slowdown or even a recession. This is when the ‘general impoverishment’ sets in, as the overall wealth of the economy decreases due to the burden of the debt.

This concept can be applied in today’s world in the context of national economies or even personal finances. In a macroeconomic sense, it warns against the dangers of excessive borrowing by governments or financial institutions, as seen in the 2008 financial crisis. The initial boom caused by credit expansion eventually led to a severe recession and widespread financial hardship.

On a personal level, it serves as a caution against over-reliance on credit cards and loans. While these financial tools can provide short-term relief or enable larger purchases, over-reliance on them can lead to a cycle of debt that diminishes overall personal wealth. This quote, therefore, encourages responsible borrowing and emphasizes the importance of living within one’s means for long-term financial stability.

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