The role of credit in American economy
Credit plays a significant role in shaping the American economy. Both the lenders and the borrowers contribute massively to the construction of the economy. Within the local level, the credit increases spending among the citizens, which leads to increased sales, thus increasing income levels. At the national level, the credit increases the economy’s productivity, therefore contributing to the increase in the US GDP. Without credit, the number of people buying new products would be meager, which implies that the manufacturing sector will scale the production backward. Scaling of the manufacturing industry would result in increased unemployment due to the closure of stores. The decreasing levels of production would also result in increased costs of commodities, making it hard for consumers to purchase products.
Credit also influences the business cycle within an economy. Adverse economic shocks are easily propagated through the falling collateralized prices, implying a deterioration in the firms’ balance sheets. The situation inhibits the investment and the borrowing capabilities of various businesses. Disruptions in the economy due to financial shocks induce the tightening of constraints, spilling over to the real sector. Decomposing a firm’s debt into unsecured and secured components, the unsecured part strongly and positively correlates to the growth of the US economy; hence credit influences the business cycles.
Credit plays a crucial role in influencing the stability of an economy. Through credit, businesses and individuals can purchase beyond their ability and their payment desire. The financial requirements of an economy like the commercial, industrial, and agricultural sectors can only be adequately met through credit. Through credit, purchase, processing, storage, and sale of goods can be achieved. Less credit will imply weak purchase trends and a decrease in the production numbers. The manufacturers, therefore, sack their employees, resulting in decreased productivity within an economy.