Expansions, Mergers, and Other Opportunities
The boom phase of the business cycle is fueled by “cheap money”—that is, the Federal Reserve injecting new money into the banking system. This increase in liquidity causes short-term interest rates to fall to levels below what the free market would have determined by the interplay of supply and demand of savers and borrowers. The Fed’s actions set into motion an unsustainable period of economic activity throughout the structure of production and “irrational exuberance” in the financial markets, especially the stock market. The inevitable bust arrives when the Federal Reserve raises interest rates by withdrawing liquidity from the financial system to dampen the overheated economy. In short, ...
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