Credit Expansion

Credit expansion is the process of increasing the amount of debt within an economy. Credit expansion occurs through the lending activities of the private sector and the fiscal policies of the government.

Financial institutions and other commercial banks create money when they issue loans. This then creates debt for the person to whom they issued the loan to. Credit expansion also occurs when the government spends more than it collected in taxes, known as a budget deficit. The deficit can be financed by borrowing from the public through the issuance of government bonds. If these bonds are purchased by private entities then it leads to credit expansion as these entities convert other assets into bonds, freeing up more funds for lending and investment.