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Your spending is someone's income
What lenders look for
Lenders look for two things in a borrower: the ability to repay and collateral. A lot of income in relation to debt gives the ability to repay, and valuable assets that could be sold give the collateral if repayment fails. When a borrower's income rises, lenders feel more comfortable lending to that borrower.
The income loop
Picture someone who earns $100,000 a year and has no debt. That person is creditworthy enough to borrow $10,000 on a credit card, so $110,000 gets spent. The person who receives that spending now earns $110,000, and with no debt can borrow $11,000, so $121,000 gets spent.
Increased income allows increased borrowing, which allows increased spending, which becomes someone else's income all over again. This self-reinforcing pattern drives economic growth, and it is why the economy moves in cycles.
Why does one dollar of spending multiply?
Economists call this the multiplier. Richard Kahn introduced the idea in a 1931 paper, and John Maynard Keynes built it into The General Theory in 1936. If people spend 80 cents of each extra dollar they receive, the total rise in income comes to five times the original injection.
Taxes and imports leak part of each round away, so real-world multipliers are smaller.
Why do rising asset prices fuel more borrowing?
Collateral gives a lender something to seize if a loan goes bad, so loans backed by assets are easier to get. When asset prices rise, the same collateral supports a bigger loan.
Nobuhiro Kiyotaki and John Moore formalized this in their 1997 paper Credit Cycles, showing that small shocks to asset values can be amplified into large swings in borrowing and output. Falling prices run the same loop in reverse.
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