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On this podcast, I’ll interview Dr. Jeff Roach, our Director of Research on where we may be in the credit cycle. This is important to understand as the Federal Reserve’s next meeting is scheduled for Sept. 25-26.
Credit Cycle
The credit cycle is the expansion and contraction of access to credit over time.
During an expansion of credit, asset prices are bid up by those with access to leveraged capital. This asset price inflation can then cause an unsustainable speculative price “bubble” to develop. The upswing in new money creation also increases the money supply for real goods and services, thereby stimulating economic activity and fostering growth in national income and employment.
When buyers’ funds are exhausted, an asset price decline can occur in the markets which had benefited from the credit expansion. This can then cause insolvency, bankruptcy, and foreclosure for those borrowers who came late to that market. This, in turn, can threaten the solvency and profitability of the banking system itself, resulting in a general contraction of credit as lenders attempt to protect themselves from losses.
Sources: Article
