Credit supply growth drives business cycle fluctuations and often sows the seeds of their own subsequent destruction.

Fiona Sydney

2018-04-26 07:37:00 Thu ET

Credit supply growth drives business cycle fluctuations and often sows the seeds of their own subsequent destruction. The global financial crisis from 2008 to 2009 suggests that we can predict a key slowdown in real economic activity by tracking incremental household debt accumulation. In both America and 30 other countries, changes in household debt-to-GDP ratios from 2002 to 2007 significantly correlate with increases in unemployment from 2007 to 2010.

From this empirical perspective, credit supply expansions, rather than permanent income or technology shocks, serve as a major driver of real business cycles over time. Most macro models attribute macroeconomic fluctuations to real factors such as exogenous productivity shocks. In contrast, financial intermediaries can play an important role in aggregate credit supply growth, household leverage, employment, and asset valuation. Credit supply expansions affect the real economy by boosting household demand, rather than the productive capacity of firms.

In fact, credit booms tend to precede higher inflation and employment in retail and construction (but not in the tradable or export-driven business sector). The key real economy slowly adjusts to the precipitous decrease in consumer expenditures due to high household leverage when credit supply slows down in major financial crises.

Even when short-term interest rates decline to zero, savers cannot spend enough to make up for the shortfall in aggregate demand. Also, employment cannot readily gravitate from the non-tradable sector to the tradable sector. Key nominal rigidities, sluggish price adjustments, and other legacy distortions render post-credit-boom recessions more severe. What triggers credit supply growth involves a major influx of capital in the financial system.

In this light, both monetary and fiscal stimulus can have a major impact on the real economy via credit supply growth, household debt, stock and bond prices, and real business cycles. Overall, financial stability serves as a core precondition for better bond and stock valuation.

 


If any of our AYA Analytica financial health memos (FHM), blog posts, ebooks, newsletters, and notifications etc, or any other form of online content curation, involves potential copyright concerns, please feel free to contact us at service@ayafintech.network so that we can remove relevant content in response to any such request within a reasonable time frame.

Blog+More

Elon Musk envisions a bold fantastic future with his professional trifecta of lean enterprises SolarCity, SpaceX, and Tesla.

Joseph Corr

2020-04-10 11:33:00 Friday ET

Elon Musk envisions a bold fantastic future with his professional trifecta of lean enterprises SolarCity, SpaceX, and Tesla.

Elon Musk envisions a bold fantastic future with his professional trifecta of lean startup enterprises SolarCity, SpaceX, and Tesla. Ashlee Vance (2015)

+See More

To secure better E.U. economic arrangements, Jeremy Corbyn encourages Labour legislators to back a second referendum on Brexit.

Olivia London

2019-06-17 11:25:00 Monday ET

To secure better E.U. economic arrangements, Jeremy Corbyn encourages Labour legislators to back a second referendum on Brexit.

To secure better economic arrangements with European Union, Jeremy Corbyn encourages Labour legislators to back a second referendum on Brexit. In recent tim

+See More

Analytic business competitors apply smart data science to support their distinctive capabilities and strategic advantages.

Peter Prince

2020-11-24 09:30:00 Tuesday ET

Analytic business competitors apply smart data science to support their distinctive capabilities and strategic advantages.

Many analytic business competitors can apply smart data science to support their distinctive capabilities and strategic advantages. Thomas Davenport and

+See More

Facebook CEO Mark Zuckerberg testifies in Congress to rise up to the challenge of public outrage.

Rose Prince

2018-04-07 09:36:00 Saturday ET

Facebook CEO Mark Zuckerberg testifies in Congress to rise up to the challenge of public outrage.

Facebook CEO Mark Zuckerberg testifies in Congress to rise up to the challenge of public outrage in response to the Cambridge Analytica data debacle and use

+See More

Federal Reserve normalizes the current interest rate hike to signal its own independence from the White House.

Apple Boston

2019-01-08 17:46:00 Tuesday ET

Federal Reserve normalizes the current interest rate hike to signal its own independence from the White House.

President Trump forces the Federal Reserve to normalize the current interest rate hike to signal its own monetary policy independence from the White House.

+See More

CNBC All-America Economic Survey indicates 54% majority approval of the Trump team's supply-side economic reform.

Jonah Whanau

2018-07-11 09:39:00 Wednesday ET

CNBC All-America Economic Survey indicates 54% majority approval of the Trump team's supply-side economic reform.

In recent times, the Trump administration sees the sweet state of U.S. economic expansion as of early-July 2018. The latest CNBC All-America Economic Survey

+See More