The credit cycle is the expansion and contraction of access to

credit Credit (from Latin verb ''credit'', meaning "one believes") is the trust which allows one party to provide money or resources to another party wherein the second party does not reimburse the first party immediately (thereby generating a debt) ...

over time. Some economists, including Barry Eichengreen,

Hyman Minsky Hyman Philip Minsky (September 23, 1919 – October 24, 1996) was an American economist and economy professor at Washington University in St. Louis. A distinguished scholar at the Levy Economics Institute of Bard College, his research was inten ...

, and other Post-Keynesian economists, and members of the

Austrian school The Austrian school is a Heterodox economics, heterodox Schools of economic thought, school of economic thought that advocates strict adherence to methodological individualism, the concept that social phenomena result primarily from the motivat ...

, regard credit cycles as the fundamental process driving the

business cycle Business cycles are intervals of general expansion followed by recession in economic performance. The changes in economic activity that characterize business cycles have important implications for the welfare of the general population, governmen ...

. However, mainstream economists believe that the credit cycle cannot fully explain the phenomenon of business cycles, with long term changes in national savings rates, and fiscal and monetary policy, and related multipliers also being important factors. Investor

Ray Dalio Raymond Thomas Dalio (born August 8, 1949) is an American billionaire and hedge-fund manager, who has been co-chief investment officer of Bridgewater Associates since 1985. He founded Bridgewater in 1975 in New York. Dalio was born in New York ...

has counted the credit cycle, together with the debt cycle, the wealth gap cycle and the global geopolitical cycle, among the main forces that drive worldwide shifts in wealth and power. During an expansion of credit, asset prices are bid up by those with access to

leveraged In finance, leverage, also known as gearing, is any technique involving borrowing funds to buy an investment. Financial leverage is named after a lever in physics, which amplifies a small input force into a greater output force. Financial leverag ...

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 In macroeconomics, money supply (or money stock) refers to the total volume of money held by the public at a particular point in time. There are several ways to define "money", but standard measures usually include currency in circulation (i ...

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 In accounting, insolvency is the state of being unable to pay the debts, by a person or company ( debtor), at maturity; those in a state of insolvency are said to be ''insolvent''. There are two forms: cash-flow insolvency and balance-sheet i ...

bankruptcy Bankruptcy is a legal process through which people or other entities who cannot repay debts to creditors may seek relief from some or all of their debts. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the deb ...

, and

foreclosure Foreclosure is a legal process in which a lender attempts to recover the balance of a loan from a borrower who has Default (finance), stopped making payments to the lender by forcing the sale of the asset used as the Collateral (finance), coll ...

for those borrowers who came late to that market. This, in turn, can threaten the

solvency Solvency, in finance or business, is the degree to which the current assets of an individual or entity exceed the current liabilities of that individual or entity. Solvency can also be described as the ability of a corporation to meet its long- ...

and profitability of the banking system itself, resulting in a general contraction of credit as

lender A creditor or lender is a party (e.g., person, organization, company, or government) that has a claim on the services of a second party. It is a person or institution to whom money is owed. The first party, in general, has provided some property ...

s attempt to protect themselves from losses.

References

{{United States – Commonwealth of Nations recessions Credit Debt Business cycle

See also

References