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 Barry Julian Eichengreen (born 1952) is an American economist and economic historian who holds the title of George C. Pardee and Helen N. Pardee Professor of Economics and Political Science at the University of California, Berkeley, where he ha ...

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

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

Austrian school The Austrian School is a heterodox school of economic thought that advocates strict adherence to methodological individualism, the concept that social phenomena result exclusively from the motivations and actions of individuals. Austrian schoo ...

, regard credit cycles as the fundamental process driving the

business cycle Business cycles are intervals of expansion followed by recession in economic activity. These changes have implications for the welfare of the broad population as well as for private institutions. Typically business cycles are measured by examin ...

. 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 investor and hedge fund manager, who has served as co-chief investment officer of the world's largest hedge fund, Bridgewater Associates, since 1985. He founded Bridgewater i ...

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 capital. This

asset price inflation Asset price inflation is the economic phenomenon whereby the price of assets rise and become inflated. A common reason for higher asset prices is low interest rates. When interest rates are low, investors and savers cannot make easy returns using l ...

can then cause an unsustainable speculative price "bubble" to develop. The upswing in new money creation also increases the

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

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 ...

, bankruptcy, and foreclosure 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-t ...

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

{{Financial crises Credit Debt Business cycle

See also

References