Tuesday, October 25, 2011
Bank loans surge as government spending slows
Followers of MMT understand that government deficits add to non-government (private sector) income and savings. That means high and rising deficits tends to cool credit demand because private sector balance sheets are getting healthier.
On the other hand, a slowdown in deficit spending tends to do the opposite: it DRAINS income and savings thus causing credit demand to rise in order to compensate for that loss in income and savings.
The chart below is quite eye-opening. It shows a very strong correlation between government spending and private credit creation. Bank loans have begun to grow since the slowdown in net government spending that started back in March-April of this year. And when net government spending went negative year-over-year in July, bank lending absolutely took off.
The private sector is now tapping credit as the government begins to step out of the economy. Unfortunately, this will not be a repeat of 2004 - 2007, where we had a credit boom, because credit conditions are, generally, much tighter now. And with unemployment high, the ability to get credit and service that credit is poor, so this credit cycle can collapse very quickly.