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.


SchittReport said...


1) there is no lag in which this happens? it appears from the graph that as soon as government spending decreased, the slack was taken up by private credit creation?

2) does this hold true for only the few months portrayed or is there evidence to support this correlation across longer time frames?

p.s. shouldn't it read "inverse correlation" in your paragraph?

mike norman said...

Yes, inverse correlation would be correct. I think that's obvious in the graph, however.

Leverage said...

Guess what will happen when recession kicks in and lending contracts. Collapse is next and then QE-infinite that won't fix nothing.

And this time is global...

Mario said...

as usual great stuff here Mike. Too bad this kind of analysis is considered "impossible" or "no problem" or something.

Matt Franko said...


One of the things the govt did at this time was to stop paying invoices due to the debt ceiling being hit.

If you are a business that is a lets say a defense contractor with multi-million dollar payroll or perhaps a healthcare system with a huge payroll that is experiencing slow medicare reimbursements from the govt you probably have to go to the bank to get credit to make payroll... the non-govt sector depends on the govt sector to make prompt payment, if the govt does not comply, non-govt has to 'go to the bank'....

Clonal said...

Clearly austerity works! ;-) See private capital is stepping in to make the required investment!

This is great for Bank profits!

Now if only the indebted businesses and individual work extra hard to pay off the loans and interest, all will be well!

beowulf said...

"p.s. shouldn't it read "inverse correlation" in your paragraph?

Better term for it is inverse deleveraging.

AH said...

Hi Mike, it is a bright analysis, please have a look at this paper. It highlights that, also on the basis of the available data, the ratio of public spending on GDP has constantly increased in the USA and in other OECD Countries, and that credit creation has much to do with public intervention.


Best regards,
Arturo Hermann

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