Recession Alert: Weak Credit Growth Points To US Recession Ahead
Posted January 17, 2015
The key to understanding the economy and the financial markets in the 21st Century is this: Credit growth drives economic growth.
From 1952 to 2008, every time credit (adjusted for inflation) grew by less than 2% the United States went into recession and did not recover until there was a new surge of credit expansion. Between 2008 and 2014, however, credit grew by less than 2% every year. To prevent economic breakdown during those years, the Fed printed $3.6 trillion and bought $3.6 trillion of financial assets, driving up their price and creating a Wealth Effect that generated economic growth despite weak credit expansion.
The latest Macro Watch video, Credit Growth: Still Too Weak, considers the outlook for the next two years. It shows that credit growth is going to remain too weak to drive the economy in either 2015 or 2016. I believe that means the United States will soon fall back into recession – unless the Fed intervenes with a new round of Quantitative Easing.
• Forecasts debt growth for all the major sectors of the economy,
• Looks closely at the outlook for the housing market, since housing-related debt makes up more than a third of all US debt, and,
• Considers how $2.4 trillion of Corporate debt (25% of the total) just disappeared from the Fed’s The Financial Accounts of the United States between the first and second quarter of 2014.
Don’t be surprised if the US economy begins to slow abruptly.
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