| Economic Waves series (see Business cycles) |
|
| Cycle/Wave Name | Years |
|---|---|
| Kitchin inventory | 3–5 |
| Juglar fixed investment | 7–11 |
| Kuznets infrastructural investment | 15–25 |
| Kondratiev wave | 45–60 |
The credit cycle is the expansion and contraction of access to credit over the course of the business cycle. Some economists, including Barry Eichengreen, Hyman Minsky, and other Post-Keynesian economists, and some members of the Austrian school, regard credit cycles as the fundamental process driving the business cycle. However, mainstream economists believe that the credit cycle can only partially explain the phenomenon of business cycles.
During the upward phase in the credit cycle, asset prices experience bouts of competitive, leveraged bidding, inducing asset price inflation. This can then cause an unsustainable, speculative price "bubble" to develop. As this upswing in new debt creation also increases the money supply and stimulates economic activity, it tends to temporarily raise economic growth and employment.
When new borrowers cannot be found to purchase at inflated prices, a price collapse can occur in the market segment inflated by excess debt, along with a dramatic reduction in liquidity in that market.[1] This can then cause insolvency, bankruptcy, and foreclosure for those borrowers who came in late to that market. If widespread, this can then damage the solvency and profitability of the private banking system itself, resulting in a dramatic reduction in new lending as lenders attempt to protect their balance sheets from further losses. This in turn results in a contraction in the growth of the money supply, often referred to as a "credit squeeze" or a "drying up of liquidity".
In the Kiyotaki-Moore model of the business cycle, collateral constraints amplify the effects of shocks to the real economy.
Prime examples of this "boom-bust" cycle of credit creation and destruction can be found in the United States housing bubble and the subsequent subprime mortgage crisis, the dot-com bubble and the Japanese asset price bubble.