What is a credit cycle?
The credit cycle is a period during which the availability of a loan on the market, country or worldwide expands and then concludes contracts. Many economic theories associate this with trade cycles that affect trade as a whole. Some economists even point to the credit cycle as the main driving factor of the trade cycle. The general idea is that growth becomes self -service: the more money people have to spend, the higher the demand is; The higher the demand, the more people are needed to work; The more people need to work, the more money people have to spend. At some point, the offer of goods or services outlined. This causes the process to operate the opposite, with decreasing demand leading to declining employment and wages, which in turn will further reduce demand.
The general credit cycle theory works in a similar way. In fact, the demand for goods and services from the business cycle is replaced by the demand for a loan. When the economy is growing, there is a greater demand for loans, as companies expand, which fromInterest rates are higher. At some point, these interest rates, which are the price of the loan, are too high for those who still want to borrow further. This means that interest rates will begin to fall, so it is less profitable to lend money and less profitable to invest money in credit markets. As a result, less money is available for lending, which ends with a loan harder to come.
The exact relationship between the commercial cycle and the credit cycle is controversial among economists. One theory, known as the Kiyotaki-Moore, claims that the credit cycle amplifies the effects of the business cycle. This is based on how in many cases the amount on paper is to deal with markets are much larger than the actual amount of cash that passes back and forth between businesses and consumers in "real life". This increases the effects of any variations caused by the economic cycle.
Another model is known as the hypothesis of financial instability in Minsky. It says the credit cycle means that with increasing economy is easy and cheap for companiesborrow. In the end, they accumulate such large amounts of debt to their profits that they can no longer risk, that they are investing in capital expenditures. This causes a decrease in demand for relevant services and products such as construction, which can help cause the trade cycle to enter into a decline.