donderdag 31 januari 2013

Public Sector Credit Expansion Vs. Private Sector Credit Contraction

In 2009, Marc Faber said these words at one of his famous seminars: 

"But for the fiscal stimulus to even have a small chance of succeeding at reviving economic activity it has to be larger than the private sector credit contraction."

In today's world we have 2 opposing forces, one is Ben Bernanke's public sector credit expansion (Chart 1) and the other is private sector credit contraction (Chart 2). If credit grows, all is well, but when they cancel each other out and credit contracts, a recession will start. To make it easy I took the credit growth chart for the money creation of banks (Chart 1). For the private sector I took the household debt chart (Chart 2).

Bank credit is going up due to money printing:

Chart 1: Bank Credit

Private sector debt is declining due to repayment of debt. I indicated that the savings rate has gone up to 6% now, so I expect more repayments in the future.
Chart 2: Private Sector Credit
If we then add these two charts together we get Chart 3 and the picture isn't pretty. The percentage change in credit has gone negative and is at a historic low. As you can see, each recession (grey bar) is accompanied by a dropping credit and 2008 is by far the worst one. If we don't see a rising trend here, you can expect ugly times ahead.

Chart 3: Credit Expansion/Contraction

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