Blog | CB Investment Management

When Credit Growth Cracks, What Options Remain?

“The Fed’s application of its framework has left it behind the curve in controlling inflation. This, in turn, has made a hard landing virtually inevitable.”

~ Bill Dudley, president of the Federal Reserve Bank of New York from 2009 to 2018, vice chairman of the Federal Open Market Committee, and previously chief U.S. economist at Goldman Sachs.

Last week the full data for credit growth in 2021 was released. As described by Richard Duncan’s Macrowatch, the chart above shows real credit growth was very weak in the last 3 quarters of 2021, and even declined in the last quarter.

This data is very important because the record shows that ever since 1952 whenever credit growth fell below 2% per annum, the US economy went into recession.

What is also clear from the chart above is the persistent weakness of credit growth ever since 2008, prior to the pandemic gyrations. This shows up more clearly in the chart below. It is important because it was part of the reason that the Fed saw the wealth effect as a source of additional growth.

What shows up in the chart below is that the wealth effect reached a level far beyond the bubbles of 2000, and 2008.

That was all before the Fed realized it had an inflation problem.

Since the end of 2021, the incentive to borrow has taken a dramatic hit. 30 year mortgage rates have risen around 2% in just the first quarter. Not surprisingly mortgage applications and pending home sales have already been falling.

Economic growth has fallen significantly in Q1 2022, by all estimates, and credit growth is clearly much weaker than previously realized.

The Fed now faces extremely challenging conditions. Investors need to carefully consider the Fed’s ability to navigate the current inflation predicament. How can the Fed believe the economy is so strong, with credit growth so weak, interest rates already impacting growth, and the wealth effect so extended?

Best Practice is a matter of your Best Interest.

Education and a Commitment to Informed Consent is an Obligation.

Chris Belchamber is an IRMAA Certified Planner

Medicare’s IRMAA impacts every retirement plan. Learning how to mitigate it is available via IRMAA Certified Planners designation.

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