Expert Commentary

Slowing Bank Credit is a Deflation Risk

There might be a shortage of fuel…for the markets.

Fuel shortages hit certain parts of America this week as a main pipeline was closed down, reminding many just how dependent society is on keeping things moving.

The chart below shows that the growth in bank credit in the U.S. has been slowing quite dramatically over the past few months. It has been a similar picture in Europe. Commercial banks have been reporting dwindling demand for loans from corporate customers. Undoubtedly a big part of this has been the fact that the bond markets have been wide open, allowing corporates to raise finance using that sometimes more attractive route rather than go through their bank. Another factor has been government support schemes for firms affected with lockdowns during World War C (as in Covid).

Nevertheless, the slowing in bank lending should be a worry for central banks. They can print fresh money (as they have been doing in spades), but unless the private sector is creating new loans, credit creation is not happening, and money supply growth gets no traction.

If money supply growth is gaining no traction, it means that a major component of the rally in risk assets (from stocks to junk bonds to metals) is being eroded. At some point, just like a Tour de France cyclist will get “le bonk” if he fails to fuel his body, markets will start to get the wobbles as they run out of the liquidity that has helped propel them higher.

Should that occur, asset price deflation will beget the private sector debt-deflation that is necessary to cleanse the system.


USA Bank Credit-All Commercial Banks- May 2021