Annual U.S. Credit Growth Slows to Single Digits

In the U.S., the credit growth rate has just fallen below its historic average.

Here’s a March 24 news item from Reuters:

Overall annual credit growth rarely turns negative, but when it decelerates into the low single-digits as it has now, it shows that the lending that helps fuel overall economic growth is under strain.

Tightening credit conditions (when banks are reluctant to extend loans to consumers and business) are to be expected when uncertainty reigns, and that’s the case now.

This was foretold in Robert Prechter’s Last Chance to Conquer the Crash, which mentions what happens when overall confidence decreases:

A trend of credit expansion has two components: the general willingness to lend and borrow and the general ability of borrowers to pay interest and principal. These components depend respectively upon (1) the trend of people’s confidence, i.e., whether both creditors and debtors think that debtors will be able to pay, and (2) the trend of production, which makes it either easier or harder in actuality for debtors to pay. So, as long as confidence and production increase, the supply of credit tends to expand. The expansion of credit ends when the desire and the ability to sustain the trend can no longer be maintained. As confidence and production decrease, the supply of credit contracts. [emphasis added]

The psychological aspect of deflation and depression cannot be overstated. When the trend of social mood changes from optimism to pessimism, creditors, debtors, investors, producers and consumers all change their primary orientation from expansion to conservation. As creditors become more conservative, they slow their lending. As debtors and potential debtors become more conservative, they borrow less or not at all. As investors become more conservative, they commit less money to debt investments. As producers become more conservative, they reduce expansion plans. As consumers become more conservative, they save more and spend less. These behaviors reduce the “velocity” of money, i.e., the speed with which it circulates to make purchases, thus putting downside pressure on prices. The psychological change reverses the former trend. [emphasis added]