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Doomsday Device

All across the banking world – from commercial loans to leases and real estate – credit is collapsing. Ambrose Evans-Pritchard writing for British newspaper The Telegraph:

Credit strategists are increasingly disturbed by a sudden and rare contraction of U.S. bank lending, fearing a synchronized slowdown in the U.S. and China this year that could catch euphoric markets badly off guard. Data from the U.S. Federal Reserve shows that the $2 trillion market for commercial and industrial loans peaked in December.

The sector has weakened abruptly as lenders tighten credit, especially for non-residential property. Over the last three months it has dropped at a rate of 5.4% on annual basis, a pace of decline not seen since December 2008.

C & I loans, y/y growth. Readers may recall that we recently showed this chart in “Libor Pains”, in which we discussed corporate debt. Actually, y/y commercial & industrial loan growth peaked in early 2015 already, not just “last December”… but lettuce not quibble (Pritchard likely meant to refer to total commercial bank credit, the growth rate of which reached an interim peak in late 2016 – shown further below). The point remains that credit growth is falling fast – click to enlarge.

If new loans aren’t made, the supply of credit money will contract. That’s the “doomsday device” embedded in our credit money system: It is subject to sharp and disastrous drawdowns in the money supply.

When loans are paid or written off, the outstanding credit (money) ceases to exist. This reduces the money supply and triggers corrections, recessions, or market crashes.

Real money doesn’t disappear in a credit contraction. But our fake “credit money” does. This makes the entire system vulnerable to the credit cycle. Credit increases. Then it decreases. And as credit money vanishes, the recession deepens… causing the credit market to tighten further and causing more money to disappear.

…click on the above link to read the rest of the article…

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