The Credit Cycle and Zombies’ Downfall

The comments below are an edited and abridged synopsis of an article by Alasdair Macleod

Leading central banks like to think that, through careful interest rate management, they have tamed the economic cycles that lead to regular economic downturns. Instead, they have only managed to bury the evidence.

The Credit Cycle and Zombies’ Downfall - BullionBuzz - Nick's Top Six
Spooky dark streets with hordes of zombies. 3D generated image.

To appreciate the extent of their delusion, one must understand the source of economic instability. In modern times it has always been driven by a cycle of bank credit. Macleod explains the role of commercial banking in this regard. The effect on non-financial economic sectors in the context of Hayek’s triangle under today’s currency regime is re-examined.

With cyclical variations in the economy buried under a tsunami of currency, market participants are oblivious to the dangers of a cyclical downturn in bank lending and the consequences that flow therefrom.

Macleod gives the problem its economic and monetary context. The article concludes that the global banking system is horribly over-leveraged and, with empirical evidence as a guide, on the edge of a bank credit contraction of historic proportions, likely to undermine the entire fiat currency system.

Up for discussion: Introduction; Austrian business cycle theory; the origin of changes in bank credit; how relevant is the Hayekian triangle today; and where the downturn in bank credit leads.

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