Thecredit cycle is the expansion and contraction of access tocredit over time.[1] Some economists, includingBarry Eichengreen,Hyman Minsky, and otherPost-Keynesian economists, and members of theAustrian school, regard credit cycles as the fundamental process driving thebusiness cycle. However,mainstream economists believe that the credit cycle cannot fully explain the phenomenon of business cycles, with long term changes in national savings rates, and fiscal and monetary policy, and related multipliers also being important factors.[2] InvestorRay Dalio has counted the credit cycle, together with thedebt cycle, thewealth gap cycle and the global geopolitical cycle, among the main forces that drive worldwide shifts in wealth and power.[3]
During an expansion of credit, asset prices are bid up by those with access toleveraged capital. Thisasset price inflation can then cause an unsustainable speculative price "bubble" to develop. The upswing in new money creation also increases themoney supply for real goods and services, thereby stimulating economic activity and fostering growth in national income and employment.[4]
When buyers' funds are exhausted, an asset price decline can occur in the markets which had benefited from the credit expansion. This can then causeinsolvency,bankruptcy, andforeclosure for those borrowers who came late to that market. This, in turn, can threaten thesolvency and profitability of the banking system itself, resulting in a general contraction of credit aslenders attempt to protect themselves from losses.[5]