Shrinking the money supply has helped the Feds reduce high inflation. Monetary and fiscal indicators continued to tighten significantly in the second quarter, pointing towards a slowdown in the U.S. economy. Negative money growth, increasing fiscal deficit, rising real interest rates, and central banking guidance of higher short-term interest rates are creating a classic ‘credit crunch.’ This credit crunch comes as the economy progresses further down the current financial cycle, slowing growth and limiting upward pressures on inflation.
While money supply and real interest rates reflect a traditional tightening financial cycle, as is the case now, a contraction in real bank credit is not usual when GDP is rising. Usually, money supply leads bank credit but the latest 12-, 24- and 36-month rates of change in real bank credit are all negative instead of the historical average of 3.4%/yr.
As the second quarter ended, the contraction in bank credit showed the potential for a credit crunch if not enough cash is available. During this time those holding sufficient cash for their needs will not be impacted if the bank credit crunch is widespread.
Edi Alvarez, CFP®
BS, BEd, MS