Deflating the credit bubble

By Alasdair Macleod

How likely is it that the downturn in broad money supply will continue, and if so, why? And what are the consequences?

The major central banks have increasingly resorted to interest rate management as their principal means of demand management. Yet history shows little correlation between managed interest rates and the growth of credit, which is represented by broad money statistics.  It can only be concluded that central banks have finally lost control over interest rates, and that they are now being driven by the contraction of commercial bank credit. The great unwind of the credit bubble, which was four decades in the making, is being driven by a growing fear of lending risk among bankers, exacerbated by the recent failures of a few significant banks. For bankers, it is no longer a time for greed, but for fear and a reduction of their debt obligations