What are credit cycles?
Sources:
Credit cycles, also known as debt cycles, represent the patterns of booms and busts in lending and borrowing that influence the economy. They can be observed through various lenses:
-
Booms and Busts: Credit cycles often involve periods of rapid economic expansion (booms) followed by contractions (busts). These cycles can manifest in different sectors, such as the COVID-19 impact on travel or the retail sector's decline due to e-commerce rise 1.
-
Short-term and Long-term Cycles: There are typically two types of debt cycles:
- Short-Term Debt Cycles (business cycles): These last about 5-7 years and are characterized by recessions and recoveries. Central banks influence this cycle by adjusting monetary policies, interest rates, and liquidity 2.
- Long-Term Debt Cycles: These span 50-75 years and involve significant economic shifts, such as the Great Depression. Long-term cycles are less frequent but lead to substantial systemic changes 3.
-
Modern Impact: Recent credit cycles have been influenced by unprecedented factors like combined real and financial money printing, and the exogenous shock of the COVID-19 pandemic. This led to extreme volatility and a significant impact on economic activity 4.
Credit cycles are critical in shaping economic landscapes, influencing asset prices, lending practices, and overall financial stability. Understanding these cycles helps in preparing for, and potentially benefiting from, economic changes.
RELATED QUESTIONS-