When credit growth is positive, bull markets result. When credit growth is excessive, bubbles result. When credit growth slows, recessions result and when credit growth contracts, all hell breaks loose.In free markets, supply and demand determine price and profits. Capitalism's paper-based markets, however, are not free markets. In today's capitalist markets, price and profits are determined by credit flows emanating from government central banks.
In credit-based capital markets, investors need credit like addicts need heroin; for just as addicts cannot survive without heroin, investors cannot profit without central bank credit. But more credit, like more heroin, becomes increasingly dangerous with continued usage.
It was the increased availability of credit in the 1980s that was responsible for the historic bull market from 1982 to 2007. In truth, the twenty-five year bull market was but a slow-building bubble in disguise, a bubble the Fed is now frantically trying to resuscitate in the hopes of preventing capitalism's imminent collapse.
In capitalist economies, constant credit fuels constant inflation which, in turn, results in constantly rising prices. This process was erroneously mistaken for wealth creation after the 1980s when inflation was contained to asset classes. But such asset gains are only temporary and become losses when speculative bubbles finally collapse.
Hoping to prevent a systemic deflationary collapse, central bankers flooded the US economy with credit in 2001, U.S. central bankers slashing the Fed lending rate from 5.25 % down to 1 %. It was, however, a massive infusion of credit that only delayed and exacerbated the inevitable.
If you keep goosing the golden goose. . .
From 2002-2005, the Fed's 1% rates revived global demand but inadvertently created the US real estate bubble, the largest speculative bubble in history, a bubble underwritten by global investors who bought hundreds of billions of dollars of subprime mortgages that are now virtually worthless.
The recent stock market rebound is like a tan on a dying man.
The real conundrum faced by central bankers is how to convince investors that the economy is improving when it isn't. A slowing descent is not the same as ascending although many investors are willing to bet their last dollar that it might be so.
Buy gold, buy silver, have faith.