In a staggering revelation, US government spending since 2020 has surpassed the combined expenditures of monumental events in history: World War I, World War II, and the spending spree spanning from 1970 to 1990. The sheer magnitude of this spending spree raises eyebrows and sparks concerns about its sustainability.
At a time when bank credit is contracting, the implications become even more profound. A shrinking pool of lending facilities could spell trouble for businesses seeking financial support. Tightening credit standards may further exacerbate the challenges faced by companies navigating an already volatile economic landscape.
The Federal Reserve’s weekly aggregate balance sheet for all commercial banks in the United States offers a glimpse into the state of bank credit. The contraction in bank credit, first observed in 2009, stemmed from losses incurred by commercial banks due to the collapse of mortgage-backed securities (MBS).
Bank credit, often viewed as a lagging indicator, tends to follow the onset of a recession. Despite the MBS crisis erupting in 2008, the contraction in bank credit didn’t materialize until the following year, highlighting its delayed response to economic downturns.
Fast forward to July 2023, and the trend continues with bank credit figures showing a negative year-over-year change. The coming months will be critical in determining whether this contraction persists or dissipates, painting a clearer picture of the economic landscape ahead.
Government spending aims to boost the economy, but with bank credit tightening, it’s like stepping on the gas while reducing fuel. Balancing this delicate dance is crucial to prevent overleveraging and potential economic pitfalls.
As the US grapples with unprecedented government spending and a contracting credit environment, the stage is set for a period of economic uncertainty.
US government spending (inflation-adjusted) since 2020 has exceeded the combined spending of:
– World War I
– World War II
– 1970 to 1990
This is unsustainable pic.twitter.com/bbZsp4NGBn
— Game of Trades (@GameofTrades_) January 30, 2024
Bank Credit: All Commercial Banks
Below, you'll find the historical view of bank credit, which is contracting for the second time since 1974.
When bank credit contracts, it becomes more difficult for businesses to secure lending facilities. It's likely that businesses that can… pic.twitter.com/hgkYvYeA8N
— Reef Insights (@ReefInsights) January 30, 2024