By John Mauldin
Here is a quote from my friend Peter Boockvar that has drawn an enormous amount of interest: “We no longer have business cycles, we have credit cycles.”
Let’s cut that small but meaty sound bite into pieces. What do we mean by “business cycle,” exactly? Well, it looks something like this.
A growing economy peaks, contracts to a trough (what we call “recession”[1]), recovers to enter prosperity, and hits a higher peak. Then the process repeats.
The economy is always in either expansion or contraction. However, this pattern broke down in the last decade.
Low Rates to Blame
In the 2008 financial crisis, we had an especially painful contraction[2]. It was followed by an extraordinarily weak expansion.
GDP growth should reach 5 percent in the recovery and prosperity phases, not the 3 percent we have seen since 2008.
Peter blames the Federal Reserve’s artificially low interest rates[3]. Here’s how he put it in one of his letters:
To me, it is a very simple message being sent. We must understand that we no longer have economic cycles. We have credit cycles that ebb and flow with monetary policy. After all, when the Fed cuts rates to extremes, its only function is to encourage the rest of us to borrow a lot of money and we seem to have been very good at that. Thus, in reverse, when rates are being raised, when liquidity rolls away, it discourages us from taking on more debt. We don’t save enough[4].
The problem is that, over time, debt stops stimulating growth[5]. Debt-fueled growth is fun at first but simply pulls forward future...