Executive Summary

• Lack of demand is the key drag on economic growth. And there's no end in sight.
• Private sector credit expansion just isn't happening fast enough
• Why the central banks' "wealth effect" policies have been a total bust
• Capital flows are simply chasing yield, precious little economic productivity is being created

If you have not yet read Part 1: Where To From Here available free to all readers, please click here to read it first.

The Bad 

Who wrote this tired sea song set on this peaceful shore?  I think you’ve heard this one before…

~ Steely Dan

As mentioned, at least for the small business community, availability of credit has not been a key fundamental issue in the current cycle. In fact, their number one issue of concern for years has been lack of final demand.

Personally, I believe the experience of the small business community is simply a microcosm of the larger domestic and global macro. Subdued final demand IS the key macro. Is this why we see a growing gap between small business perceptions of credit availability and actual capital spending? Probably. The credit is there, but actual final demand that would support credit expansion is not. Hence the current cycle divergence in what has historically been a very tight data series correlation between credit and capital expenditures.

Of course this is a segue into a broader dark cloud of the current cycle that is private sector credit expansion, or more correctly, lack thereof relative to historical experience.  When we listen to pundits speak of the economy potentially reaching “escape velocity”, they are of course referencing prior economic cycle growth results, aided and abetted by prior credit expansion that is now lacking. This is perhaps most dramatically seen in the rhythm of banking system credit, in the change in actual loans and leases outstanding.

As is clear in the chart below, in every expansion cycle of the last four decades (and probably more) banking system credit has grown in double-digit territory – until the present. The current cycle looks nothing like recent history. So when speaking of escape velocity, just how is to be achieved without the accelerant of double-digit private sector credit growth?