Commercial Loans Accelerate in 2014

After declining steadily for the 18 months ending 12/31/13, commercial credit - the sum of all loans and leases in the US - has been accelerating in 2014.

This is important because banks generally don't issue loans unless they believe that they're going to get paid back. I believe that the perceived lack of creditworthy borrowers was a contributing factor as to why we've had such a lackluster economic recovery post-2009.

I subscribe to the theory that the vast majority of money creation in the US modern monetary system doesn't happen via the federal government or some massive printing press at the US Mint, but rather at your humble hometown bank. Thus, money creation has been privatized for quite some time in the US. The mechanism goes something like this: banks create money when they issue loans to creditworthy borrowers, who then spend the proceeds of the loan to achieve some economic purpose. We like to think of the federal government as the sole issuer of money, but the vast majority of payments in the modern monetary system happen by using bank deposits, not federal funds or hard currency.

The concept that private banks themselves "create" the money by crediting a borrower's account is a difficult yet critical concept to understanding how the modern monetary system functions. The key for me in accepting this was to study how banks actually use reserve funds and the realization that a bank usually doesn't lend out reserves that it has on hand - instead, the loan is created first as an asset and only THEN will go find necessary reserves after the fact (usually in the overnight market, but sometimes even with the Fed). Banks in this description are really just operating a payments system to facilitate the economy. They are profitable when their assets (loans) are less expensive than their liabilities (to households, usually, via bank deposits, or the Federal Reserve Discount Window).

Banks have been flush with cash and other short-term reserves since emergency measures were made during the economic crisis to ensure that the US payment system was flush with liquidity. The catalyst for this action was the collapse of the overnight loan market after Lehman Brothers failed.

This theory explains why in spite of a rapidly accelerating monetary base from 2008-present, we haven't seen robust economic recovery, nor ravaging hyperinflation, as in traditional monetary theory, more dollars chasing goods should result in an increase in prices. Inflation hasn't increased, however, because the monetary base hasn't made it's way out into the broader economy - it's been sitting at the bank-level. And the banks have been unwilling to lend out their deposits to non-creditworthy borrowers. Thus, prices have remained stable.

A much better and detailed explanation can be found here.

Regardless, credit is not just expanding in the economy, it's accelerating. I interpret this to mean that banks are expecting to be repaid via increase economic growth, which, in theory, could benefit us all.