President Calvin Coolidge said, "The business of America is business."
When Coolidge was president -- the Roaring 'Twenties -- much of the business expansion was fueled by credit. But the growth of credit then was small potatoes compared to recent decades.
Since 2007, however, many businesses and individuals don't want to take on more debt. They worry about the future and their ability to pay back debt. Many want to pay down the debt already owed. This psychology prevails despite very low interest rates and the tailwind of optimism from the market rally.
The Chief Financial Officer of a well-known company said in a recent interview that his company's financial priority was to pay down debt -- not assume more. That CFO's financial strategy is probably representative of many other companies.
"The 90-day T-bill rate fell to 0% in late 2008, essentially making credit free. More loans were offered in 2009 and 2010, but the end appeared in the form of slack demand."
Elliott Wave Financial Forecast, Sept. 2010
"Just when credit becomes more available, there's little evidence of a surge in demand for it."
CNNMoney, August 2010
It took independent thinking and intellectual courage to call for a "credit contraction" when most economists disagreed.
Yet, EWI's Robert Prechter made that call years ago:
"...two things are required to produce an expansionary trend in credit. The first is expansionary psychology, and the second is the ability to pay interest...after nearly seven decades of a positive trend, confidence has probably reached its limit...a multi-decade deceleration in the U.S. economy...will soon stress debtors' ability to pay. These dual forces should serve to usher in a credit contraction very soon."
Conquer the Crash, 2nd edition, pp. 110-111
Of course, some businesses do want to borrow money from banks. But many of those businesses which would have been approved before the financial crisis are being turned down today. Banks don't want to take on too much risk because they've already been badly burned.
Here's an excerpt from an interview Ben Bernanke did with CBS' 60 Minutes (12/5):
Correspondent Scott Pelley: Lending to small businesses actually declined in the third quarter. Why is that?
Fed Chairman Ben Bernanke: A lot of small businesses are not seeking credit...because their business is not doing well, because the economy is slow. Others are not qualifying for credit, maybe because the value of their property has gone down. But some also can’t meet the terms and conditions that banks are setting.
Taken together, all the reasons that Bernanke cites point to a downward spiral -- a deflationary trend. The reasons why depend on the given small business situation, but it's credit contraction just the same.
The Wall Street Journal recently reported that fourth-quarter commercial and industrial loans increased by a whopping 0.2% from the third-quarter, yet the WSJ also states (12/29):
"The amount of business loans outstanding remains well below historical levels."