Credit Expansion Driven By The Market Forces    

Credit expansion and response from a different markets. The Friday jobs report (June 2, 2017) was a disappointing one. Gold prices increased, and the price of silver went up even more. In just three hours, gold gained $18 wile silver went up 39 cents. Before reading too much into this connection, it is worthwhile to first look at the response from a different market. 

Credit is a garden-variety expansion. According to mainstream economic theory, that is how the monetary system supposedly works. Individuals borrow to purchase assets.

The initial reaction before the opening bell in the US equities was down (signal from the futures markets). However, it was a muted one, and then within a couple of hours turned around with the market ending even higher.  

Every stock represents a business. If there is disappointing jobs growth then presumably there is two reasons why that is bad for stocks. The first reason is that companies do their hiring based on what their revenue expectations are not a credit. No or slow hiring means there is no or slow revenue growth that is expected. The second reason is that when people are not hired they don't do as much buying, and so it becomes a feedback loop with sluggish growth in business revenue.  

However, in this case the stock market disagreed. What was said was let's cut a bit more on the earnings yield, down to 3.93% from 3.94%. That basically means that earnings are set to increase and show lower unemployment as well. The Euro and US Treasury bonds went up in addition to the stock market. Finally, silver and gold did as well. So what do all of them have in common?

There isn't any way that the real unemployment rate is lower than 5%. There are more than 45 million individuals on food stamps, and more than 94 individuals not in the workforce. Trying to claim a 5% unemployment rate within the content of those two other data points is like trying to claim you are in amazing shape as long as you don't count cardiovascular health or body fat. 

Credit Expansion and Mainstream Economic Theory

Credit, as a garden-variety expansion. According to mainstream economic theory, that is how the monetary system supposedly works. Individuals borrow in order to purchase assets. A wealth effect is created, as increasing asset prices make individuals (or at least the ones who own the assets) feel like they are richer. And when people feel rich, they will purchases more Porsche's, and Rolexe's and eat out more often, and this employs everybody else. At least according to the theory.   

Conclusion

When it comes to credit expansion, the objective is to make sure that more capital gets generated for the market in order to provide more of what is demanded by consumers. However,it fails and has the opposite effect actually. It skews the judgment of entrepreneurs and causes them to align resources in order to produce products that are not being demanded by consumers and causes them to use production factors for processes to turn out products that consumers are demanding later while withdrawing from those that would be in compliance with the time preferences of consumers.

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