Credit and Debt

Credit

Short-term cycles depend on credit.  Credit can:

  1. Increase spending without increasing incomes
  2. Be used to increase income

The availability of credit is influenced by:

  1. Interest rates – lower interest rates increase credit in the market
  2. Credit-worthiness – determined by income and collateral assets
The short-term debt cycle is determined by credit and controlled by central banks through interest rates.
Credit Cycles
Credit Cycle Graph

Debt

Debt Cycle

Debt is a cycle because you spend more than your income now and in future will have to spend less than your income to repay it.  

  • When the slope of the credit curve is increasing, income > debt repayments
  • When the slope of the curve is decreasing, debt repayments > income
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