Commercial Credit Collapse

Commercial credit is the money businesses borrow to fund their operations on a short term basis. Large corporations use the commercial paper market and bank loans. Smaller companies use loans from banks and finance companies. In the USA, the availability of commercial credit is contracting violently across the board. In our opinion, this portends an acceleration of the Depression, as employers find it more difficult to fund any sort of expansion - or even maintain their operations.

The commercial paper market has shrunk by 28 percent in the last three months according to this Bloomberg report. The entire market has shrunk by over half since its peak two years ago.

Bank lending is also falling. Since the beginning of the year, commercial and industrial loans of commercial banks have fallen by about 7% according to Federal Reserve Bank data.

Finally, lending by finance companies is also collapsing. According to data from the Federal Reserve Bank, business lending by finance companies had fallen about 6% from the beginning of the year to April. This figure will get substantially worse with the imminent demise of CIT, a large finance company.

Taken as a whole, a picture of severe credit contraction emerges. Both lenders and borrowers are losing en masse the capacity to lend or borrow due to deteriorating finances. Even sound borrowers may have little reason to borrow under the current circumstances and would just pay off loans as they come due. In any case, the result will be continued economic contraction.