Over the Falls: Credit, Collateral, Risk, Asset Valuations

April 20, 2023

by Charles Hugh Smith Of Two Minds

Together, these factors generate a self-reinforcing cycle of debt saturation, declining collateral and credit contraction.

If we want to understand where the economy is going, credit and risk are good places to start. Credit/debt is how the system creates and distributes money: when a home buyer gets a mortgage to buy a house, that mortgage increases the money supply. When the mortgage is paid off, the money supply contracts.

The mortgage is secured by two things: the income of the buyer and the house, which is the collateral for the loan.

Risk is integral to credit. Should the income of the buyer or the value of the house decline sharply, the loan is at risk of default / loss. In the national/global economy, the cost of credit reflects trends and policies that raise or lower the risks which then influence the cost of credit: as risk rises, the cost of credit goes up.