Part 2/7:
Understanding the Credit Cycle
The credit cycle consists of four distinct phases:
Easy Credit/Expansion Phase: Characterized by loose lending standards and low interest rates, fostering optimism and increased spending by both businesses and consumers.
Credit Boom/Euphoria Stage: Occurs as borrowing becomes excessive, leading to overleveraged consumers and rampant speculation.
Tightening and Stress: Banks begin to raise rates and credit slows, resulting in defaults and stalling asset prices.
Contraction/Bust Phase: Credit availability diminishes, defaults spike, and asset prices plummet, possibly leading to a recession.