As quoted by Jack Schwager in his book Hedge
Fund Market Wizards:
“Unlike in recessions, when cutting interest rates and
creating more money can rectify this imbalance, in deleveragings monetary
policy is ineffective in creating credit. In other words, in recessions (when
monetary policy is effective) the imbalance between the amount of money and the
need for it to service debt can be rectified because interest rates can be cut
enough to (1) ease debt service burdens, (2) stimulate economic activity
because monthly debt service payments are high relative to incomes, and (3)
produce a positive wealth effect; however, in deleveragings, this can’t happen.
In deflationary depressions/ deleveragings, monetary policy is typically
ineffective in creating credit because interest rates hit 0 percent and can’t
be lowered further, so other, less-effective ways of increasing money are
followed. Credit growth is difficult to stimulate because borrowers remain
overindebted, making sensible lending impossible. In inflationary
deleveragings, monetary policy is ineffective in creating credit because
increased money growth goes into other currencies and inflation hedge assets
because investors fear that their lending will be paid back with money of
depreciated value.”
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