1. The core role of commercial banks and the dilemma of credit contraction
As the backbone of the US economy, commercial banks bear the core function of money creation. Data shows that US commercial banks contribute 80% of the broad money supply (M2), and their credit behavior directly determines the vitality of the economy. However, commercial banks are currently caught in a vicious cycle of "cautious lending - monetary stagnation":
Weak credit growth
The annual growth rate of commercial bank loans in 2024 will be only 3.2%, far lower than 5.8% in 2018-2019 (Federal Reserve data). Among them, the growth rate of commercial real estate loans will drop from 6.5% in 2022 to 1.1% in 2024, reflecting the sluggish investment willingness of enterprises.
Default risk rises
As of Q4 2024, the proportion of loans overdue for more than 90 days in the United States reached 1.8%, up 0.7 percentage points from the low point in 2022. The credit card default rate rose from 2.4% in 2021 to 3.9% in 2024, and the auto loan default rate exceeded 4.5% (New York Fed data).
Balance sheet pressure
Commercial banks hold about $520 billion in unrealized securities investment losses (mainly from Treasury bonds and MBS), accounting for 12% of Tier 1 capital (FDIC data). If long-term interest rates remain high, large-scale asset impairments may be triggered.
Although the capital adequacy ratio of the US banking system is still 12.5% (higher than the Basel Accord requirement of 8%), credit standards continue to tighten. The Fed's Q4 2024 survey showed that 68% of banks have "significantly increased" their requirements for corporate loans, the highest level since 2008. This "turtling" behavior has led to a decline in the momentum of money creation, which directly threatens economic growth.
2. Stagnation of money supply: the core cause of economic slowdown
There is a strong correlation between the growth rate of money supply and economic growth. From June 2022 to December 2024, the annual growth rate of US M2 was only 1.1%, far lower than the average of 3.8% from 1960 to 2020 (FRED data). The "golden growth rate" (6%) proposed by Hankey aims to balance the 2% inflation target with actual growth needs. The current growth rate has been below this threshold for 28 consecutive months.
Transmission mechanism of money supply contraction
Demand-side suppression
The corporate loan demand index fell from 72 in 2021 to 58 in 2024 (Federal Reserve survey), reflecting pessimistic expectations for future profits.
Supply-side constraints
The scale of commercial bank loans supported by each dollar of capital will drop from 10.5 times in 2021 to 9.2 times in 2024, and the money multiplier effect will weaken.
Policy superposition effect
The Federal Reserve's quantitative tightening (QT) will reduce its holdings of Treasury bonds and MBS by $95 billion per month, and will withdraw a total of $2.1 trillion in liquidity from 2022 to 2024, further suppressing monetary expansion.
The lag of economic impact
Money supply changes usually affect the economy with a lag of 12-18 months. The sharp drop in M2 growth in 2022 (from 15.6% to 6.1%) has caused real GDP growth to slow to 1.5% in 2024, lower than the average of 5.9% in 2021-2022. The inflation rate has dropped from 9.1% in 2022 to 2.3% in 2024, and the core PCE price index growth rate is close to 1.8%, indicating that insufficient demand has become the main contradiction (BEA data).
The Fed's over-reliance on interest rate tools and neglect of money supply may increase the risk of policy lag. The current federal funds rate remains at 5.25%-5.5%, and the real interest rate (excluding inflation) is 3%, the highest level since 2008, which has exerted a double pressure on consumption and investment.
III. Institutional uncertainty: the chain reaction of policy shocks
(I) Misleading focus of trade policy
The US trade deficit is essentially a mirror reflection of insufficient domestic savings. In 2024, the US GDP is $27.4 trillion, with private consumption ($17 trillion), investment ($4.8 trillion), and government spending ($6.2 trillion) totaling $38 trillion. The $10.6 trillion that exceeds GDP is the trade deficit (3.9% of GDP). This deficit is balanced by a capital account surplus (foreign purchases of US bonds, stocks and other assets) and has nothing to do with "foreign exploitation" (BEA data).
Tariff policy not only fails to solve structural problems, but may also exacerbate cost pressures:
The average tariff rate on imported goods will rise to 4.5% in 2024, pushing up corporate raw material costs by 1.2 percentage points (New York Fed research);
The share of manufacturing employment will fall from 28% in 1965 to 8.4% in 2024, mainly driven by automation (productivity growth of 2.3% per year) rather than trade (St. Louis Fed data).
(2) Unsustainability of fiscal policy
The current federal government debt is 37 trillion U.S. dollars (135% of GDP), and interest expenditure in fiscal year 2024 will reach 1.2 trillion U.S. dollars (15% of the budget). The “$4 trillion tax cut bill” debated in Congress is essentially an extension of the current tax rate, but the additional $1.2 trillion increase in defense spending will further worsen fiscal discipline:
The Department of Defense budget will increase from $732 billion in 2019 to $987 billion in 2025, with an average annual growth rate of 6.3%, far exceeding the GDP growth rate;
The Government Accountability Office (GAO) pointed out that the Department of Defense has at least $2.3 trillion in “unverifiable expenditures,” with a waste rate of 23%.
Historical comparison shows that the Reagan administration reduced the federal expenditure/GDP ratio from 22.7% to 21.2% in 8 years, and the Clinton administration achieved a budget surplus with the help of the "peace dividend" (the fiscal surplus accounted for 2.4% of GDP in 2000). Currently, both parties lack fiscal constraints. CBO predicts that the federal debt will exceed 57 trillion US dollars in 2034, and interest expenditure will account for 4.5% of GDP (exceeding social security expenditure).
(III) Superimposed impact of regulatory policies
After the 2008 financial crisis, the Dodd-Frank Act raised the leverage ratio requirement for large banks from 4% to 5%, and the Basel III Accord required the common equity Tier 1 capital ratio to be no less than 4.5%. These policies increased the cost of bank capital by 150-200 basis points and reduced loan supply by about US$3.2 trillion (New York University research).The final version of the Basel III Accord to be implemented in 2025 will further tighten capital requirements, and is expected to reduce banks' lending capacity by 5%-8%. Hankey suggested canceling redundant regulations such as the "supplementary leverage ratio" to release about US$2.1 trillion in credit space (equivalent to 9% of the current M2).
IV. Risk transmission in financial markets and historical lessons
(I) Pricing contradictions in the treasury bond market
The yield on 10-year treasury bonds in 2024 once exceeded 5%, reflecting market concerns about fiscal risks. This pricing ignores the deflationary pressure brought about by stagnant money supply:
Inflation expectations (10-year TIPS spread) fell from 2.8% in 2022 to 2.1% in 2024, indicating that the market has revised its inflation expectations;
The difference between the actual GDP growth rate and the 10-year yield reached -3.5%, the largest negative gap since 1970, indicating the risk of economic recession.
(II) Lessons from the Great Depression
From 1930 to 1933, the US money supply decreased by 30%, corporate investment plummeted by 60%, and the unemployment rate rose to 25%. Policy uncertainty in the early days of Roosevelt's New Deal (such as frequent adjustments to the National Industrial Recovery Act) prolonged the recession, and capital formation did not return to the 1929 level until 1936. The current cancellation rate of corporate earnings guidance has reached 45% (higher than 28% in 2008), indicating a similar wait-and-see sentiment (S&P data).
(III) Warning of Japan’s “Balance Sheet Recession”
After the Japanese real estate bubble burst in the 1990s, enterprises and households turned to debt repayment, commercial bank loan growth was below 1% for a long time, and M2 growth remained below 2%, forming a “low growth - low inflation - low interest rate” trap. The current household debt repayment rate in the United States has reached 13.2% (higher than Japan’s 11.8% in 1998), and we need to be vigilant against falling into a similar cycle (New York Fed data).
V. Policy path selection and future prospects
(I) Short-term response: activating money creation
Adjusting the monetary policy framework
The Federal Reserve should include the growth rate of M2 in its policy targets, lower long-term interest rates through reverse operations (OT), and ease the pressure of bank securities investment losses;
text="">Postpone regulatory tightening
Postpone the implementation of the final version of Basel III, cancel the supplementary leverage ratio, and release credit supply;
Reshape fiscal discipline
Link tax cuts with spending cuts, for example, for every $1 in tax cuts, there should be a $1.5 spending reduction, giving priority to rigid spending such as social security.
(II) Long-term reform: rebuilding growth momentum
Industrial policy focuses on productivity
Reduce protection of traditional manufacturing industries, and increase investment in basic research in areas such as AI and new energy (currently federal R&D spending accounts for only 0.7% of GDP, lower than China's 1.6%);
Improvement of immigration policy
Supplement the labor force through skilled immigration to alleviate the decline in the labor force participation rate. The labor force participation rate in 2024 will be 62.8%, 1.2 percentage points lower than in 2019);
Debt monetization constraints
Establish a "fiscal rule" to limit the deficit ratio to 3% of GDP and automatically trigger spending cuts when the debt/GDP ratio exceeds 120%.
(III) Risk Scenario Simulation
Soft landing (35% probability)
The Federal Reserve cuts interest rates by 50 basis points in 2025, the M2 growth rate rebounds to 4%, GDP maintains a growth of 1.2%, and inflation stabilizes at 2%;
Mild recession (50% probability)
Starting from Q2 2025, GDP will experience negative growth for two consecutive quarters, the unemployment rate will rise to 5.5%, the 10-year yield will fall to 3.8%, and the Fed will launch QE5;
Deep recession (15% probability)
The escalation of trade conflicts and the impairment of bank assets will lead to a GDP decline of more than 2% and an unemployment rate of over 7%, posing the risk of "stagflation" in the 1970s.
Conclusion: Structural changes beyond short-term games
The core contradiction of the US economy is not a single policy mistake, but the resonance of the rigid monetary supply mechanism, lax fiscal discipline and excessive regulatory burden. The credit contraction of commercial banks is a superficial phenomenon. The deeper problem is that institutional uncertainty has stifled the risk appetite of market players. Only by breaking the policy inertia of "treating the symptoms instead of the root cause" and activating money creation and reshaping fiscal sustainability through market-oriented reforms can we avoid falling into long-term growth stagnation. For investors, it is necessary to pay close attention to the growth rate of M2, the progress of commercial banks' securities loss recognition and policy shift signals, and seize structural opportunities in a complex environment.