The correct use of language may not appear to be a priority in our straitened circumstances, but the misuse of technical terms has a capacity to spread confusion and misunderstanding. This, in turn, leads to poor decision-making and financial loss. One of the popular descriptions of the crisis that engulfed us in 2007-09 is the Great Recession, but it was nothing of the sort. Recession is the name we give to the negative phase of a trade or business cycle. This is to be distinguished from a depression, which is the technical description of the negative phase of a credit cycle. Depressions and recessions are as different as migraines and headaches. The challenge before us, once more, is to stave off a depression.

Make no mistake, from a global macro-financial perspective, the defining characteristics of 2007-09 were the collapse of credit growth (figures 1 and 2) and the explosion of credit spreads (figure 3). Only when the US Federal Reserve and other central banks expanded their own balance sheets and offered them as collateral to private sector banks, was the crisis contained. We face the same dual threat today, with the additional twist that the non-financial corporate sector has feasted on cheap loans and debt issues over the past 7 years and is now leveraged up the eyeballs.

At times like these, the Keynesians gravitate to their perpetual narrative of deficient demand and the need for government stimulus; monetarists, camped forever on the wrong side of the balance sheet, obsess about the growth of bank deposits. Yet, for at least the past 30 years, it is credit that makes the world go around. Politicians and central bankers are running in all directions to ‘do whatever it takes’, but if we fail to protect the credit system, we are heading into depression territory. After slashing interest rates, injecting liquidity and expanding its balance sheet, the US Federal Reserve finally turned its attention to the corporate bond market.