The Sceptical Inflationist

Many investors pigeon-hole themselves as “inflationists” or “deflationists”, where an inflationist is someone who expects more inflation over the years immediately ahead and a deflationist is someone who expects deflation. They then latch onto evidence that confirms their side of the inflation-deflation issue and ignore, or discard after only a cursory glance, evidence that supports the opposing view. To put it another way, rather than be open-minded and willing to let the evidence speak for itself, they selectively ‘mine’ the evidence in an effort to prove a dearly held opinion. This is an unreasonable approach, because nobody knows the future. Instead of making an unswerving commitment to one side of the great debate, it is more reasonable to be sceptical of the arguments presented by both sides. Actually, this applies to everything, not just the inflation-deflation issue.

We are in the inflation camp, because the overall case for more inflation is strong. However, we would be deflationists if the case for more inflation in the US rested on an increase in commercial bank lending. The reason is that even if the commercial banks were eager to grow their loan portfolios, which they most certainly aren’t at the moment, there is a dearth of willing, credit-worthy borrowers for them to lend to.

We note, firstly, that according to recent NFIB (National Federation of Independent Business) surveys, more than 90% of small businesses claim that their credit needs are fully met at this time. In other words, less than 10% of private businesses are looking to expand their borrowings, and it is probably the case that only a small percentage of this small percentage is credit-worthy. Secondly, we note that large businesses are generally cashed up and that if they borrow in the future they are more likely to do so by tapping the corporate bond market (by tapping the existing supply of money, that is) than by taking out bank loans. This leaves the “consumer” as the remaining possible engine of private-sector credit expansion and monetary inflation. With 15%-20% unemployment, residential real estate in a secular bear market and consumer debt levels at high levels by historical standards, we would not want to hang our hat on a major new upward trend in consumer borrowing.

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via The Sceptical Inflationist.


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