A dozen years of “money printing” and debt monetization created a lot of things, but inflation isn’t one of them.
Well, that’s not true. Inflation is one of them, just not the kind of inflation central banks would like to see.
There’s been plenty of inflation in financial assets. And, obviously, there are myriad instances of exponentially higher costs for crucial things like healthcare and education in the US, but at least some of that is explainable by government ineptitude and dynamics not directly attributable to developed market central banks.
What accounts for the apparent disconnect between, on one hand, trillions upon trillions in asset purchases and generally free money, and, on the other, lackluster inflation? One answer is the middleman. Because everyone involved insists on maintaining the charade that says QE isn’t debt monetization, we have to insert an intermediary. The result of that arrangement can be illustrated using the familiar visual (below).
I suppose some of the “blame” lies with the demand side of the equation, but the fact is, the largest US banks are dedicating less and less (as a percentage) to loans over time.
There are myriad factors that explain the trend, and yet one can’t escape the obvious. Banks are hoarding cash and government-backed securities and lending less into the economy.
Bloomberg summed up the situation earlier this month. “Lending has faced scrutiny during the pandemic as banks retrench, and small businesses and households find it harder to obtain reasonably priced credit,” an article dated February 8 said. “Loans began accounting for less than half of big banks’ books for the first time last May, and in the 35 weeks since then lending has fallen to a fresh low 21 times.” If you’re wondering what that looks like, you’re in luck (figure below).
Little wonder, then, that all this “money printing” doesn’t manifest in real economic outcomes.
At the risk of oversimplifying complex dynamics, the sharp decline in the figure (above) suggests that for all the boasting banks did last year about their efforts to bolster beleaguered households and businesses, a 30,000-foot view tells a different story.
Is this ever going to change? Well, possibly. Some continue to suggest that once the pandemic abates, quite a bit of this liquidity could be unleashed. When you consider the prospect that elevated savings levels (e.g., due both to consumer retrenchment and stimulus checks) could simultaneously be drawn down once employment in key areas of the economy bounces back (assuming it does bounce back), you can conjure an “interesting” (to employ a euphemism) scenario.
“The velocity of money will rise,” BofA’s Michael Hartnett wrote this week. He noted the $3.5 trillion US budget deficit and $13.3 trillion in global central bank liquidity, before observing that “as in pretty much every one of past 12 years, policy stimulus in 2020/21 continues to flow directly to Wall Street not Main Street.”
That has, of course, exacerbated the wealth divide. It’s “inciting historic wealth inequality via asset bubbles,” Hartnett went on to remark, on the way to saying that, “we expect rising velocity of people (vaccine > virus) in 2021 to engender [a] rise in the velocity of money, inflation mutation from Wall Street to Main Street, [and a] pop in the nihilistic bubble.”
As you can see, Hartnett “goes there” (if you will), where that means alluding to one of the scariest possible historical examples.
“Post-WW1 Germany [is the] most epic, extreme analog of surging velocity and inflation following [the] end of war psychology, pent-up savings, and lost confidence in currency and authorities,” he said.
Is that what’s coming in the US? In a word: No. And that’s not Hartnett’s point (I hope).
Rather, he simply noted that “we believe 2020 marked [the] secular low for rates/inflation, and [the] 2020s [will] likely [be a] decade of inflation assets > deflation and real assets > financial.”
Draw your own conclusions.