|
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.
The reason we are in the inflation
camp is that the case for more inflation in the US doesn't depend on
private-sector credit expansion; it depends on the ability and willingness of
the Fed to monetise sufficient debt to keep the
total supply of money growing. A consistent theme in our commentaries over
the past 10 years has been that the Fed could and would keep the inflation
going after the private sector became saturated with debt.
Up until 2008 there was very little
in the way of empirical evidence to support the view that the Fed COULD
inflate in the face of a private sector credit contraction, but that's no
longer the situation. Thanks to what happened during 2008-2009, we can now be
certain that the Fed has the ability to counteract the effects on the money
supply of widespread private sector de-leveraging. The only question left
open to debate is: will the Fed CHOOSE to do whatever it takes to keep the
inflation going in the future?
Based on the publicly-stated views of
those who operate the monetary levers, as well as on the economic remedies
prescribed by today's most influential economists and financial journalists,
there's a high probability that the answer is yes (refer to the article
posted HERE for an example of an influential financial
journalist who believes that it is time to print money on a grand scale). At
least, there is a high probability that the answer will be yes until the fear
of inflation becomes much greater than the fear of deflation. However, the
Fed has to be careful. It does not (we assume) want to engineer a SHARP
decline in the dollar's purchasing power, so every step of the way it tries
to do no more than the minimum necessary to maintain a steady rate of
purchasing-power decline.
A problem faced by the Fed and all
the other central banks is that it is never possible to determine, in real
time, what that "minimum" is, because money-supply changes affect
the economy in unpredictable ways and with large/varying delays. The economy
therefore ends up careening all over the place and we occasionally get
deflation scares (periods when it seems as if genuine deflation is about to
happen). The deflation scares tend to be highly inflationary because they
invariably prompt the Fed to ramp up its rate of money pumping, but while a
deflation scare is in progress it usually feels like the deflationists are
finally going to be right.
We aren't ruling out the possibility
that the deflationists are finally going to be right. We hope they are going
to be right, because more inflation will only lead to an even bigger problem
down the track. It's just that they are, in effect, betting that devotees to
the central planning ideology will suddenly realise
the error of their ways and let nature take its course. The odds are very
much against this bet paying off.
Steve Saville
www.speculative-investor.com
|
