Well, while not a professional economist, Our Man does have the benefit of having spent his undergraduate years studying that dark art and one of the few things he still remembers is the importance of multipliers. While this may seem a like tangential path that we are wandering, all will become clear…
The Technology Bubble and the Real-Estate bubbles of the last decade were transported to the real economy where they were able to percolate and spread due to multipliers; through Technology’s impact on corporate productivity, costs and profitability and through Real Estate’s impact on consumers perceived wealth (Home Equity = ATM). But how does this tie in with OM’s view of deflation and Commercial Lending?
Well OM’s belief in deflation is two-fold: that we are in a secular debt reduction phase and that these multiplier effects which extended the previous bubbles don’t exist in the current one. Or more accurately, that the most likely transition mechanism…that of Banks lending to real businesses is broken (and likely, if we’re in a secular deleveraging cycle as OM purports, to remain that way). And how better to see if this viewpoint has merit, than to check-in with the FED…and so that is what we shall do.
A cursory inspection of the data, in the graph and table above, leads to a couple of interesting things…- Credit seemed to grow steadily from the mid-1970’s to 2001 at about 9% per year, before increasing its rate of growth to 15%+ in the 4-5 years leading to the 2008.
- It appears, with the caveat of limited data, that credit expansion cycles appear to have shortened though contractions haven’t.
- This contraction is noticeably more violent than any preceding contractions.
Our Man thinks these points can be instructive in the debate.
Firstly, it is clear that the FED’s quantitative easing hasn’t resulted in a smoothing of the credit contraction (i.e. banks didn’t take the FEDs money and go out and lend it) though given the weakness of the banking system, this should come as no surprise. That said, if the FED’s quantitative easing results in a quicker and prolonged up-turn in Commercial & Industrial Lending there is the potential to reinflate the economy, and we shall all live happily ever after with only the fear of inflation (which we have an existing toolset to control) before us.
However, what if the FED’s easy money policy solely succeeds in encouraging speculation in the markets but fails to transition to the real economy? What if that multiplier isn’t there? A stock-market bubble perhaps, but one with a shorter life…
And that’s without even considering the consequences of a structural, as opposed to cyclical, decline in debt, the weakness of the consumer & unemployment, and OM’s skepticism on China (bubbles, bubbles, everywhere).
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