One of the biggest pushbacks about my theory that inflation is the real worry for the markets, not deflation, is the argument that there is no demand for credit, and therefore, inflation will never be able to take root. There can be no denying that Central Bankers throughout the world have had much more difficulty creating inflation than they would have ever guessed. Draghi and Kuroda would have never predicted it would take negative rates and doubling their balance sheets every couple of years to stabilize their economies, nevertheless, this is where they find themselves.
Take a moment to think about the insanity of their policies.
First look at Japan’s short term rates. Negative at the front of the curve, and pegged to zero at the 10 year mark.
Then, consider the rate of Bank of Japan balance sheet expansion.
When it comes to Europe, like Mike Myer’s Saturday Night Live skit “Sprocketsâ€, the ECB has experimented with some pretty weird stuff, pushing short term rates to asinine negative levels.
And the ECB’s pace of balance sheet expansion over the past year, would even scare Sprockets’ host Dieter.
At this point my skeptics will say, so what? We have seen this movie before, and each time, the money has not made its way into the financial system, so it ends up sitting inert on the banks’ balance sheets. And these doubters would not be wrong. Ever since the 2008 Great Financial Crisis, monetary policy has been pushing on a string. As Central Banks have shoved credit into the economy, the velocity of money has sunk, keeping the money supply from expanding rapidly.
While many believe this has solely resulted from of a lack of demand for credit, I take the opposing view. After the 2008 crisis, regulators cracked down on banks. Determined to never let it happen again, government officials introduced an array of rules designed to limit banks’ ability to lend too aggressively. Whether it was stricter BIS Basel III rules or US regulatory crack downs, banks were under pressure everywhere to limit lending. Recall JP Morgan’s Jamie Dimon’s 2015 comments:
