Andrew, let me begin with the thought of the day:
Inflationism is that monetary policy that seeks to increase the quantity of money. Native inflationism demands an increase in the quantity of money without suspecting that this will diminish the purchasing power of the money. It wants more money because in its eyes the mere abundance of money is wealth. Fiat money! Let the state "create" money, and make the poor rich, and free them from the bonds of the capitalists! How foolish to forgo the opportunity of making everybody rich, and consequently happy, that the state's right to create money gives it! How wrong to forgo it simply because this would run counter to the interests of the rich! How wicked of the economists to assert that it is not within the power of the state to create wealth by means of the printing press! Other Inflationists realize very well that an increase in the quantity of money reduces the purchasing power of the monetary unit. But they endeavor to secure inflation nonetheless, because of its effect on the value of money; they want depreciation because they want to favor debtors at the expense of creditors and because they want to encourage exportation and make importation difficult. Others, again, recommend depreciation for the sake of its supposed property of stimulating production and encouraging the spirit of enterprise.
Ludwig von Mises, The Theory of Money and Credit
your question about where the limit to this unfettered credit creation is has been debated here before. essentially, there are two possible scenarios: 1. the Fed stops it. 2. it doesn't, and one day the house of cards comes tumbling down of its own accord.
since 1. is not to be expected, 2. is what we have to consider. well, there is no objective yardstick by which to determine the limit. one only has to look at the credit explosion of the past five years to realize that the argument that this is getting out of hand and must end soon could have been made in '96 or '97 already.
however, it is clear that credit can not keep growing 4,55 times faster than GDP forever. it's a simple matter of compounding...just as CSCO couldn't possibly keep growing at a 50% rate forever, as at some point its revenues would become larger than the entire GDP, a mathematical impossibility. so yes, there IS a threshold. and i would say we have in all probability reached it more or less. note however that e.g. in Japan, outstanding bank loans only reached their peak some 5 years after the stock market bubble peaked, as bad debtors were simply kept alive artificially (GROWTH in new loan origination however slowed dramatically right after the stock market plunge). i'm not sure if we can expect exactly the same to happen in the US, but some variation on the theme most assuredly.
most likely, credit will continue to grow initially, as corporations begin to draw on their emergency bank credit lines while they can still avail themselves of same, in order to survive a developing cash crunch in many cases (see DCX: $6 billion of cash blown in a single quarter! not a red cent left in the kitty). HOWEVER, credit growth should slow down sufficiently to not allow the asset bubble to re-inflate. THAT would require a continued ACCELERATION in credit growth, as not even $410 billion in mufu inflows were able to move stocks higher over the past 1 1/2 years.
i believe 2001 will be a watershed year in this regard. |
