Despite pockets of weakness and Fed announcements, credit inflation appears to continue unabated.
Yes or no, is there a monetary tightening in the United States? The question arises and is important for the analysis of the situation and future developments.
In a nutshell, here’s my working hypothesis: I wonder if the monetary tightening being sold to us and oversold is really real. Isn’t it cosmetic? Aren’t the authorities gambling – incredibly boldly – to believe that real tightening is not necessary and that we can only play on perceptions and expectations?
In short, I wonder if the authorities are not satisfied with the psychological actions.
Expected inflation and realized inflation
This would be consistent with the current analytical framework of Fed thinking leaders: they no longer have any theory of inflation, neither quantitative nor Keynesian, and, as a last resort, they are turned to a theory of pure psychology: inflation is when inflation expectations take over.
So the real core of the fight against rising prices is, these are, these would be anticipations and perceptions.
It would also be consistent with the constraints regulators face: constraint not to upset the economy and the labor market and constraint not to trigger a disorderly chaos in the stock market.
The only way to fight inflation would then be to fight at the level of one’s imagination and imagination, at the level of magic, trying to preserve the transmission to reality as much as possible. It would be necessary to hurt some parts of the imaginary sphere, without touching the essential.
The perceived wealth is in the realm of the imagination, we are in the world of paper.
The second quarter of 2022 was miserable for the securities markets. There was a sharp decline in perceived wealth, as well as a significant tightening of the apparent conditions of the financial markets. Meanwhile, the quarter was marked by an extraordinary increase in price pressures.
How did these antagonistic forces develop?
Credit continues to gallop
My hypothesis is that the action-show, cosmetic, at the level of the Stock Exchange, has certainly acted as a signal of the fight against inflation, as a marker, but that the action in depth, objective, real, has been reversed. !
Simply put, financial conditions have contracted only at the visible level, the stock market. At the same time, they continued to skid quickly to the underground level, to the level that no one controls, that no one sees: I deserve! The markets, too prominent, have passed the baton to the banks, which are more discreet.
Credit continued to gallop, and they wanted not to damage, not to hurt.
It is true that, due to a sharp slowdown in Treasury debt (from 10.22% to 5.56%), the growth of total non-financial debt (NFS) has slowed down from 8.32% of the first quarter at 6.49%, but, in reverse direction, all other debts were galloping.
Household mortgage debt growth rate reached 8.78%, the fastest pace since 2006. Consumer credit accelerated to 8.51% in the second quarter. Payables to companies increased by 7.93%. The growth rate of business credit is the fastest since 2007.
In short, despite pockets of weakness, credit inflation continues unabated. Credit policy is anything but oriented towards moderation and austerity.
On a seasonally adjusted and annualized (SAAR) basis, non-financial debt increased at a rate of $ 4.316 billion during the second quarter. It is more than double the annual average of $ 1.846 billion for the decade 2010 to 2019 and nearly 50% higher than the cycle peak of $ 2.899 billion in 2004, which was only surpassed in 2020, with the credit craze. of $ 6.796 billion.
One year of debt in six months
Looking ahead, loan growth averaged $ 363 billion annually over the period 2000 to 2019. Here, bank lending grew at a staggering 17.3% during the second quarter. By mid-2022, loan growth of $ 721 billion has already surpassed the record of $ 685 billion set in 2005.
For years it is the booming stock market that has been the engine of inflation, but in 2022 it is the reinvigorated banking system that takes over. Bank lending increased by an additional $ 555 billion in the quarter, a figure only surpassed by the record high of $ 561 billion in the first quarter of 2020 due to Covid.
Loans and bank credit are once again powerful engines of credit growth.
Fed officials not only know these numbers, they are playing with them! They know they are fueling inflationary conditions, they know they are making them solvent. They know that inflation will not return to 2% as long as credit continues to be distributed so generously. But, in the context of the strategy unveiled in the preamble, above all they do not want credit to moderate, because this is what allows the system not to crumble and to keep itself orderly.
It is this historic credit glut that keeps the pipes from clogging. And it is possible because American banks are in good health; they have recovered their health since 2008.
The authorities were forced for political reasons to do something against inflation, they supported the great rhetoric of rigor at the public level, at the level of the perceived financial conditions of the market, but they encouraged the laxity of financial conditions at the level of the other. segment that of real financial conditions, that of banking!
The speculative dynamics have certainly been broken, but on the other hand the dynamics of the distribution of bank credit have recovered.
To continue in the next article …
[NDLR : Retrouvez toutes les analyses de Bruno Bertez sur son blog en cliquant ici.]