Total Loans and Leases Are Deflating

A giant pin is asking where the inflation narrative is at.

Treasury debt is rising, but TCMDO or total debt outstanding was $83 trillion at the end of 2021. Even Biden's $2 trillion plan isn't much of a dent in total debt.

The deflation argument doesn't require that USG become responsible with the nation's wealth and currency. It only requires that they don't fully grasp the size of the credit bubble or lack the will (themselves or because they fear public wrath) of being as irresponsible as the credit bubble requires.

Zooming out, total credit historically doesn't go below 5 percent unless there is a recession. Post-2008 there was a window from 2014 to 2016 where growth increased, but it didn't last. Credit growth has been at recessionary levels since 2008 outside of that window. TCMDO never went above If I go back to the pre-pandemic TOTLL level, growth over the past 14 months is 3.2 percent.

Credit growth indicates people or businesses are paying off their loans.

Besides commercial and industrial loans, or “business loans” as they are often called, other key categories of loans reported by banks and savings institutions include loans secured by real estate, loans to finance agricultural production, and loans to individuals—including credit card loans.

I don't know if that's consumers paying off their credit with stimulus checks because data on consumer debt only goes through January. TOTLL dipped about $65 billion in the prior week and stimulus checks have been hitting though. If that is happening and it continues, stimulus will have less impact than expected.

Credit growth will also disappoint. Assume that Adam has a $1000 credit card loan yielding 20 percent. Assume Benny holds that bond. The income from the bond is $200 per year. The Baizuo admin sends Adam a $1000 check. They expect some fraction of that to flow into GDP through consumer purchases or investments. Instead, Adam calls his bond. He sends Benny the $1000. Benny wants to hold a bond though, so he goes out and buys one of the new Treasuries yielding 1 percent. (He'd more likely buy a similar bond, but that investor would then need a new bond and so on and so forth.) He earns $10 per year. Interest rates decline. Credit growth slows/disinflates.

Turning to USG's latest gambit, the Baizuo admin's $2 trillion "infrastructure" plan (much of it is pork that doesn't build any capital goods) alongside total debt puts the situation in perspective. There is $83 trillion outstanding in debt that is recorded by the Federal Reserve (TCMDO). The Baizuo plan is a 10-year plan and while it will be front loaded, that works out to an average of $200 billion per year. It sounds like a lot because GDP is headed towards $22 trillion, making the annual spending equivalent to 0.9 percent of the 2021 economy. But against total debt, $200 billion versus $83,000 billion, it is closer to being a drop in the bucket. Particularly if the private sector offsets USG's debt increase by cleaning up its balance sheet.

When dealing in the markets, everything is relative. Markets price based on assumptions about the future. The future either meets, exceeds or fails those expectations. Market tops and bottoms are made on sentiment, not reality. More critically, a credit bubble doesn't pop when growth goes negative. It pops when the increase in credit no longer sustains malinvestment. The spike since March 2020 isn't some self-fulfilling inflation engine if credit doesn't grow. One off stimulus bills won't do it either. If the underlying economy is significantly damaged from the coronavirus, or worse, the economy was already headed for recession and coronvirus stimulus has only delayed its onset while lockdowns annihilated the real economy, then perhaps $2 trillion for infrastructure on top of $2 trillion in stimulus is nowhere near enough for the deflationary wave lurking around the corner. Circling back to markets, a massive bear market doesn't requie a major recession at this point. It only requires that everyone has inflation expectations totally wrong to an extreme degree.