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Deflation in Bank Lending

by Murray Gunn
Updated: December 31, 2020

Money printing is futile if it is not being used.

Central banks around the planet have engaged in so-called quantitative easing which can be thought of as just a fancy name for money printing.

Well, to be more specific, what central banks have been doing is to create fresh digital central bank money which is used to buy assets such as bonds, and also to create extra reserves for the banking system. The asset buying has helped fuel the bubble in asset prices and boosted the view held by many that hyper-price-inflation is the next logical outcome. However, increased reserves in the banking system are not being used to lend to businesses.

This chart shows that commercial bank lending in the U.S. is beginning to deflate. It had spiked up earlier this year as companies tried to borrow to get them through the pandemic lockdowns, but the data appears to be showing a change in sentiment as lenders and borrowers are becoming more conservative. Part of the decline might be explained by the tendency of corporate borrowers over the past six months to go to the bond market for financing rather than their bank, but the fact remains that bank lending is shrinking.

That is not good news for central banks that want to see their actions spurring economic growth. From the late 1990s to the mid-2000s the money supply in Japan increased dramatically. At the same time, though, bank lending was decreasing. Result -- anemic economic growth and price deflation.

The 3 trillion-dollar question, of course, is whether this decline in commercial and industrial loans is the start of a larger trend. Ultimately, that boils down to whether social mood will trend negatively and the sign of that occurring will be a declining stock market. Our Elliott Wave analysis suggests that the U.S. stock market is in a euphoric bubble where retail investors have become fully engaged. History suggests that when retail investors become so heavily involved it is usually near the end of the trend. This would point to a high probability that the U.S. stock market might be on the cusp of a very significant turn.

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