A Primer on Inflationary Business Conditions (Segment IV)

Preface: ‘You build a baseball field, and you sit here, and stare at NOTHING? – Quote from the Field of Dreams

A Primer on Inflationary Business Conditions (Segment IV)

Inflation rates year-over-year since 2000 in the US have not exceeded the 2007 high of 4.1% as an estimated peak inflation rate. With this crucial tracking of historical US inflation data, why would there be any more significant or growing concerns regarding immediate or future higher inflation rates than usual inflationary effects to business conditions and corresponding risks? The answer is simply credit.

Considering the wave of upward economic mobility for all economic classes in recent decades from the financial stimulus of increasingly easy and easier credit access, there are increasing bands of comrades excited about the prospects of gain and wealth with investments in real estate, business, stocks, and other assets classes. Picture for a moment life without easy auto loans, home loans, and student loans, etc., combined with higher interest rates for debt service. The antithesis has created the best of the economic tropics sailing conditions for both business ebullience and wealth accumulation. More credit = more money = more buying power = (with the right expectations) more demand = higher prices.

The above is a critical equation because credit is the primary driving reason why more inflation is highly probable in the future. Easy credit can be compared to a successful marketing plan for a great game on a “Field of Dreams.” There will be a great crowd and lots of fun. Correspondingly, the money supply [ say M-1 or M-2] is the food supply for those at the venue. The longer the duration of the “Field of Dreams” series continues, and the larger the crowd and…..the more food will be required—is that why some individuals like to watch a robot’s reaction when given a new $100 bill.

The Feeding of the First Billion [or Trillion] of Credit

Perhaps you borrow ten million dollars from a bank? Considering current bank regulations, a lending bank is only required to hold a small percentage of those dollar funds in reserve to constitute and formalize the loan financing. That is the functional and elemental purpose of fractional credit financing. Just suppose you purchase a farm with the loan, and the seller of the real estate deposits the cash proceeds back in the same bank you obtained the financing from. That bank can fractionally lend additionally on those new reserves too.

Fractional lending practices are best exemplified with the Biblical story where Jesus feeds 5,000 from a story of one young and well-prepared attendee’s lunch that multiplies to provide a meal for more than 5,000 people. It leads to economic and financial miracles, much more, and all is well.

For lack of a better analogy, if a “Field of Dreams” game elongates and crowds prolonged, the food supply will be increasingly vital. Therefore, the money supply foundation, say M-1 and M-2, if it remains perhaps stagnate or deflations, another words a lacks of inflation, will manifest a marked shortage perhaps of proper nutrition at the “Field of Dreams” venue.

With this analogy of why inflation is the necessary decision on the path forward for central bankers to insulate and placate supply demands at the “Field of Dreams” venue, preparing for that possible risk is not irrational or amiss. This is to say that the “transitory” rhetoric from the Federal Reserve persons may not be entirely predictable because the government has a complete financial toolkit including a full set of tax management gismos, not to mention interest rates, stimulus plans, price controls, and alternative mediums of exchange for the good life.

It is essential to clarify that printing the money alone doesn’t create higher prices. Inflation is the increased velocity of the new money as it circulates through the economy. The velocity of money, new and old, is a variable managed on user expectations. These user management expectations include market prices like the S&P 500 or, say, oil prices. Therefore, emerging or accelerating inflation rates, perceptions and risks can be initially concealed with prudent management. Ultimately, as food is purposed for the perceived enjoyment of eating (survival or feast), so most money is purposed for the perceived enjoyment from spending (today or at a time in the future).   


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