Inflation will not be an consequence for the economy so long as the banks are not lending. The TARP bail out saw trillions of dollars go into the banks at no interests and with restriction of use. Currently the Fed is lending funds to banks at zero interest.
Banks are taking application but the underwriting guidelines are hence restrictive that no actual money is hitting the street. I am in the trenches lending to small businesses and on a daily basis I cannot believe it when I talk to intelligent clients who cannot get a bank to loan to them.
reexamine good personal credit, business credit, healthy revenue, ledger balances and strong customer bases. The banks simply are not lending to customers except on uniquely “prime” scenarios. The math is simple inflation cannot climb if there is not funds on the street.
There may be more wealth that ever in the overall economy but if it is being used by banks and large wealth to by securities and t-bills the capital simply floats at 30,000 feet and never truly makes an affect on the street.
If a small business can’t get the $30,000 it needs to acquire a new machine or hire the new employee then that capital never gets onto the street via a paycheck or the purchase of materials. The business owner “tightens his belt” and more than ever looks for the cheaper products and material. This simply drives prices down. The property market is no longer a achievable alternative for capital to be injected into the economy. Property values continue to drop or stay low at best. Incomes are staying low and unemployment is not truly easing. The average credit ratings of citizens have dropped nationwide (ofttimes as a result of unexpectedly maxed out credit cards).
Also the “stated income” lone is dead. What a lot of people don’t realize is that this lending qualification was primarily used to allow self employed customers to borrow capital. With over 60% of the nation’s economy being made up of small businesses and more than that again being employed directly by small businesses t is essential for lending to flow to the small business owner. The probability to banks lending to small businesses again soon is low due to zero interest capital from the Fed and no political will to force lending. Even when the Fed Capital rate is slowly inched up and it will be slow) the stricter underwriting policy will disallow lending to all but the most perfect borrower (see my other report about the realities of underwriting for loans).
Deflation is already in effect – prices have dropped in all production areas even with higher gas prices. The fear based employment sector has seen salaries cut across the board. The real question is not weather inflation is a worry but “how can we activate and economy that is strangled by fear, deflation and corruption?”