Whatever happened to deflation? It wasn't so long ago that numerous commentators were predicting a 1930s period of falling prices and a deep freeze recession.
The inflation numbers have always been the most obvious objection to the deflation story. Despite the collapse of many key credit markets, prices have actually accelerated. In fact, today's inflation numbers confirm that the UK is a long way from deflation. Nevertheless, others pointed to credit numbers as evidence of impending debt deflation. Credit was supposedly collapsing.
Again, the numbers do not bear this out. Take, for example, US total bank credit. The following chart illustrates annual credit growth since 1975. It also shows the long run average growth rate for this period, along with some upper and lower bounds defined by one standard deviation from the long run mean.
As the chart illustrates, credit growth today in the US is very close to the mean. Moreover, in recent years, the growth rate has been significantly above the mean, and often been close to one standard deviation above the mean. In short, since 2005 the US has enjoyed (if that is the right word) a period of exceptionally rapid credit growth. Now, credit availability is adjusting to its long run level.
But what about more recent short run data. The following chart illustrates the outstanding stock of US bank credit. There was a what could be described as a modest credit contraction in March. However, more recently, credit growth has resumed. Overall, the outstanding stock of credit today is significantly higher than the beginning of the year.
Notwithstanding these numbers, US home buyers looking for a mortgage will find that lending rates have not come down, despite the Federal Reserve's manic rate cuts. Banks now ask for 20 percent deposits, and check borrowers income more thoroughly. This, however, could be best described as a return to good banking practices. Some of this "new regime" lending has found its way into the aggregage credit numbers. Nevertheless, the total effect remains limited.
The real danger remains inflation, which has picked up sharply across the world. Unfortunately, central banks have largely wimped out in the face of the enemy and failed to raise interest rates. As a consequence, inflation keeps trucking along, reaching new highs as each month passes.