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The Inflation Beat
Q & A
Inflation Forecasting Methodologies
Aggregate Credit Growth Per Capita
Today, we have a debt based money system, where ALL MONEY IS DEBT, and thus, every dollar that exists is either your's or someone elses debt.  You NEED dollars to both service and pay off the debt.  Thus, that is what creates the demand for US Dollars and also limits it's supply as you only want to borrow money that you think you can pay back.

When you have a growing economy with rising living standards, more and more things can become consumed.  Couple that will more people within the economy and there is a great NEED TO CREATE MORE MONEY.

That more money comes from DEBT issued by banks via loans.  

This creation of money via debt is the starting point frome which inflation can be both measured and forecasted.

What's important to note is that it's the net debt growth per capita that gets created.  

To start, we'll look at the total level of debt outstanding from this chart below that shows all sectors debt securities and loans.  This is the combination of all types of debt outstanding, including Goverment debt, household debt like credit cards, car loans and or mortgages, and corporate debt like business loans and corporate bonds outstanding.

Board of Governors of the Federal Reserve System (US), All sectors; debt securities and loans; liability, Level [TCMDO], retrieved from FRED, Federal Reserve Bank of St. Louis;, August 14, 2019.
What we want to be concerned with is the aggregate debt growth.  It doesn't matter who or what entity is putting out the debt but what matters is how much new net debt gets created for the sake of its inflationary impact. 

For the simple sake of needing more money to facilitate an economy with a growing population, we need to adjust the net debt growth for population growth.  This is to come up with the excess money that was created per capita that would have the inflationary impact.

In the chart below, it shows aggregate debt growth per capita and the rate of inflation.

Blue Line:  The annual rate of growth in aggregate net debt per capita

Red Line:   The annual rate of inflation.

If the rate of inflation only had to do with the increase in money that gets created via debt, then these two lines would be the same.

There are are other inflationary forces (forces that would contribute to a rise in prices) and deflationary forces (forces that would contribute to lower prices) at hand that play a role in the end result in what the rate of inflation becomes.

These include, but are not limited to

1.  Productivity
2.  The strength of the currency

3.  The level of imports coming in for foreign countries with lower labor costs


4.  The general price level of commodities

It is these forces that will help determine not only the end result in the inflation rate, but also help to determine whether or not real wages will rise.  Whether or not real returns will be had in fixed income.  Wether or not we'll face stagflation or a credit boom and asset bubble.

So how can we predict credit growth?

There are ways of getting a sence of how much credit is being created, but its never going to be precise.  For example, we can look to the Federal Budget to get an idea of how much the Federal Government will be needing to borrow.  

The Federal Reserve has meetings and provides minutes on the state of the economy and might give us clues about credit growth.  But even better, the Fed has what is known as the Senior Loan Survey that goes out every quarter to bankers to gage both the degree of lending standards and the demand for loans.

This lending survey is a key tool I use to help determine the state of loan demand to get a sense of how it's growing.  

The actual total amount of credit growth for each quarter we don't know until months later.  For example, we'll find out how much total credit was outstanding at the end of June 2019 sometime in September.  It's found in the Federal Flow of Funds report.

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