Guest Post: Government Spending, Bank Lending And Inflation

Guest Post: Government Spending, Bank Lending And Inflation: "

Submitted by Kletus Klump

In his latest weekly commentary, Inflation Myth and Reality, Dr. John Hussman makes the argument that changes-in federal government spending dictate the future path of inflation. As shown below, his data set covers the period from 1951 through 2008 and there appears to be a decent correlation.

Source: Hussman Funds, Inflation Myth and Reality

However, his data set is incomplete in 2 respects: 1. It does not include the Great Depression years and 2. It does not include data on bank lending. The relationship between government spending and future inflation was vastly different during the years of 1932 to 1941. The correlation between the 2 series for this time period is negative 0.25.

The factor causing this is change in mortgage-loan growth. (The mortgage data was sourced from Survey of Current Business, U.S. Commerce Department; National Income Unit, Bureau of Foreign and Domestic Commerce July 1944.)

Why is this important? Post WW2, year-on-year declines in bank lending have been virtually non-existent through 2008. Only 2 negative comparisons, which include 1975, -0.44%, and 1991, -0.09%.

Look at the same chart updated through October 2009. One year of negative loan growth is a far cry from a negative 4-year average but it is worth monitoring.

Draw your own conclusions, but as for me, fears of government-spending-induced extended inflation in terms of time and magnitude are not a concern until the lending mechanism improves.

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