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Inflation: The Rumors of its Death are Greatly Exaggerated – Doug French (05/07/2019)

Speaking at the Grant’s spring conference, Steve Hanke, master monetary economist, described the money creating business in the US as “Pretty much everything is well-behaved.” While the Fed does its best (or worst) to inflate, Hanke is one of the few in academics to understand that the real money-creating machines are commercial banks. Loan dollars become deposit dollars. Lots of lending means the money aggregates increase. Little lending means the opposite.

Banks bitten in 2008, are, along with their regulators, twice shy to make the marginal loan. The short summary of Hanke’s remarks in the latest Grant’s Interest Rate Observer, includes, “But he invited the audience to imagine an upsurge in bank lending, perhaps stimulated by a Federal Reserve decision to pay a reduced rate of interest on excess reserves.”

For now, Bloomberg Businessweek wonders on its April 22nd cover, “Is Inflation Dead?” Peter Coy’s article inside points the finger at capitalism. Coy quotes Fed Chair Jerome Powell as saying low inflation is “one of the major challenges of our time.”


Coy throws Milton Friedman’s inflation is “always and everywhere a monetary phenomenon.” out the window. It’s the “consequence of globalization or automation or deunionization—or a combination of all three.” You remember, and have tried to forget, the “wage push” theory of inflation you learned in Econ 101.

Giving the Marxist take, Coy writes, “the capitalists killed inflation. In the decades after World War II, Polish economist Michal Kalecki depicted inflation as a product of the struggle between business and labor.”

He continues, “Surprisingly, even the Fed has entertained the idea that inflation could be related to something like class struggle.”

Aging societies are even blamed for the lack of price inflation. Older folks won’t bargain for higher wages, borrow more money, and buy more big-ticket stuff.

Bloomberg posits that inflation is gone for at least a decade.

Well, maybe not.

Banks are lending with gusto on apartments. Housing Wire reports,

Lenders in the commercial and multifamily space closed a record $573.9 billion in loans in 2018, according to the Mortgage Bankers Association’s 2018 Commercial Real Estate/Multifamily Finance Annual Origination Volume Summation, with an average loan size of $19 million.

Multifamily properties saw the highest volume of mortgage bankers’ origination volume by property type, at $266.4 billion, followed by office buildings, retail properties, industrial, hotel/motel and health care. MBA noted in its report that first liens accounted for 96% of the total dollar volume closed.

Additionally, the report states that commercial bank portfolios led the way as the top capital source for loans originated in 2018, responsible for $174 billion in originations.

Of course, Fannie and Freddie did their part, originating $142.3 billion in loans.

Last year’s originations were an 8 percent increase over 2017.

“Borrowing and lending backed by commercial and multifamily properties hit another new record last year,” said Jamie Woodwell, MBA vice president of Commercial Real Estate Research. “Solid fundamentals, growing property values, low interest rates and strong appetites from both borrowers and lenders all helped drive an 8% increase in recorded multifamily lending from a year ago. Repeat participants in our survey increased their lending by 4% during 2018, with the remaining growth coming from the addition of new firms.”

At least one mortgage lender, 360 Mortgage Group, wants in on the action, introducing NINA loans. For those who remember NINJA loans, these are similar, except you may have to have a job, but income or assets, nah.

These loans will be available for non-owner-occupied investment properties only, with 360 looking to originate $1 billion worth.

And don’t think a solid gold credit score is required. Housing Wire reports, “The loan is also available for borrowers with FICO scores as low as 620, which would firmly put the loan in the subprime range, as Experian considers subprime to be borrowers with FICO scores below 670.”

“We are excited to be the first lender in the marketplace to offer this unique product,” 360 Mortgage Group Chief Operating Officer Andrew WeissMalik said. “It isn’t some non-QM bank statement program you see every other lender out there offering. Rather, a no income, no asset common sense FICO and LTV based solution for those that are willing and capable of making timely payments but don’t fit within the highly regulated, ultra conservative, guidelines every other lender offers.”

“The idea behind this product is to allow a more lenient option for investors to purchase, refinance or cash out of their properties,” the company said in a release.

Lenient, yeah, that’s the ticket. That kind of thinking will grow those stubborn monetary aggregates and bring back the inflation the central banks want so much.

Douglas French is former president of the Mises Institute, author of Early Speculative Bubbles & Increases in the Money Supply , and author of Walk Away: The Rise and Fall of the Home-Ownership Myth. He received his master’s degree in economics from UNLV, studying under both Professor Murray Rothbard and Professor Hans-Hermann Hoppe.