Is there too much money floating around?

Obtaining money in this day and age does not seem to be a problem. One just has to find what stone to turn over and…there is the money.

To me, this is a consequence of the credit inflation that has been going on in the United States over the past sixty years.

I have used the phrase “credit inflation” to describe the policy of the US government to stimulate the economy in order to try and keep unemployment at very low levels, not just during recessions, but throughout the whole business cycle.

This effort by the federal government over the years, has resulted in monies put into the US economy, by either monetary and/or fiscal policy, moving more and more into the financial circuit of the economy and not go into the production of goods and services.

What this tells us, is that this policy, producing almost continuous stimulus, results in a better risk/return tradeoff when monies go into the financial circuit than can be obtained when the monies go into the real capital investment.

An example of this was the tax reform package of December 2017. Some analysts argue that about two-thirds of the tax proceeds went into corporate stock buyback programs. And, that was the only “financial circuit” use that was identified in these reports.

Credit Inflation Now Built Into The Economy

The point is, that from its starting point in the 1960s, the government’s efforts at credit inflation have resulted in more and more money going to finance that anything else. This has resulted in the growth of the financial engineering, the increase in financial innovation, and the relative size of financial institutions in the United States economy. The finance profession during this time has attracted more and more top talent from the US and from abroad.

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And, the money continues to flow. One has only to point to the efforts of the Federal Reserve over the past twelve years or so.

From the time the Fed began to stimulate the economy out of the Great Recession, the central bank worked to err on the side of monetary ease so as to avoid the possibility that the economy would fall back into a recession.

Then there were three rounds of quantitative easing. Then, as it seemed as if the economy were moving back into a more normal trajectory, the Fed continued to signal that it was still protecting the “down side” in moving into a more normal environment.

However, we never got into that more normal environment. Then, the coronavirus pandemic hit and the Federal Reserve responded by flooding the financial markets in almost every way it could to avoid a liquidity crisis. So far, the plenitude of funds has protected the economy from such a downward movement.

Consequences Of Credit Inflation

Now, we setting on a pile of debt that causes many to worry about a debt crisis, something that the Federal Reserve may not be able to handle.

For example, recent information has been published that indicates that commercial loan borrowers, in the 2013 to 2019 period, overly represented their incomes on loan statements.

In studying 40,000 loans, two finance professors at the University of Texas at Austin found that the actual net fell below the underwritten net income by 5 percent or more in 28 percent of the loans.

“The findings corroborate a complaint received last year by the Securities and Exchange Commission stating that commercial mortgage loans frequently feature inflated financials.”

The environment of credit inflation, an environment in which more and more money was being pumped into the economy, set the stage for such behavior to get by and not be recognized.

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If everything is constantly going up, overestimating income is not something that one looks at closely.

But, this fact now seems to be coming home, as the reality of financial stress sets in.

New Financial Innovation Also Plays Its Role

An indication of the amount of money that is roaming around the economy, check out the rise of “blank check companies.” The name should tell you a lot.

These companies are also referred to as “special purpose acquisition companies” or Spacs. These organizations have become a popular avenue for private companies to come to the public markets.

Spacs raise money from investors with the aim of finding a private company to buy. Note, that if the sponsors fail to find a private company to buy within a certain period, the Space is dissolved and the money is returned to the shareholders.

Christian Nagler, a partner at the law firm of Kirkland & Ellis states “The market is booming. All major banks are focused on Spacs and we are seeing a juge increase in high-quality, first-time issuers.”

In face, these Space have raised $23.6 billion in the United States alone. The Financial Times article claims that these blank check companies “now account for one in five dollars raised in initial public offerings: about three times the share of last year.”

Note that “the investment banks that have helped to usher in Spacs have not been the same cohort known for winning coveted mandates on big-name tech IPOs in recent years.” Smaller players have been able to get into the game.

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Obtaining Money Does Not Seem To Be A Problem

At this present time, there seems to be lots of money around…if you want it.

It seems as even debt-ridden companies have been able to get money to extend their lifetimes. But, as we have seen, this only postpones the inevitable. Companies coming into the current recession in bad shape eventually pay the price as the number of companies default or go into bankruptcy.

This is why the economy will lot like it is hanging on. Between what has been done in the past and what the Federal Reserve seems to be poised to do going forward, a debt crisis seems to be always something that is for a distant future.

The question, though, is how close is the distant future?

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.