Taps Coogan – January 4th, 2022

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Despite a jump spike in consumer borrowing in 2021, the actual cost of consumer debt servicing relative to disposable income has plunged and remains near record lows in the fourth quarter of 2021, as the following chart from ACEMAXX ANALYTICS highlights.

This phenomenon highlights the Catch-22 of interventionalist monetary policy. Ever since the Global Financial Crisis, every market scare has lead to larger deployments of monetary stimulus. Those ever larger doses of monetary stimulus have led to ever lower interest rates and debt servicing costs. Those lower debt costs have enabled ever more borrowing, which in turn has led to ever rising debt levels. Rising debt levels have increased interest rate sensitivity in the economy, necessitating ever larger monetary interventions, enabling ever more debt, and so on and so forth. 13 years of increasing debt levels and household debt servicing costs are nowhere near a breaking point, quite the opposite.

How does this feedback loop end? The idea used to be that inflation would pressure the Fed into stopping the accommodation cycle. While that may come to pass, it certainly hasn’t yet. Inflation is nearly 7% and the Fed will be doing $60 billion of QE this month.

Indeed, the Fed is roughly 28 quarter-point interest rate hikes away from positive real-overnight rates. Sure, inflation may moderate a bit in 2022, but given a choice between persistent inflation overshoots and deleveraging, this Fed will choose persistent inflation, as this year has highlighted.

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