The Wrong Time(s) For Inflation

Forget gazelles, the ongoing post-2008 threat to small and medium-sized businesses had amounted to an unnatural vise squeezing owners and operators in between their persistent inability to access credit and the lack of revenue growth (or even predictability). The biggest businesses thrived, borrowed freely, and then paid shareholders in the form of gross buybacks (a liquidity preference of their own). Underneath them, even lesser corporates, it was never so good therefore never real recovery for which inflation might have been possible.

Insanely spiraling commodity prices can be the start, but by themselves are not inflation. In fact, it was – and is – the situation described above which had previously thwarted the one becoming the other. An economic system fully greased by monetary excesses (nowadays credit being a huge money-like component) can lead to the bid in commodities then raising input costs for firms of all scales easily passed on to consumers (who, as workers, likewise demand increased wages).

If, however, material inputs get more expensive but companies can’t find credit and don’t see their revenues rising anywhere close to enough, they aren’t going to be bidding high for additional labor (instead overmanaging their whole cost structure) and sure won’t be able to pass along (and continue passing along) higher end prices to their customers whose bigger impact on business fortunes comes in the form of their absence. This is exactly what happened up to 2018-19.

I’ve never seen a three-faced vise, yet that’s what we’re describing here; can’t get credit, revenue stays down and then along comes a supply shock in commodities to make it all the more miserable for the commercial interests already run out of options. Inflation doesn’t follow; its opposite does, more readily appreciated once the commodity impact fades.

This is all the more the case given a situation when, as today, the government has previously provided the only other possible outlet (PPP) preventing the vise from more completely completing its duty. While last year’s huge “rescue” is coming to an end, and commodity prices are definitely on fire (because of sticky shortages), for small and medium businesses both are potentially huge trouble.

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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