3 Reasons Reflation Won't Crimp Economic Growth In The Charts

From an investors/investing perspective, holding the appropriate economic and corporate growth expectations can go a long way toward remaining rational when markets react negatively to the momentary and weekly data points. This is the goal of Finom Group's Research Reports, offering strong analysis that helps investors prepare for likely outcomes in order to make savvy investing decisions. Now that we know what to expect from the CPI and PPI data in the coming months and why it is less demonstrative than the incessantly hyperbolized and fear-driving financial media narratives surrounding inflation, let's better offer a counter-argument to the fearful inflation narrative with a look at how the consumer aims to combat the normal and to-be-expected inflationary period. And yes, Finom Group aligns with the Federal Reserves' consensus belief that the inflationary period will prove TRANSITORY!

Wow indeed! The average household balance sheet, despite the Covid-19 economic shutdown and germinating reopening, is in the best shape since the 1970s. There are at least 2 reasons that Household Financial Obligations as a percent of Disposable Personal Income are recognized to express the best balance sheet for households/consumers since this metric has been tracked:

  • Cares Act and subsequent fiscal policy measures
  • The Great Deleveraging period

In order to understand this metric displayed in the chart above, its most important to also dismiss with the notion that debt is inherently a bad thing. Therefore, it's also important to recognize that the size of the debt is not to be feared, but calculated. What do we mean by this? For the average household and a growing population, we understand that the AMOUNT of collective debt will grow alongside a growing population of working-age adults. Subsequently, the size of the debt is less relevant than the serviceability of that debt. In other words, it doesn't necessarily matter whether the debt is $100 or $10,000 if the debt can't be serviced for either debt amount. What matters is whether or not the average household can service either debt amount. At the Federal level, the same is true and serves as a reminder that while the fiscal debt has incrementally grown over the last 20 years to combat 9-11 recession, the Great Recession and the recent self-induced, pandemic recession, historically low rates aid in the ability of the Federal government to service that growing debt and regardless of the economic output. This reminds us that the Central Banks partnership with the Federal government is necessary to support an economic recovery as Central Banks dip into their toolbox of monetary policy to combat rising rates as they did during the WWII era. Bottom line reminder: It's not the size of the debt, but the serviceability of the debt that matters most.

Referring to the Household Financial Obligations as a percent of Disposable Personal Income chart above, we can recognize the deleveraging period that commenced during and since the Great Financial Crisis (GFC). We can recognize that the average household essentially learned a valuable lesson from the GFC. They determined that debt was still acceptable, but within the confines of being able to pay down the outstanding debt on a monthly basis while still having a reasonable, if not substantial, amount of disposable income to support economic growth through consumer spending habits. Both fiscal and monetary policies implemented to combat the latest recessionary period only served to benefit the household balance sheet. So while the current "reflationary" period is to-be-expected, consumer balance sheets appear to be able to withstand the momentary reflation.

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