Consumer Debt and Inflation

This last week we came across an article from the Wall Street Journal titled “Americans Ramp Up Borrowing.” In this piece, the author cites figures showing that consumers are beginning to take advantage of lower interest rates. While it only seems logical that consumers would look for the lowest costs possible when assuming debt, this is the first time since 2008 that consumer debt has increased year over year. The market beginning to assume more debt could have far reaching implications on our economy as a whole.

Student Debt, Auto Loans and Credit-Card Debt all increased from one year ago. These increases have been due to a combination of a slowly improving job market, a rising stock market, increases in housing prices, and stability in the mortgage market according to the article. However, we must revisit a simple yet timeless investment formula when we study monetary policy and economics: Inflation Rate = Change in Velocity * Change in Volume.

While this is a rather elementary explanation of a much more complex theory, the idea is rather simple; if an economy has money continually changing hands, yet the monetary supply remains constant and does not grow, that economy will not experience inflation. Likewise, if an economy continues to print money without any currency changing hands, that economy will not have inflation. It requires both factors to be present in order for inflation (or hyperinflation in some cases) to occur.

We have said for years that the Quantitative Easing policies of the Federal Reserve have resulted in a substantial growth in money supply, yet that money was not finding its way through the economy. Simply put, we had volume, but no velocity. Now that consumers are beginning to borrow again, we could very well be in the early stages of an inflationary cycle.

It is far too early to tell if the United States is about to experience a substantial period of inflation (which some might consider a sigh of relief from the stagflation that we have experienced for the last 4 years), but it is important to be cognizant of what causes inflation and to be prepared. There are many investments that are said to be safe-guards against inflation (specifically hard assets and commodities), however that is not investment law, only a rule of thumb.

Whether we are looking at macro-economic trends or even at individual investments, there are no guarantees and there is no perfect timing. All that we can do is take the data in front of us and predict what we see coming, and if consumers keep borrowing it could paint a very inflationary picture for the US.

Ben Treece is a partner with Treece Investment Advisory Corp ( and licensed with FINRA ( through Treece Financial Services Corp. The above information is the opinion of Ben Treece and should not be construed as investment advice or used without outside verification.
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