At the beginning of the month, I wrote Printing Press to provide the Fed’s printing press data. I was going to wait until November to write this post, but it is extremely relevant right now.

The government is still trying desperately to fight deflation by printing new money. How much is the government printing? Well, here’s the monetary base graph as of September 24:

And here’s the monetary base graph as of October 22:

The printing spike now dwarfs all other features.

As last time, that data is skewed because of the massive absolute growth. On a percentage basis, we’re printing like crazy. First, September 24:

And now, October 22:

Now the printing spike looks obscene even compared to the previous recession.

In my last post, I wanted to see the year-over-year trend. First, September 24:

And now, October 22:

A month later, and it is even more obvious that the Fed is trying to print its way out of this mess. As before, my thesis is that this will lead to inflation eventually, but we are still experiencing deflation. If you bought $10,000 in corporate bonds last year, what do you think you could sell those bonds for today? If you took the same discount and applied it to the total amount of credit, you would realize that credit (marked to market) is still shrinking at an alarming rate. Deflation is simply the decrease in total money + credit. The decrease in credit appears to be winning the race against the increase in money. At some point, the collapse in credit has to stop. Total credit can’t go below zero, which is the Armageddon scenario (it will stop before then). Before it stops, the printing process will start winning. Then inflation begins. When will that be? Nobody knows. Some people believe it has already begun. Nobody can rationally think it won’t happen.

That thought was the setup for something relevant today. If you were a bank, would you lend, and at what rate? In order to profit, you have to lend at a rate above the cost of money to yourself (5% for the government injected money), and at a rate above the rate of price increases (purchasing power of the dollar). If you believe inflation is here or around the corner, then you expect the price increases to lag that by only a quarter or two. You have to estimate those increases. Look at those printing charts and try to estimate what the price increases will look like. Also, remember that the cost of the government money goes up to 9% after a while. What rate would you lend at? The minimum rate is your own “risk free” rate. Anyone other than the government should get a percent or two on top of that. Would you lend to a customer willing to borrow at that rate? Remember, they have to have cash flows that support that interest rate.

This analysis is incomplete. Holding the money is not the alternative to loaning the money. Holding the money is a guaranteed loss over time because of the government injections. Other options include mergers, which appears to be the best use of the money in terms of risk/reward (it’s the route that banks appear to be pursuing, anyway).

Banks should not be lending right now, except perhaps over extremely short time frames.