When Borrowing Dominates

David Merkel has another thought-provoking post. I like when people put real data up. Here is his chart:

So the stock market is being driven by inflation expectations. Hm… Let me put on my Monday Morning QB hat and think about this.

I think this is normal behavior in bad times. If things are healthy, the boom should rise for far longer than inflation expectations coming out of a recession. You need healthy demand to fuel inflation and the series really never had a chance to decouple from the early 2000s slodown.

My second point is that the series really link up in 2007 when subprime hits the headlines and investors probably start seriously thinking about worst case scenarios. Worst case scenario here meant a debt-deflation spiral.

Deflation KILLS borrowers by making the real burden go up. This makes the borrowers less likely to pay back their loans, which means, ironically, that the banks lose big time.

And the market tells us what happens when the banks lose big time:

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