Corporate leverage is higher around the globe and the search for yield continues, but the current supply and demand for credit cannot be thought of as just speculative excess between buyers and sellers. The growth in credit is a result of the financial environment that we live in.
Minsky will say that speculative excess is a result of complacency toward the risk faced, yet that does not tell the whole story. Borrowers issue more debt and investors buy more debt because both believe in a benign inflation environment. This is not just complacency when inflation volatility is low and not expected to increase.
Central banks, through inflation targeting, have created an environment where borrowers and lender feel safe from the ravages of inflation. Central banks did not solely engineer this stable inflation environment, but given their desire to ensure there is no deflation and provide creditability that they will not allow overshoots above 2%, inflation falls within a corridor.
Minsky will say that speculative excess is a result of complacency toward the risk faced, yet that does not tell the whole story. Borrowers issue more debt and investors buy more debt because both believe in a benign inflation environment. This is not just complacency when inflation volatility is low and not expected to increase.
Central banks, through inflation targeting, have created an environment where borrowers and lender feel safe from the ravages of inflation. Central banks did not solely engineer this stable inflation environment, but given their desire to ensure there is no deflation and provide creditability that they will not allow overshoots above 2%, inflation falls within a corridor.
A financial world of corporate leverage increasing and investor yield reaching will only change if central banks change their behavior or make a huge policy mistake. The is credit risk that is real and will drive spreads, but the underlying term (inflation) premium is stable.
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