Market Watch

1.7 trillion reasons to worry

Inflation could change how you run your business

By Avery Vise

Last month, the Federal Reserve reported that the aggregate reserves of depository institutions stood at $1.7 trillion. That’s a lot of money.

Before September 2008, bank reserves consistently had stood at between $42 billion and $46 billion for many years. But then the global financial system almost collapsed. The U.S. government responded by pouring hundreds of billions of dollars into banks to keep them from folding and ensure they had ample funds to keep lending and keep the economy going.

Banks were scared to death, however, and didn’t want to lend to anyone who couldn’t prove that they didn’t need the money. And that actually was OK, because consumers and businesses generally didn’t want to borrow. So banks as well as most of Corporate America have just held on to their money.

There are upsides to this situation. Once everyone decides that an economic recovery is on a sound footing, there will be plenty of capital for investing. But there’s a major downside, too.

In the late 1970s and early 1980s, inflation was rampant, peaking at nearly 15 percent a year. We have seen nothing close to that since. In July, the rolling 12-month increase in the Consumer Price Index was 3.6 percent, the highest since the end of the 2008 surge in oil prices.

Inflation is tricky because there are multiple causes for it. In the late 1970s, soaring oil prices primarily were to blame. Another potential cause of inflation is a surging economy. When employment is high and wages and revenues are rising, people and businesses drive up the price of goods because they are willing to pay more. In the 1990s, the Federal Reserve fended off inflation by hiking interest rates sharply.

The $1.7 trillion held by banks is an inflation bomb with a delayed fuse.

A third way you can get inflation is to increase the money supply. The more money that is circulating, the less that money is worth. In theory, the kind of money the Fed has been throwing around should have led to inflation. But so far, inflation remains moderate and appears to be driven this year mostly by the brief surges in oil prices in the winter and summer.

What gives? It’s simple: The money isn’t circulating. Normally, banks would just be holding on to about $45 billion, and the rest of the $1.7 trillion would be moving around the economy, sparking inflation. Presumably the day will come when the reserves start dropping, and that’s when things could get dicey. Chances are, we will see higher inflation in the coming months or years. Let’s just hope it doesn’t match the levels of three decades ago.

Cash still will be king, but maybe not so much.

Inflation may force you to rethink some assumptions, starting with the bedrock principle in trucking that cash is king. A cash cushion always will be essential, of course, but when money is losing its value at the rate of 8 or 10 percent or more a year, you don’t want to keep too much of it. You will want to buy things you need sooner rather than later. In the shop, for example, you might want to build inventory of parts that won’t become obsolete. You might want to accelerate equipment purchases. And you just might buy that property for a new terminal now rather than wait a year or two.