Quantitative easing has been controversial for plenty of reasons, but one of the objections that could still rear its ugly head is that it is covering up deflationary trends that will put pressure on growth once tapering begins. If the Fed relaxes monetary policy in response, we could get stuck in a ‘QE trap’ with no clear way out, as prominent analysts like Richard Koo and Christopher Wood have recently argued. But Gluskin Sheff chief economist and strategist David Rosenberg thinks that looking at monetary velocity is misleading, and that what’s really happening is a move away from bank loans.

David Rosenberg on bank lending

“I hear all the time that bank lending is weak and how this is a hurdle for the private sector, and how velocity of money remains on a secular descent and as such is creating the conditions for a deflationary environment even with the Fed’s massive balance sheet expansion,” Rosenberg wrote in a recent newsletter. “The reality is that the banks matter less and less over time with respect to their share of the total lending market. The Fed may operate its policies through the banks, but an increasing share of household and business credit, as the chart below illustrates, is depending less on them (down to a record-low near-40% share) and more on other sources.”

bank lending total house bus credit David Rosenberg

This is certainly welcome news if it’s true, but there are a couple of caveats. First, the bulk of the relative decrease in bank lending happened before 2002, so while it’s true that banks are less important than they have been historically, they aren’t less important than they have been recently. Relative bank lending has actually been surprisingly stable since the global crisis began.

David Rosenberg on credit card debt

Second, combining business and household debt could be misleading. Per-household credit card debt went up about 12-fold between 1980 and 2008 according to Business Insider, so the above graph is mostly another way to show the advent of the credit card. That doesn’t make his point invalid, but it seems like it would be helpful to look at bank lending as a share of business credit on its own before drawing any strong conclusions.