What, if anything, should financial risk managers of banks and other corporate entities be thinking and doing right now? Will such businesses suffer in a world of persistent, unbridled inflation?
As it happens, corporations are, relative to pensioners, fairly immune to inflation. The corporate structure itself is a natural hedge. Debt liabilities will lose value during inflationary years, and that's good for the debt issuers.
To the extent that a corporate's balance sheet holds a mix of financial and non-financial assets, the fall in asset value may match or be less than the drop in debt value. Further unlike the pensioners' fixed revenue, both the revenue and the expenses of businesses tend to "float" with inflation.
Professional risk managers, therefore, need not dread the onset of inflation. The corporate risk challenge is deflation! In deflation, the debt liabilities gain value. The assets of a non-financial corporate will likely "underperform the debt" in terms of the reaction to inflation.
While banks own predominantly financial assets that nominally appreciate during deflation, the corporate loans among such assets will fall in credit quality. In addition, the "floating" aspect of income statement expenses can be sticky on the deflationary side. For example, societies tend not to accept workers' wage reductions as a reasonable consequence of deflation.
Monetary Policy Risk? Deflation! By J.M. Pimbley [source]
I have no difficulty in understanding the whole article except for the bold sentence.
When I look up underperform in the dictionaries, they all say it's an intransitive verb. But it's being used as a transitive verb here. What makes this usage justifiable here? What is the purpose of the quotation marks?
Then I remember some action verbs can act as both transitive and intransitive. Take break for example, we can say the bottle broke just now and he broke the bottle just now. I would think it's similar here. Does the sentence mean the assets make the debt underperform - or, to put it another way, the value change of the assets outstrips that of the debt? Is my understanding right?