U.S. Credit Contracting at Depression-Like Rates

Discussion in 'Wall St. News' started by ByLoSellHi, Sep 14, 2009.

  1. Bulls and inflationistas; take this into consideration:


    US credit shrinks at Great Depression rate prompting fears of double-dip recession

    Both bank credit and the M3 money supply in the United States have been contracting at rates comparable to the onset of the Great Depression since early summer, raising fears of a double-dip recession in 2010 and a slide into debt-deflation.

    By Ambrose Evans-Pritchard, International Business Editor
    Published: 11:59PM BST 14 Sep 2009

    Professor Tim Congdon from International Monetary Research said US bank loans have fallen at an annual pace of almost 14pc in the three months to August (from $7,147bn to $6,886bn).

    "There has been nothing like this in the USA since the 1930s," he said. "The rapid destruction of money balances is madness."

    The M3 "broad" money supply, watched as an early warning signal for the economy a year or so later, has been falling at a 5pc annual rate.

    Similar concerns have been raised by David Rosenberg, chief strategist at Gluskin Sheff, who said that over the four weeks up to August 24, bank credit shrank at an "epic" 9pc annual pace, the M2 money supply shrank at 12.2pc and M1 shrank at 6.5pc.

    "For the first time in the post-WW2 [Second World War] era, we have deflation in credit, wages and rents and, from our lens, this is a toxic brew," he said.

    It is unclear why the US Federal Reserve has allowed this to occur.

    Chairman Ben Bernanke is an expert on the "credit channel" causes of depressions and has given eloquent speeches about the risks of deflation in the past.

    He is not a monetary economist, however, and there are indications that the Fed has had to pare back its policy of quantitative easing (buying bonds) in order to reassure China and other foreign creditors that the US is not trying to devalue its debts by stealth monetisation.

    Mr Congdon said a key reason for credit contraction is pressure on banks to raise their capital ratios. While this is well-advised in boom times, it makes matters worse in a downturn.

    "The current drive to make banks less leveraged and safer is having the perverse consequence of destroying money balances," he said. "It strengthens the deflationary forces in the world economy. That increases the risks of a double-dip recession in 2010."

    Referring to the debt-purge policy of US Treasury Secretary Andrew Mellon in the early 1930s, he added: "The pressure on banks to de-risk and to de-leverage is the modern version of liquidationism: it is potentially just as dangerous."

    US banks are cutting lending by around 1pc a month. A similar process is occurring in the eurozone, where private sector credit has been contracting and M3 has been flat for almost a year.

    Mr Congdon said IMF chief Dominique Strauss-Kahn is wrong to argue that the history of financial crises shows that "speedy recovery" depends on "cleansing banks' balance sheets of toxic assets". "The message of all financial crises is that policy-makers' priority must be to stop the quantity of money falling and, ideally, to get it rising again," he said.

    He predicted that the Federal Reserve and other central banks will be forced to engage in outright monetisation of government debt by next year, whatever they say now.
  2. jnorty


    so buy-sell we all know the facts. the question is when will the mkt react to all this bad news and tank?
  3. I've been saying the dollar bears have it wrong, and that much of the money being created, through treasury sales or 'quantitative easing,' is being destroyed into vapor-space.

    Cash will be absolute king again, and the USD is going to strengthen tremendously as other nations' economies have their band-aids ripped off.

    The best currency forecasting analysts in 2008, Deutsche Bank, are projecting a 12% rise in the USD versus the world basket this year.

    Commodities are going to crash.

    Japan and Russia are in freefall, and China has admitted they have no choice but to spend much of their surplus just to maintain nominal growth (and who knows how bad things really are there).
  4. achilles28


    It's all about lenders ability to lend.

    And consumers ability to borrow.

    Key metrics:

    1) Lending standards - tight or loose? If banks are tight, new credit is scarce.

    Related - Banks P/L, solvency, and accounting regs. Banks net red means tight money to preserve capital reqs.

    2) Consumer debt - Average consumer debt available per FICO rank? Higher consumer debt levels lower credit-worthiness, and availability of new debt.

    Most banks are in the red, and tight.

    Most consumers have too much debt, and cannot afford, or access, new debt.

    During periods of expansion, debt available is high across all FICO scores. Largely because of solvency, cheap credit, and appreciating assets.

    During periods of contraction, debt available across all FICO scores SHRINKS. Largely from too much existing debt, deflating asset prices, and uncertain economic conditions = higher risk.

    The real leading indicator, imo, is consumer debt-to-income/assets. As it increases (debt gets paid down with static income), more debt becomes available. THEN FICO scores rise as debt-to-asset ratio improves.

    The reflation of the bubble is a temporary fix for banks and consumers. Banks see their collateral values rise and asset-backed security markets open. Consumers get improved debt-to-asset/income ratios from buoyed real estate which equates to more available debt.

    Not sure where to find consumer debt-to-income/asset figures. I think thats key.
  5. A massive chunk of the money forwarded by the taxpayers (involuntarily, by Paulson, Bernanke, Geithner, et al.) to banks and financial firms has been used to recapitalize asset depreciation and loan losses, and this is an ongoing process, and will probably continue for years.

    These monies are essentially sucked into a black hole, are for practical purposes destroyed, and are not available for lending to business or consumers.
  6. That sure seems to be the (much) less crowded position. And there is nothing long-term bullish about the dollar index chart - absolutely nothing.

    It's worth taking a shot.

    Was just looking at USD historicals - more than a little ironic that for all the heat Carter took during his presidency, the dollar came out of the Reagan era no stronger than it was at the end of the Carter years.
  7. moarla


    ByloSellhy: how much money you bet for your opinions?
    without any risk for you, why someone should listen to you?