031708-TheCreditCrunchDeepens.txt

03/17/08 Dollar's Fall
Undoubtedly, the continued reach of US military power requires that the dollar remain the world's reserve currency.
What's new in the profile of this recession?
I. Persistent globally high commodity prices
The loose dollar regime architected by the Fed since Greenspan has encouraged the further hollowing out of US manufacturing by the outsourcing of investment to Asia resulting in the historical boom in capitalist production in China and India. The demands of this global production boom has led to a surge in commodity prices threatening to undermine any solitary efforts by nations to stimulate their economies as the prospect of recession grows.
II The Credit Crunch
the onset of the global downturn is a crisis in liquidity as the debt instruments which allowed the us to continue its rate of consumption while running current account deficits now show a frightening fragility in their architecture. As the Fed pours more money to shore up bad debt, the prices of commodities rises in parallel. Thus the weak dollar regime generalized infationary pressures world-wide.
III The Dollar Crisis
Fed stimulus and bail-outs has the sense of desperation. Rather than fearing inflationary consequences, the Fed appears to regard the crisis in liquidity as the crisis of the dollar.
Europe has elected to try to fight the inflationary effects of the dollar's fall by refusing to lower interest rates in tandem with the US. this will prevent a rise in US imports that might otherwise help pull the US from recession.
Japan has watched its currency fall under 100yen to a dollar with devasting consequences for the ability of its export markets to compete. this will close off another import market needed for an american turn-around.
Currency reserves of dollars held by foreign countries are getting hammered.
IV The Global Climate Crisis.
V. The domestic economy's split into Haves and Have-nots
VI. The way forward
the liquidity crunch must be held off at all costs seems to be the Feds message. the world econ powers will demand that the US dollar avoid further downfall. This will cut off an export-led recovery for the US in return for the dollar retaining its position as the world's reserve currency.
Asian economies must start to reorientate production from an emphasis on export and further domestic investments. This will allow for the eventual displacement of the dollar's prominence.
CreditBubbleBulletin March 10 2008
. When the seemingly irrepressible bubble in Wall Street finance was inflating, aggressive Federal Reserve rate cuts fed quickly into speculative leveraging; heightened demand for securitizations; aggressive lending in the asset markets; asset inflation; and the inflation (of volume and prices) of myriad credit instruments with perceived limited liquidity and credit risk (certainly including ABS, MBS and agency debt, along with more sophisticated Wall Street debt instruments and structures).
The Fed didn’t really need to concern itself with the dollar. Not only were foreign financial institutions rushing in to play the boom in US "structured finance", the US credit system was creating perceived "money"-like securities that were the envy of the world. As fast as our trade deficits and speculative outflows flooded the world with dollar liquidity, this finance would return to find a perceived "safe and secure" home through various monetary processes right back into our asset-based securitization markets. It was a bubble of historic proportions and it’s all laid out on the L.107 page in the Fed’s Z.1 report.
We haven’t heard much of the "Bretton Woods II" nonsense lately. Somehow, everyone wanted to make believe that we would always enjoy the luxury of trading endless new securities for imported energy, commodities, capital equipment, cheap electronics, and all the consumer goods we could ever dream of. The problem was that our credit system was issuing ever larger quantities of increasingly suspect financial claims (well documented in the Fed’s "Flow of Funds").
Well, the entire world has become aware of our situation and will be less than keen to accumulate more of our debt. The Fed’s willingness to cut rates so drastically in the midst of faltering confidence and heightened inflationary pressures is certainly exacerbating the very dangerous dislocation that has erupted in the agency, MBS and investment-grade corporate markets.
For the year, total credit (non-financial and financial) expanded a record $3.998 trillion (8.9%) to $48.808 trillion. This was a moderate increase from 2006’s growth of $3.859 trillion (9.4%), and compares to 2005’s $3.310 trillion, 2004’s $3.178 trillion, 2003’s $2.779 trillion, 2002’s $2.781 trillion, 2001’s $2.020 trillion, and 2000’s $1.679 trillion. Total credit market debt averaged $2.500 trillion annual growth over the 10-year period 1997 to 2006. Non-financial credit increased $2.351 trillion (8.1%) in 2007, compared with the previous year’s $2.334 trillion. Financial credit surged $1.569 trillion (11.1%), up from 2006’s $1.273 trillion (9.9%) and 2005’s $1.015 trillion (8.5%). It is worth noting that financial sector credit growth averaged about $500 billion annually during the nineties.
In true bubble blow-off fashion, total corporate debt expanded at a 12% annualized rate during the fourth quarter, with 2007's growth of 11.6% the strongest since 1998. Now that bubble has burst as well. We’re now poised for a year of significantly slower debt growth - a serious dilemma for both the highly over-leveraged financial sector and the deeply maladjusted US bubble economy. The negative effects to the real economy from a lack of credit are becoming increasingly evident.
3/18/2008Dow Gains 420"i'm going to place my bet with the guy with printing press for dollars"
Mergers and Acquisitions?
The action by the fed to open the discount window to investment banks at 3.25% loans for 30 (90?) days, not done since the depression, is probably more the reason for the big market move than a further large drop in the fed fund rate by 75 basis points. By being able to borrow at the low rate, investment banks should be able to put off trying to sell their asset backed securities, which in fact the fed will accept as collateral for their loans. This should provide a great boost in liquidity. Meanwhile, the asset backed securities will continue to drop in market value as the housing market sees no near-end to its drop. This continue fall in the value of these loans should continue to depress lending between institutions. but, thanks to the fed offer of use of the discount window, will borrowing from other finance groups be necessary. the new borrowing will allow leverage to again function but in a recession lending possiblities are greatly reduced. Perhaps, we can expect mergers and acquisitions to gain momentum now. Meanwhile, commodity inflation will renew its rise, placing growing strains on asian and european economies, and lessening the effect of the rate cut stimulating the economy.