Quantcast

(Mostly) for The Joker: Shrinking money supply and credit

dante

dante

Unabomber
Feb 13, 2004
8,807
9
looking for classic NE singletrack
http://www.telegraph.co.uk/finance/financetopics/recession/6190818/US-credit-shrinks-at-Great-Depression-rate-prompting-fears-of-double-dip-recession.html

Picked this up at minyanville.com. It's interesting to note the contraction in money supply and bank credit, which is the definition of deflation. Even though the Fed is printing money like crazy, if it's not getting into the hands of consumers through available debt/credit, there is deflation instead of inflation.

This article also goes a bit deeper into it, and talks about the fact that while the Fed is trying to do everything it can to avoid deflation, there may not be much that it can do to avoid it.

http://www.minyanville.com/articles/fed-bernanke-deflation-inflation-reflation-printing-money-printing-currency-velocity/index/a/24469
 
Pesqueeb

Pesqueeb

bicycle in airplane hangar
Feb 2, 2007
40,448
16,982
Riding the baggage carousel.
So, if i'm following correctly, the pressure on the Banks to deleverage is going to cause the next great depression? I fail to understand how sound economic poilcy(being able to cover your debts) is a bad thing. Explination please.
From my own personal experince, I know my bank is practically bending over backwards to lend me money. I wanted a motorcycle loan and instead got a line of credit at a better interest rate without me having to turn over the title. Everytime I go in the bank is pushing its zero interest (for a year) credit card. I have great credit but isn't this hurry to leverage anyone and everyone what got us into trouble in the first place?
 
Pesqueeb

Pesqueeb

bicycle in airplane hangar
Feb 2, 2007
40,448
16,982
Riding the baggage carousel.
On an unrelated note, have you read the comments on the bottom of that article? Who are these people? Escpecially the fascist advocating a military coup as a solution to our economic trouble :tinfoil:
We have a President whose political background is Socialistic and neo Communistic. His character is such that even in the face of failure he is determined to push his agenda - at any cost and will continue to do so. We have no real alternatives in the Republican or Independent parties maybe except for Joe Wilson and his "liar" accusation to the President.
We are inolved in a losing war of attrition in Afghanistan with no end in sight and according to this article our position in the world and our economic strength are both waning, while our rivals' powers are gaining.
In the face of this a direct military take over seems the best alternative. This would allow the Generals to conduct the war in Afghanistan in a manner that is favorable to us. It will put a military face in our foreing affairs and change the paradigm of a "meek America" that is jeered and should be feared. It will finally deal with our insecure borders in a common sense manner and cut nepotism within our rank and file politicians. Remember our first President George Washington was a General before he became a President.
Click to expand...
 
stoney

stoney

Part of the unwashed, middle-American horde
Jul 26, 2006
21,705
7,393
Colorado
http://www.frontlinethoughts.com

Go here and sign up (it's free). Then go to the archive and read:

The Elements of Deflation
Elements of Deflation, Part 2

It will explain what PEsqueeb has Q's on, and answer more of Dante's.
 
dante

dante

Unabomber
Feb 13, 2004
8,807
9
looking for classic NE singletrack
Don't forget, it's not just you taking out a loan to buy a motorcycle but also it's the small business owner trying to get $50k to bring in a container's worth of goods to turn around and sell to local businesses. With easy credit that small business can borrow money, bring in the goods, sell the goods for $75k, pay some of his loan back, use the rest to finance another container of goods, sell it, repeat as needed.

The government is trying to entice banks to lend money by keeping the fed funds rate so low (zero) that banks can borrow at zero and lend at 2% and make money. However, banks are charging far higher than that in an effort to bulk up their own balance sheets due to the debt loads that they have. Furthermore, even with low(ish) interest rates, people aren't borrowing. They're tapped out and not willing to borrow more to finance either their own personal purchases or invest in other enterprises.

So what's happening is that the government is trying desperately to shovel money at the American consumer. The only way they can do that (other than sending everyone a check) is to make money readily available to banks, who then turn around and make money readily available to consumers. With more money in circulation people buy more things, prices stabilize and maybe even start going up. The only problem is that the money isn't making it's way to the end consumer. The government is printing billions (trillions, actually) of dollars, but credit is still tight and the supply of money at the end user (consumer) is actually declining. When the money supply declines (definition of deflation), prices fall (supply and demand).

The problem with this is that in a deflation environment, cash is king and debts are absolutely devastating. In the current environment, deflation will make all debts that much harder to pay off, whether they're the US Government's or yours/mine. Just think about the housing aspect:

You borrow $300k to buy a $300k house and make $100k/year.

In an inflationary environment, there's an abundance of money to pay back that loan. At 5% inflation, your wages go up 5%, your house's value goes up by 5%, and so after 15 years your wages have doubled, the value of your house has doubled to $600k. You've paid off half of your 300k loan, so now you only owe $150k. Your mortgage is easier to pay, because the supply of money has increased.

In a deflationary environment, there's a lack of money available to pay back that loan. Wages decline, and people get laid off so that the overall wages declines by 5%/year. Your house value declines by 5%/year. Suddenly your house is only worth $150k, you probably still owe $150k, and you now only make $50k/year. Or worse, you get laid off, you can't sell your house since you owe more on it than it's worth, and have to foreclose on it, which further depresses housing prices in your neighborhood.

Flip side: You have no debts and $200k in the bank.

In an inflationary environment, IF YOU'RE LUCKY you get a savings rate equal to inflation. So inflation is 5%/year, and after 15 years you now have $400k. Only problem is whatever your $200k would have bought (average 3br house) today is all your $400k will buy in 15 years. So your money has done nothing, and you lose out on whatever opportunities that $200k could have bought (you could have lived in the house for those 15 years, for example).

In a deflationary environment, that $200k is awesome! In 15 years that $200k is still $200k, but it buys 2x as much stuff. So that average 3br house that cost $200k in 2009 only costs $100k in 2024. You can buy a house, and still have $100k left over to buy even more stuff.

(The biggest problem with deflation is the "deflationary spiral", which is: In the scenario above, you've held on to your cash for 15 years while housing prices plummet. Why would you buy a house for $100k, when the following year it might drop ANOTHER 5%? Obviously the smart choice would be to sit on the sidelines and not buy anything. When this happens, prices continue falling as per supply and demand, and you have even MORE incentive to sit on the sidelines and not buy...)
 
jonKranked

jonKranked

Detective Dookie
Nov 10, 2005
86,230
24,730
media blackout
Pesqueeb said:
On an unrelated note, have you read the comments on the bottom of that article? Who are these people? Escpecially the fascist advocating a military coup as a solution to our economic trouble :tinfoil:
Click to expand...
I don't know who they are, but I can tell you where they came from:

 
Pesqueeb

Pesqueeb

bicycle in airplane hangar
Feb 2, 2007
40,448
16,982
Riding the baggage carousel.
Dante and Joker, Thank your for your insight. I understand delfationary cycle pretty well. I've listend to (and read the blog of)NPR's Planet Money from pretty much day one. Granted thats about the extent of my finance education so I'm not claiming to be an expert. I guess my question is, How does Banks deleveraging their balance sheets lead to a delfationary cycle? Again, going on personal experince only, is that my bank is more than willing to lend me money, and at good rates. We refinancied the home with my bank some months back at 4.3% My line of credit for the BMW, 5.7% Is it that I'm the exception and not the rule? How hard is it now for small business to get loans? Or any business for that matter? I have cash, should I pay off the BMW to get rid of the debt? Should I be worried? I thought the recession was over.
 
You must log in or register to reply here.
Top Bottom