We finally got to the point when Main St takes a hit from Wall St. As you recall I’ve mentioned few times that so far the collapse of commercial paper market was offset by the extension of lines of credit. Few minor bumps on this road are not important.
Now is the major bump. Just released H8 shows that banking credit contracted by $102 bln from last week and by $132 bln from the March peak. Now add here $16 bln two-week contraction of commercial paper. I always used to add those two numbers, so the total two-week credit contraction is $148 bln. You can add here a more modest bond issuance contraction that I reported here. The total outstanding short-term debt is $1,817+$9,433=$11,250 bln. The relative contraction is 1.3%.
I think this is a very big number. You can compare it with “stimulus package” passed earlier this year – they pretty much cancel each other. I think the effect will be almost immediate – we are in the earning season and one after another the corporate CEOs will tell us that they plan to cut spending. Of course they will be forced to cut spending if they are forced the reduce debt.
Maybe I should call all this the year of The Great Deleveraging?
April 11, 2008 at 10:34 pm
So now we at least have the hard data verifying what we’ve speculated for the past month.
The mad dash for cash is underway. The word “no” is coming back into the modern American vocabulary!
Some of that “noise” about a bond market crash might have legs after all, no? The “crowding out” effect I studied in econ 702 (but didn’t believe in) may be in play again as well…
Wow. It really IS coming to an end. The first flakes of the Kondratieff winter are accumulating, covering the ground we used to harvest our grains and vegetables from. I hope the rest of you canned enough beets and tomatoes to carry you over.
April 12, 2008 at 2:44 am
Year of Leveraging?
My friend, we are going to see years of deleveraging.
Shankar
April 12, 2008 at 1:54 pm
Shankar, actually a great idea. I think we can call the period from August ‘07 to April ‘08 “The 9 months of the Great Leveraging”. I can’t say exactly 9 months or 12 months, doesn’t matter.
Let me explain.
Many financial institutions chose to not mark certain assets to market and instead moved them to level 3. The effect of this is the real leverage that could far exceed the last year levels, even though nobody was actually voluntarily increasing the leverage in the traditional sense of this word.
The data I posted above means, IMHO, that banks went to the point where they just can’t lend anymore even to the best clients. Any new loan increase the leverage and they’ve reached the brick wall.
Next data coming next Friday 4:15 pm. It’s incredibly interesting to watch!
April 12, 2008 at 4:00 pm
Hi Roxy
The deleveraging is likely related to the massive amount of money loaned to the banks as reserves. With negative reserves, how much leverage can you have? It better pay back or you cannot pay back what you borrowed.
Banks are ahead of hedge funds in terms of leveraging. Before the fed gave them reserves they were 20×1 leveraged. Now with the Fed supplying their reserves, the leverage can be infinite. That is true money printing.
The fed gives every indication that they will substitute fed funds for a substantial portion of the lost liquidity. That bodes for massive inflation, both monetary, and price.
April 12, 2008 at 11:42 pm
PrintFaster, H8 shows me that banks already scratched the bottom of the TAF possibilities. To support your argument the credit must keep expanding.
April 13, 2008 at 2:48 am
Hi Roxy
Don’t confuse money with credit. The Fed continues to take in credit, of worse and worse quality and giving in return money.
Credit contraction can occur with an expansion in money supply. As a simple example. All the homes in the US could reach a value of zero. The fed could print cash to pay for its day to day operations, buying mortgages from homes of zero value.
Destruction of credit, cannot destroy money.
the net effect would be credit contraction, with money created from bad credit.
PrintFaster
April 13, 2008 at 11:04 am
PF , I agree and disagree with# 6. While the Fed can take in lower quality assets in exchange for credit , the Fed presently cannot issue debt in its own name ( I note recent proposals floating whereby the Fed may seek / or others are proposing the Fed be given such authority . ) Furthermore , with half of its balance deployed through the various alphabet entities used to assist apparently insolvent Banks and IBs , there appears to be some limitations presently on non inflationary steps the Fed can take. As far as the Treasury Dept , they can certainly increase debt issuance and borrow more than the Government needs and keep the balance with the Fed , thereby effectively increasing the Fed’s balance sheet. The 64 billion dollar question is when will our foreign creditors say no mas ? When will they demand substantially higher yields for treasuries and agency debt to continue to buy same or in the alternative ,will FCBs simply seek out higher yielding debt / assets elsewhere ? A buyer’s strike for treasuries and agency debt would put an abrupt halt to the reckless money printing that we see , however , I’m certainly not wise enough to say when that might occur. But if inflation – especially in food prices , continue to persist in the developing creditor nations ( DCNs ) , coupled with a weakening dollar which lessens their purchasing power and creates serious issues for their citizens , something will have to give. Treasury can issue all the debt it wants to… someone still has to buy it , right ?
April 13, 2008 at 2:09 pm
Many banks are forcing consumers to ‘deleverage’ by freezing their HELOC.
April 13, 2008 at 2:12 pm
Good discussion.
I fear PrintFaster’s scenario too. While the drop in bank credit is interesting and worthy of being reported, I wouldn’t get too excited about just a one week drop. We need a couple of months of this to filter out the static and determine if this is indeed a trend change. Keep us posted.
April 14, 2008 at 12:52 am
Printfaster,
It’s not actually true that the Fed is taking in credit and issuing money. In fact they are sterilizing every new issuance of money AND MORE by redeeming SOMA. The net effect is to swap good credit for bad on their balance sheet, while decreasing high powered money.
What they are doing is withdrawing money from the broad system and directing a focussed stream of it at the troubled areas – think “fire engine sucking water out of the ocean to fight a fire in a lighthouse”.
April 14, 2008 at 10:20 am
Hi Eventhorizon
A lot of folks seem to miss what printing money is about. It is about taking something of questionable value and issuing something of higher value in return.
To whit, the Fed issues dollars instead of Ts. Ts have questionable value, but by issuing dollars in return, they have monetized Ts and created value where buyers might find them of questionable value, eg the risk of interest rate changes.
By moving down the risk chain toward toxic waste, the Fed is creating more and more money value. Kind of like a water level raising all ships.
Fed and T credit acceptance is where money printing actually takes place. The notion of sterilzation is fictional unless the sterilized product is kept off the market. Witness China’s sterilization of dollars with Chinese debt — it simply has created Chinese inflation. Why? because they have replaced questionable (US debt) with Chinese debt (better debt). The Chinese debt is readily convertible with renminbi which makes it more money than debt. Dollars are not.
April 14, 2008 at 3:44 pm
FYI.
Credit Crisis Could Affect Markets for Decade
http://www.cnbc.com/id/24110064
April 15, 2008 at 8:32 pm
>>> To whit, the Fed issues dollars instead of Ts. Ts have questionable value, but by issuing dollars in return, they have monetized Ts and created value where buyers might find them of questionable value, eg the risk of interest rate changes.
PrintFaster, this is true, but Feds are monetizing at the rate 3% to 5% (comparing to existing monetary base) Ts per year. And this rate is unchanged even this year.
April 16, 2008 at 11:27 am
Hi Roxy
The actual monetization is only part of the story. I would argue that the monetary base is the sum of all Ts. When the Fed monetizes, it sets the value of Ts which are then as good as money.
If the Fed were to abandon monetization, the value of Ts would be questionable, and not exchangeable for cash.
In all this talk about credit destruction, the value of the Ts and cash will not be destroyed. The monetary base as I define will not decrease unless the there is a budget surplus.
April 16, 2008 at 4:57 pm
PrintFaster, ok, got you. I don’t have a straight opinion so far to what extend you can count Ts as part of monetary base. It is a very complicated question and I never saw a straight answer.
If we slide into hyperinflation then you’ll be right, I guess this is how we can test it
April 16, 2008 at 6:31 pm
Theroxy,
Any comment on this?
http://macro-man.blogspot.com/2008/04/funny-thing-happened-on-way-to-rally.html
Shankar
April 16, 2008 at 9:24 pm
PF and Roxy , just a basic question , how can you test or verify anything in an environment when unconstitutional actions by the Fed ( that would be the BSC transaction – pertinent point being the 29 billion dollar bribe by the Fed for BSC to step and assume BSC counterparty risk ), go unchallenged by Congress or any Regulatory body allegedly managing this overall fucke*y ? What is the litmus test ? I think I know a thing or two… but I really can’t get my arms around the markets right now. I know they’re delusional.. from a trading perspective , I’m not know sure which delusion represents anything that one would call a trend.
April 16, 2008 at 9:54 pm
fredw, it’s against the law but not unconstitutional – this crap is not in constitution. What it shows is that Feds and the inner circles are really, really, really, really, really scared.
April 16, 2008 at 10:25 pm
Shankar, very interesting.
I am also playing with Libor curve on spreadsheet and it seems interesting. I will write about it soon
April 16, 2008 at 11:33 pm
BTW, the entire Fed is unconstitutional, according to Congressman Ron Paul.
IMHO, either – 1. the Fed should be abolished, or 2. it should be stripped of its power for growth and made only responsible for price stability, 3. mandated to manage/control money supply.
As long as the Fed is responsible for growth, it will let money supply grow in lieu of asset price inflation.
Having Executive Branch responsible for monetary growth won’t stop price inflation, but at least each President will know that he/she’ll be thrown out if the inflation runs amok. And that is why you’ll see why many foreign Governments are now seriously worried about inflation and riots.
Shankar
April 16, 2008 at 11:53 pm
Hi Roxy
Taking the notion of Ts as money, there is one thing that bears watching.
If Ts are indeed money, then what counts is if they are circulated or kept in a mattress. If they are kept in a mattress, they are removed from the monetary base for however long they are sat on.
Where this gets interesting is the foreign holders. US banks trade Ts like kids trade baseball cards; they are constantly being exchanged. Foreign banks are about sterilizing them. Here if the foreign banks start dumping them, they go back into the monetary base. A couple trillion here, a couple trillion there, and you could have the start of a little bit of monetary inflation.
Right now the fools in the CBs think that they are sterilizing the Ts by issuing local currency debt, but that only plays the same game that the treasury plays with the Fed. As long as those debt instruments are traded or part of bank reserves, they become cash.
They export goods in return for our inflation. At some point in this game of musical chairs, the music stops.