Some of Stewart's more interesting tidbits:
As we've recently discussed here, Treasury rates have fallen in some cases to 0% and even to negative rates. Says Stewart:
I love his next paragraph because it highlights another theme mentioned here before -- never look at just the "headline" numbers to draw conclusions about something, because it's the underlying character of the data that tells the most complete and insightful story. To wit:
What the Minneapolis Fed report fails to take into account is inflation [is] one reason for investors to purchase Treasury bonds. Another is safety. Because US Treasury bonds are considered the safest in the world, people are buying them at a high [price], meaning Treasuries are yielding an incredibly low rate right now.
Some T-Bills have recently been issued at 0% interest! That in and of itself tells us the level of concern is abnormally high and a credit crunch is indeed going on - people don't want any return; they simply want their money back! In short, inflation expectations are one reason why people buy Treasury bonds. But another very important reason is safety. And investors are clearly concerned mostly with safety right now if they don't even want a return on their investment.
The Bank of Boston adds other extremely credible explanations for the lack of decline in lending. They note that in a credit crunch companies rely more on their existing lines of credit as other sources of funds (the stock market, commercial paper and new lines of credit) dry up. In addition, banks are unable to securitize loans in the current environment and are therefore forced to keep more loans on their books, thereby increasing lending. The paper also shows that lower grade corporate issuers (single A) have seriously cut back on their commercial paper issuance, indicating that only the very best credit quality issuers are able to obtain short-term funding in the commercial paper market.In short, because companies can no longer find success raising money from investors, they have to tap their "credit cards" for cash. This causes an increase therefore in loan balances (to substitute what otherwise would be investor cash and not loans in normal times), which causes a "headline" appearance that lending is increasing, which is a completely inaccurate read of what's really going on. New credit is not being issued, and banks can't sell their "old credit" loans so they have to keep them - because there is a crunch.
But then there's this tantalizing nugget regarding the currency issues we've discussed here, from a Stewart reader, Jonathryn:
Jonathryn said...I love it. I've been arguing here in favor of inflationary measures to combat a deflationary environment. Inflation of the US dollar would cause our exports to become cheaper internationally, which could therefore increase the value of our exports and help combat the national debt -- thereby "giving back" some of the inflation and decline in dollar value dynamic.
Okay, yes, very well. There's a bubble in Treasuries. Under what circumstances or in what manner could that bubble blow up? What would be the consequences?
If Paulson, Bernanke, and their successors tried to inflate the hell out of the currency to avoid deflation, would this not precipitate some sort of currency devaluation trade war with China? Isn't that why Paulson went over there?
December 19, 2008 11:40 AM
Jonathryn points out that China, which is deeply dependent upon its exports to the US and other western nations, might economically "retaliate" by inflating its own currency to support its exports (it's been doing this to an extent for decades already, and we've let them). I don't know enough to say. But it's terribly interesting, terribly.
Are we looking at the prospect of a new "currency cold war"? If so, it could make the War on Terror look quaint.
[I'll get back to writing about real estate shortly.]