Writing about complex financial matters is never easy, but awareness of what’s going on in this arena just might be the most import knowledge you can have. Put a couple of facts together and see where you come out on the overall vectors of our “recovery.” One of the key “missing ingredients” in rebuilding small and mid-sized businesses (the largest body of employers in the U.S.) and getting the middle and higher levels of the housing market in a stable and perhaps even nascent appreciation phase is restarting the credit markets. After Lehman Bros. collapsed in the fall of 2008, the credit markets began to freeze, and as 2009 rolled along, the markets turned to ice. Funny how statistically, the financial companies we funded with TARP money to get credit rolling again reduced their lending practices, tightened credit requirements and gave their senior managers higher levels of compensation than institutions that the taxpayers did not bail out.
Some – like perennial bad boy Goldman Sachs – actually signed on to become federally-insured “banks” … not mainly because they wanted to help in this credit impaired marketplace but because they wanted to borrow money from the government at some of the lowest fed fund rates in U.S. history in order to invest the proceeds of such taxpayer-funded loans into their own portfolios! I’d sure like to be able to borrow money at almost zero percent interest and, using my supercomputers with automatic trading (buy-sell) triggers that would get me in or out of the market before almost anyone else, make fortunes while minimizing any possible risk. Exactly why do we even allow this to happen? Oh, I forgot, the voters elect politicians who in turn report to Wall Street. Silly me.
Add to the above mix is the question of exactly how much borrowing can take place on this planet? If there is a pile of global cash (or virtual cash if you prefer… M1 money supply) and lots of borrowers are taking from the pile, what happens? Governments try to keep loan rates low, especially when they are the primary borrowers, and by increasing the money supply (what most refer to as printing money), make sure there is enough money to borrow. The bigger and more economically rich the government, the better the chances that some of these policies might work. But in the end, demand for money to borrow inevitably – under a simple application of the supply-demand curve – raises the interest rates in order to attract lenders and contracts the funds available to other new borrowers (like small and medium businesses). And if there aren’t enough lenders, increasing the money supply without any increase in underlying values inflates currencies… which also serves to raise interest rates. Sooner or later. The U.S. has borrowed plenty as its deficits have risen to record levels in an attempt to fix the economy; several European nations (notably the U.K.) have also incurred huge new debt loads. And now there is the latest round of mega-borrowing.
What’s been saving the U.S. from sinking relative to the rest of the world is the fact that Europe is borrowing a whole pile of money to lend out again to failing European economies. The stock market saw that move – an infusion of almost a trillion dollars by a combination of the EU and the IMF – as a stabilizing factor, which sent stock prices soaring on May 10th. But that “sooner or later” hasn’t gone away. By May 11th, the markets began to sputter, and the Asian market began to fall. The May 11th Los Angeles Times: “Now, with fresh commitments to lend potentially huge sums to struggling borrowers, ‘it does seem li ke you're just giving the addict another fix,’ said Paul Kasriel, chief economist at Northern Trust Co. in Chicago… But Kasriel and other analysts said policymakers had little choice. With last week’s plunge in global markets — including one of the wildest trading sessions in Wall Street history — it was clear that Europe’s government-debt woes posed a growing threat to the world’s nascent economic recovery.
“Late last week the talk on Wall Street was that stresses were rising in the European banking system. The eroding value of government bonds put banks worldwide at risk because financial institutions hold huge amounts of that debt… By [May 7th], interest rates were rising on short-term loans between European banks, suggesting that some banks were becoming leery of lending to others — similar to what followed the failure of brokerage Lehman Bros. in September 2008.” Will European voters reelect the governments that approved these loans? Will the austerity measures imposed on the debtor nations ease? The fact remains that the global financial markets, particularly on both sides of the North Atlantic, remain very weak, susceptible to another fall. There’s been a lot of national slorping at the global debt trough. And it seems we are not only living on borrowed funds; we are living on borrowed time. What’s your opinion?
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