Available Credit

Credit peaked last year and has been falling since. By now we all know that the US Economy is driven by credit. Falling credit either means falling consumption or it means that the Government has to print more money to keep consumption up.


Available Credit for business loans has contracted at the fastest rate on record. This tells you that banks aren’t lending and money available for buy bonds has flowed into Mortgages and Government Issued Debt.


Europe
It is not just in the US. Here is the headline today from Euroland –

“Bank lending to companies operating in the Eurozone fell in September for the first time on record, according to the European Central Bank.”

http://news.bbc.co.uk/2/hi/business/8327809.stm

The US Government
In an effort to make up for tightening credit at banks, the Fed has been pumping money into the system to try and prop up the system. The Monetary Base is at a new all time high, so does it surprise you that Gold hit an all time high and Oil is rallying again?


Here is a visual example at what is occurring in the lending markets. The US Government (Ginnie Mae, Fannie Mae and Freddie Mac) have gone from originating about 55% of all mortgages in 2007 to over 90% in 2009. Banks and private lenders simply aren’t willing to lend money (or can’t lend) at these low interest rates.


http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2009/Midnight+Candles+Gross+November.htm

Why do we need all of this cheap money? Bill Gross at PIMCO describes it like this –

“(A)lmost all assets appear to be overvalued on a long-term basis, and, therefore, policymakers need to maintain artificially low interest rates and supportive easing measures in order to keep economies on the ‘right side of the grass.’”

Let me know if what Mr. Gross says next sounds familiar –

“Let me start out by summarizing a long-standing PIMCO thesis: The U.S. and most other G-7 economies have been significantly and artificially influenced by asset price appreciation for decades. Stock and home prices went up – then consumers liquefied and spent the capital gains either by borrowing against them or selling outright. Growth, in other words, was influenced on the upside by leverage, securitization, and the belief that wealth creation was a function of asset appreciation as opposed to the production of goods and services.”

This is probably the most important thing Bill Gross will write over the rest of my career –

“Asset prices are embedded not only in our psyche, but the actual growth rate of our economy. If they don’t go up – economies don’t do well, and when they go down, the economy can be horrid.”

Asset Price Appreciation as a policy tool…

“Asset appreciation in U.S. and other G-7 economies has been artificially elevated for years. In order to prevent prices sinking even lower than recent downtrends averaging 30% for stocks, homes, commercial real estate, and certain high yield bonds, central banks must keep policy rates historically low for an extended period of time. If policy rates are artificially low then bond investors should recognize that artificial buyers of notes and bonds (quantitative easing programs and Chinese currency fixing) have compressed almost all interest rates.”

“(The Fed, the Treasury, the FDIC) recognize… that asset prices must be supported in order to generate positive future nominal GDP growth somewhere close to historical norms. The virus has infected far too many parts of the economy’s body, for far too long, to go cold turkey.”

“That support, of course, comes in numerous ways. Financial system guarantees, TARP recapitalization of banks, TAFs, TALFs, PPIFs – and in Europe and the UK, low interest rate term financing, semi-bank nationalizations, and asset purchase programs similar to the United States. In the case of the U.S., the amount of the implicit and explicit financial support given by policymakers totals perhaps as much as $5 trillion, which goes part way to support the $15 trillion overvaluation of assets theoretically calculated in the PIMCO model (100% of nominal GDP).”

“At the center of U.S. policy support, however, rests the “extraordinarily low” or 0% policy rate. How long the Fed remains there is dependent on the pace of the recovery of nominal GDP as well as the mix of that nominal rate between real growth and inflation.”

Any way you slice it, the name of the game is for the Government to use newly printed money to buy stuff from those who are looking to sell and deleverage.