A Dollar Rout or More Bernanke Trickery?

[Crewleader]

October 12, 2009

The Consumer Credit Crisis

By MIKE WHITNEY

Consumer credit is falling fast. In July, consumer credit plunged by $19 billion, followed by an August drop of $12 billion, a 5.8 percent annual rate. Credit card spending decreased by nearly $10 billion in August, while non-revolving debt, including auto loans, fell by $2 billion. Credit has shrunk for 7 consecutive months, the longest period of decline since 1991. The banks have shrugged off their commitment under the TARP program to increase lending to consumers and businesses. They've either deposited their excess reserves with the Fed, where they earn interest, or invested them in the equities markets for better returns. The bottom line: Credit is shrinking and the economy is slipping further into deflation.

From MarketWatch:

U.S. banks are reducing their lending at the fastest rate on record ... According to weekly figures provided by the Federal Reserve, total loans at commercial banks have fallen at a 19% annual rate over the past three months, while loans to businesses have dropped at a 28% annualized pace...

... if the decline is mainly due to weak banks unable or unwilling to lend, then a turnaround in credit creation may have to wait until banks' balance sheets are repaired, a process that could be delayed by further expected defaults in consumer loans, mortgages and commercial real-estate loans. (Rex Nutting, "Banks cutting back on loans to businesses", Marketwatch)

http://www.counterpunch.org/whitney10122009.html

[girl gone mad]

1. My bet is on a strengthening dollar...

in the short term.

Japan had no success with quantitative easing and I don't know that Bernanke can do better.

[MercutioATC]

2. I'm curious. Where do you see that strength coming from?

There are two ways to strengthen a currency, increasing consumer spending and raising interest rates.

If banks won't lend money, consumer spending doesn't increase...and if a lack of consumer spending continues to drag down the economy, raising interest rates will strangle whatever small amount of lending DOES exist.


Whether one agrees with the idea of using billions of dollars of taxpayer money to "stimulate" the economy or not, it should be obvious that giving banks virtually free money without any requirement that they actually use that money to facilitate consumer spending doesn't accomplish much...and it certainly doesn't strengthen the dollar.

[girl gone mad]

3. The dollar has no real competition at the moment.

There just isn't any other currency or asset class that can substitute and I believe we are years away (at least) from the establishment of any new monetary system.

[angryfirelord]

5. I think a key factor

in this was that the Australian central bank raised interest rates. This could cause other banks to follow suit if it doesn't have any significant impact on Australia's economy.

Another thing is that the dollar has been forming a wedge pattern downward and it didn't break down through the wedge. In fact, it has been starting to go up. It has to since there are hardly any bulls on the dollar, so for the short term, it's going to strengthen. If you don't mind taking a bit of a gamble on a PowerShares stock, look up UUP.

Finally, the stock market has recovered quite a bit, so a correction downward would also help the dollar along.

[roamer65]

4. M1 is increasing at a 20% pace right now.

This is a nearly pure monetary inflation situation. Trust me, the hyperinflation is coming.

http://www.shadowstats.com

Look at John Williams's graphs, in particular the M1 money supply growth.

[fasttense]

6. The one problem with the hyper-inflation theory

is that other countries are so tied up with the dollar that it will hurt them if they allow it to inflate too much.

China, and India for example, sell most of their products in the US. If the dollar hyper-inflates, then it will undermine their own economies.

And the dollar/oil tie certainly will support a less inflated dollar.

Not that I think the US wont suffer some inflation, I just don't see the US suffering hyper-inflation like pre WWII Germany.