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|User Info||M1 Multiplier goes BELOW 1.0 - WTF??; entered at 2009-02-06 11:05:21|
Registered: 2008-03-13 DC - VA
Credit is a supply and demand instrument. The prevailing market conditions reflect pervasive lack of demand for it. Certainly not the growing demand that is necessary to support a debt-based monetary system.|
Debtmoney can only work so long as growth increases. At each point in the US where we had a material change in growth prospects, we've had a monetary crisis, first in GD1, later in 1971 with the collapse of BW1. Each point reflected an inflection in growth expectations.
The problem now is that the debt bubble was astoundingly larger than any before it. The quadrillions in derivatives were largely created with leverage, people buying swaps with borrowed money and selling swaps to pocket arb spreads. Slicing and dicing them and trying to magnify a few pennies here and there via leverage. If you could create an imaginary bond that needed no real plant, no equipment, no land, no house, and turn this into "profits," wouldn't you do this? And not just do it once but cycle the returns into ever-higher pyramids of instruments? That is exactly what they did. The notion of a triggering event on a CDS was irrelevant because all parties assumed they could pass that risk on to someone else or otherwise hedge it.
This type of crap is what is hiding in all the SIVs and conduits all over the world. This animal had its tentacles in every single sector of our economy...look at GE if you don't believe it.
Now, the Fed is creating credit that is NOT circulating into the economy with any effect. The economy has its own problems that are unrelated to the finance sector. Free money cannot revive a ponzi bubble; it just cannot. The monetary base has its own issue because most of the credit growth of the past decade was for synthetic instruments and ponzi finance. This has collapsed en masse, consequently, the Fed originates credit that extinguishes other debt, slowing velocity dramatically while still increasing the aggregate monetary base. They're showing a HUGE increase in their "credit base," but for reasons that escape them, it's not showing up out here in the real world.
I don't think they knew how big the synthetic finance market was, or maybe they just saw no evil and looked the other way. Nobody is "hoarding" cash. Car sales have collapsed only because people have chosen not to buy. There is no horde of people at the glut of dealerships wanting to buy but who cannot "get" credit. Demand for credit has decreased markedly and the Fed has destroyed nearly all of the credit markets at any rate.