Re: [TNF] Re: FSO Storm Watch - Weekly Update for November 2, 2001

["Henry C.K. Liu" <hliu@xxxxxxxxxxxxxx>]

The situation is really quite clear.  The slowing economy cannot afford any
shrinkage of the money supply.  Thus as the public debt is reduced through a
government budget surplus, the slack must be taken up by private sector
debt.  The trouble is, unlike public debts, private debts cannot be rolled
over without a credible cashflow stream.  As revenue falls faster than
interest cost decline, asset price falls to adjust accordingly. If and when
interst rate falls to zero or negative, borrowers of fixed-rate long-term
loans are subject to a new interest tax. To avoid that tax, borrowers, at
least those who can, will resort to early repayment of outstanding laons.
But this has the effect of reducing the money supply.  It also forces the
credit-worthy borrowers from the credit market. Thus the Fed's effort to to
increase the money supply through lowering of the Fed Funds rate actually
shrinks the credit pool.  This is in addition to the rise of credit standards
to compensate for a narrowing of interest spread enjoyed by banks.
That is what pushing on a credit string is all about.

Henry C.K. Liu

wmtamblyn@xxxxxxxxxxx wrote:

> Interesting, Nick.  Thanks.
>
> One section, "The Band-Aids Aren't Working," says in part
>
> "As the Fed moves to aggressively lower interest rates, its efforts
> are being defused by tightening credit standards and reluctant
> borrowers. As the economy weakens, job layoffs increase, and
> corporate profits contract, it is getting harder for debtors to pay
> back loans. This process, which is now in the process of unfolding,
> argues against a quick recovery in the second half of next year."
>
> Perhaps the Fed's persistent rate cutting is an example of the truth
> of the old saying "When all you have is a hammer, the world begins to look
> to you like a nail."
>
> Warm regards,
>
> Bill
>
> --- In TheNewForum@xxxx, "Sharefin" <sharefin@xxxx> wrote:
> >
> > http://www.financialsense.com/stormwatch/oldupdates/110201.htm
>
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