Monday, February 22, 2010

Bank Lending Continues to Contract

This article from the Telegraph in the U.K. was actually published last week.

Authored by Ambrose Evans-Pritchard (what a great British name!), it notes that for all of the talk about building inflationary pressures due to Fed policy, the opposite seems to be occuring.

Not only is bank lending dropping, but monetary velocity is also declining, which essentially means that the Fed has flooded the banks with liquidity that is being used only sparingly.

I continued to believe the investment implications are for deflationary, not inflationary, pressures, with interest rates moving lower later this year.

Here's an excerpt, with the link below:

US bank lending falls at fastest rate in history

Bank lending in the US has contracted so far this year at the fastest rate in recorded history, raising concerns that the Federal Reserve may have jumped the gun by withdrawing emergency stimulus.

US Federal Reserve - US bank lending falls at fastest rate in history
US Federal Reserve - US bank lending falls at fastest rate in history

David Rosenberg from Gluskin Sheff said lending has fallen by over $100bn (£63.8bn) since January, plummeting at an annual rate of 16pc. "Since the credit crisis began, $740bn of bank credit has evaporated. This is a record 10pc decline," he said.

Mr Rosenberg said it is tempting fate for the Fed to turn off the monetary spigot in such circumstances. "The shrinking in banking sector balance sheets renders any talk of an exit strategy premature," he said.

The M3 broad money supply – watched by monetarists as a leading indicator of trouble a year ahead – has been contracting at a rate of 5.6pc over the last three months. This signals future deflation. The Fed's "Monetary Multplier" has dropped to a record low of 0.81, evidence that the banking system is still broken.

http://www.telegraph.co.uk/finance/economics/7259323/US-bank-lending-falls-at-fastest-rate-in-history.html

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