American business is afraid that *everyone* spending like a drunken sailor for 50 years is finally catching up with all of us. Everything with the words “credit” or “debt” attached to it is to be avoided at all cost, because to tie your rope to it is to be dragged down with it.
The only way out of this mess is for our economy to be divided in half, with the “real” economy being protected on one side, and the fantasy, leverage economy actively encouraged to go broke on the other side.
This means that every businessman involved in the real economy is boarding up their windows and barring their doors until after the hurricane has hit. And every leverage and margin businessman whose love boat is sinking fast, is banging on the doors of real businesses, hoping to loot them to save his own sorry rear end.
And the government is still trying to save the leverage corporations who got us into this mess. But that’s worse than futile, because they *have* to be eliminated before there is a hope for recovery.
At the individual level it means to slash your debt ASAP as well. Put those credit cards in a safe place and go back to using cash and checks at the store. It is also a good idea to keep cash at home.
The US government is on a binge of spending right now, even though its tax revenues for next year are going to be severely cut. Soon, they may run out of funds as well. They can’t throw around money if nobody will loan them money, or worse, when they call in those debts.
Wild times.
Good post.
Great summary.
My answer to the question is, the banks are simply afraid of throwing good money after bad. The complete and total lack of transparency is a disincentive for banks to lend. They can’t tell if the institutions they lend to are on the verge of insolvency, so they refuse to lend to anyone who can’t prove sterling credit circumstances beyond a shadow of a doubt.
Quick question. If all the toxic paper was exposed today, wouldn’t this solve the liquidity trap? The banks would immediately begin lending to that half you mentioned that are doing real business with real money, and the other half would be left hanging out to dry as the banks would avoid them like the plague.
Not that this will ever happen... Just saying. Or, asking.
"We know what causes a recession to metastasize into a slump. Irving Fisher, the paramount US economist of the inter-war years, wrote the text in 1933: "Debt-Deflation Theory of Great Depressions".
By Ambrose Evans-Pritchard
Last Updated: 6:34PM GMT 18 Dec 2008
"Such a disaster is somewhat like the capsizing of a ship which, under ordinary conditions is always near stable equilibrium but which, after being tipped beyond a certain angle, has no longer this tendency to return to equilibrium, but a tendency to depart further from it," he said.
Today we call this "Gladwell's tipping point". Once it goes, you can't get back up. This is why the Federal Reserve has resorted to emergency measures that seem mad at first sight.
It has not only cut rates to near zero for the first time in US history, it is also conjuring $2 trillion of stimulus out of thin air. This is Quantitative Easing, or just plain 'QE' in our brave new world.
The key is the toxic mix of high debt and deflation. An economy can handle one at a time, but not both.
[snip]