The government claims that the small businessman can’t borrow money and consumers can’t purchase new cars. Bernanke needs 700 Billion to fix this liquidity crisis. Interest rates rose a bit yesterday, 3 month T Bills are paying a little better than 1% per year (not per month). New car loans are under 7%. Do you get the feeling that just maybe the consumer stopped buying?
What happens when there is a shortage of funds for borrowing? Interest rates rise. They sure don’t seem to be rising. Inflation is roaring in at 10% and everyone is hunkered down with a bank deposit just under 100K. If I didn’t know better, you would think that the banks were flush with cash and nobody wants to borrow money.
If banks were to pay a decent interest rate, money would become available. 12% interest on cash might be better than holding on to the yellow metal which pays nothing. Of course if a banana republic printed up 700 Billion Pesos, gold might be the currency of choice. The wisdom of owning gold boils down to one thing, you can mine it, but you can’t print it. The government is out of the loop on Gold.
Remember back to the last housing slump from 1992 to 1998? It was 6 to 8 years in length depending on where you lived. Here we are into one year and one month of this crisis that started with the implosion of Bear Stearns and we need 800 billion. What will we need next year? You kind of have to wonder about year six, using year one as a measure. If we were to do that, it looks rather grim.
The one thing that really keeps a market going is confidence, there is none. The opportunity to make money with borrowed funds is pretty much gone. We can’t borrow a dime from the banks unless we can prove we don’t need it. Whereas the lenders that are broke, are given unlimited loans on bad debt.
This bailout mess is kind of like having flatulence contest in a crowed elevator with the winner getting a government cash award. It takes a real "Stinker" to win.
This could be the last part of the “Perfect Storm.” We the people ( AKA government) have 10 trillion in debt. If the interest rates climb to 10%, that’s one trillion a year of the budget for interest only. If interest rates go higher, the game could be over. If Paulson injects the new found funds, institutions will fight for the cash by offering higher rates for real money deposits.
Next week Bernanke and Paulson will be sponsoring the "Wall Street Iron Man Enema Competition." You don’t have to participate in the event to be “Cleaned Out.”
As a post note:
This was written before the Bail Out was passed. In my humble opinion, Congress raised no funds to pay for this from their tax base. The fact that Congress said they must do something to fix this crisis is a joke and a travesty. They did nothing. No real money was added to the system. The Fed could give counterfeiters a bad name.The fact that they spend 800 billion (that they didn't have) sounds impressive. Don't be fooled by the smoke and mirrors--I feel disappointed and let down by what has happened.
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