Thursday, August 09, 2007

Interest rates , Mervyn and Bernanke

Well, now we know. Interest rates are on hold both sides of the pond, but in both cases, the word is that they are expected to rise. This is talking up the possibility to fool the markets into thinking they are not going to get a reduction.
America has a gigantic ( almost insuperable) funding problem for it's twin deficits, and will shortly have to shift the bias to lower rates, in order to encourage people to buy their debt. This is exacerbated by the present turmoil. Notice how they keep saying it's no problem, storm in a teacup, not spilling over, not damaging - except companies and individuals keep running out of money and going bust. Bernanke will not want to drop rates, he doesn't want to continue the Greenspan Put, but he will have no option but to increase liquidity. Adam Smith ( not the Scot) in his book " Paper Money" told the tale of a day in the '60s or '70s " when America ran out of money". It wasn't quite true of course, but a confluence of events meant that all the liquidity got drained out of the system. For a couple of hours, there was effective paralysis,noone realy knew what might happen. Then the Fed phoned round and told all the banks " If anyone - ANYONE - comes in asking for money give it to them".They lent billions to all the banks themselves, at miniscule rates, effectively printing gigantic sums of money. That was kind of the start of the sub-prime problem.
And by the way, if you package up a load of shit in a beautifully wrapped parcel, it's still shit inside. That's what the banks have been doing with the sub-prime mortgages - AAA rated because there's a spread? Don't make me laugh.
Look to the start of the dotcom crash. What actually caused it? Why, the Fed started draining liquidity. And then it took three years to get enough back in to create the next boom.
And over here? Mervyn has virtually promised higher rates. But the turmoil in the markets has virtually done his work for him. Inflation isn't about to rise.
But, boy, it sure suits him to say it is.

UPDATE 1: In case you missed it, one of France's largest banks has suspended three of its funds " due to complete evaporation of liquidity". So to help out, the European Central Bank has added Eur 100 billion to today's liquidity. That's Eur 100 billion to help out TODAY only. Think about it.
How much is Eur 100 billion? Well, if each Euro was 1 second, 1million would be about 11.5 days.
1 billion is about 31.7 YEARS. So 100 billion is 3,170.9 YEARS. So you would need to start counting, at 1 per second, in 1164 BC to have done it by today.
Think about it some more.

UPDATE2: Another day another - what - $3 trillion dollars evaporated? To use the analogy above, that represents 9,537 years.
Oh and its's all down again today, 10/8/07

2 comments:

Whispering Walls said...

yes...rumours of an emergency Fed rate cut as early as next week

kinglear said...

WW- told you