CIT bailout is just putting your finger in the dam.
By Daniel at 20 July, 2009, 9:47 am
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If CIT went under the write downs of the losses on a lot of companies’ balance sheet would have destroyed hundreds of billions of dollars and removed them from the M3 money supply. This would have been the straw that broke the camel’s back throwing the entire world’s economy into inescapable and very destructive money supply deflation and price deflation.
At the moment destruction of money supply through defaults and loan repayments is just barely being replaced by new money created by the Fed’s monitizing of Treasury debt. But small business borrowing has fallen 30%, corporate bond issuance has fallen 62.4% over the last year, consumer new credit has fallen 5% which doesn’t seem like much but represents almost 1 trillion dollars that wasn’t created through loans. The rate of new money creation through loans is dangerously declining and the Treasury has become the borrower of last resort issuing bond debt that the Fed monetizes and sends to banks under TARP in exchange for already defaulted on toxic mortgages bought by the Fed at face value because they got rid of mark to market accounting rules so that the banks get more money. The government comes out with stimulous to inject new liquidity into the system but now rumors abound about the need for more stimulous all because the real M3 money supply is on the verge of serious contraction.
Folks if the M3 money supply starts to contract then this will snowball into depression as price deflation establishes itself. In deflation nobody buys anything, even those with money saved because why buy something if I don’t really need it when I can get it for much less a year from now. Money sitting under my mattress at zero interest rate will see a rise in buying power as the price of other economic goods falls.
Had CIT gone under it would have snowballed and spread like an avalanche decimating the M3 money supply. problem is we are not saved by today’s news that CIT will be bailed out. If they cannot reflate the money supply through consumer borrowing to buy stuff then I fear that this is just the start of the avalanche which was averted for the time being.
Originally from RealBills
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