How quickly the new money supply will turnover?

This is depending on the banks’ willingness to extend new loans. My day in and day out direct experience is painting a very different picture based on the scenario I’m seeing play out:

1.) The banks are lending but only to A/A+ customers as the regulators/FDIC are still pounding on the banks for their bad commercial real estate and working capital loans. So while the best companies/credit risks may be getting credit, the rest are being asked to exit stage left.
2.) As for A/A+ customers, the number of these deals have decreased significantly during the past two years. Why, it’s simple in that the performance of most small to medium sized businesses have suffered significantly over the past year with the past six months being very painful. This trend will only get worse through the remainder of 2009 and early 2010 as I expect the failure rate of small to medium sized businesses, the backbone of the economy, to accelerate.
3.) No question the banks have ample capital and reserves to lend. You don’t have to look any further than to the recent capital raises (from the stress tests), dividend cuts, government injections, etc., etc. etc. to realize that the banks have improved their liquidity significantly.

So in summary, the following conclusion can be drawn. Banks have more capital/reserves to lend. However, there are fewer customers that qualify for the loans so fewer loans are being made (with the exception of the grade A deals). What’s a bank to do with all of this excess capital, I know, there’s a great supply of US debt available (I beleive $2 trillion this year) so let’s loan the money to the Feds (as surely, nobody can question the quality of this debt). So the feds bail out the banks who inturn bail out the feds while America suffers. This does not really present a strong case for velocity in the short-term as all of this cash/bank reserves is just being recycled.

However I would like to comment on the huge problem this creates in that the US Government is sucking up every bit of capital available leaving nothing for private businesses. Whether directly through debt offerings or indirectly (by telling banks to increase capital which in turn is being invested in US debt), the government is killing the very Golden Goose that represents the foundation of our economy and capitist society. Risk based capital represents the backbone of the American Entrepenuer in terms of providing resources to bring new ideas, concepts, and innovation to the market (which in turn creates jobs and opportuniites). Without capital, the Golden Goose dies and so does the foundation of America. Just look to see how the flow of capital from VC’s, PEG’s, private investors, etc. into new businesses has basically died.

The current administration in Washington just doesn’t get it. They think by investing in dead companies and industries and saving jobs that a recovery will occur (at the expense of allowing capital to flow into the new industries that will lead country forward). While this may work for a year or two, the damage long-term will be irreversable as the final competitive advantage held by the USA on a globle basis, innovation and the speed at which products/services can be brought to market, will cease to exist.

So even if everyone’s predictions on inflation and higher interest rates are wrong (which I don’t believe they are), not being able to innovate and market products/services to the world will do even more damage long-term. Just look to GM for a case study (too much social spending, not enough investment in innovation, too much internal “governence”, etc.). So just like the market pounded the value of GM stock to a worthless state, so to will the world pound the USD, as once America has nothing of value to offer (unless of coures you believe US debt, our greatest export, is valuable), the value of America’s equity, the USD, will follow suit.

Rodan

Related Posts:

• Federal Reserve playing Games
• Timeline I have seen mentioned (I hope it’s wrong!)-
• Reports on Possible Imminent Bank Failures
• Must watch: Elizabeth Warren, chairman of the Congressional Oversight Panel of TARP is calling for a miserable future in the commercial real estate world.
• Substantive factors that will crash the markets:

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