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Tuesday, September 15, 2009

US credit shrinks at Great Depression rate

I feel like the market is about to enter into a real parabolic blow off, but who knows, it could just sputter out. I get a feeling that when this turns, it will be very very nasty.

In my blog entry yesterday, I noticed I went a little nuts with "quotes", I need to keep that in check, annoying to read.

This blog entry will be short today, I saw an article titled US credit shrinks at Great Depression rate. Quote from article:
Referring to the debt-purge policy of US Treasury Secretary Andrew Mellon in the early 1930s, he added: "The pressure on banks to de-risk and to de-leverage is the modern version of liquidationism: it is potentially just as dangerous."

US banks are cutting lending by around 1pc a month. A similar process is occurring in the eurozone, where private sector credit has been contracting and M3 has been flat for almost a year.

In a nutshell, the article is saying banks are contracting credit. In the modern world, credit IS money. (in a fractional reserve system) Therefore the destruction of money is occurring at 1% per month in total US bank lending. This does NOT lead to a new bull market, this is a bear market rally that will end badly.

In the comment section someone posted some opinion, that I found rang true, food for thought.

Deflation cannot be stopped, it is a natural consequence of the credit bing. Any attempt to reverse it will prolong it and may add unintended consequences. Why deflation if so bad? You have to ask: who profits from inflation (bankers? people or government in debt?). I like deflation, don't mind falling prices, everything is cheaper. But then I am a saver and have no debts.

Bernanke is responsible for the Fed, but the buck really stops on the desk of our President and Chief (and, FYI, that's supposed to be Obama) ... and considering we have a President with Zero experience running any sort of capitalistic enterprise, is any of this surprising?

The real lesson of the 1920s was that, if you allow the conditions for a monumental depression to develop, you will get a monumental depression and there is nothing you can do to stop it.

I blame primarily the government (dems and republicans) under President Bush for the lionshare of these issues. Under Clinton critical legislation was passed to enable these toxic assets. Now Obama is focusing on healthcare when there is a war to be waged to improve the financial system. The result will be plenty of blame to go around, but everyone paying the price.

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