Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
Coronavirus: UK Parents Demand ALL Schools OPEN September, 7 Million Children Abandoned by Teachers - 9th Aug 20
Computer GPU Fans Not Spinning Quick FIX - Sticky Fans Solution - 9th Aug 20
Find the Best Speech Converter for You - 9th Aug 20
Silver Bull Market Update - 7th Aug 20
This Inflation-Adjusted Silver Chart Tells An Interesting Story - 7th Aug 20
The Great American Housing Boom Has Begun - 7th Aug 20
NATURAL GAS BEGINS UPSIDE BREAKOUT MOVE - 7th Aug 20
Know About Lotteries With The Best Odds Of Winning - 7th Aug 20
Could Gold Price Reach $7,000 by 2030? - 6th Aug 20
Bananas for All! Keep Dancing… FOMC - 6th Aug 20
How to Do Bets During This Time - 6th Aug 20
How to develop your stock trading strategy - 6th Aug 20
Stock Investors What to do if Trump Bans TikTok - 5th Aug 20
Gold Trifecta of Key Signals for Gold Mining Stocks - 5th Aug 20
ARE YOU LOVING YOUR SERVITUDE? - 5th Aug 20
Stock Market Uptrend Continues? - 4th Aug 20
The Dimensions of Covid-19: The Hong Kong Flu Redux - 4th Aug 20
High Yield Junk Bonds Are Hot Again -- Despite Warning Signs - 4th Aug 20
Gold Stocks Autumn Rally - 4th Aug 20
“Government Sachs” Is Worried About the Federal Reserve Note - 4th Aug 20
Gold Miners Still Pushing That Cart of Rocks Up Hill - 4th Aug 20
UK Government to Cancel Christmas - Crazy Covid Eid 2020! - 4th Aug 20
Covid-19 Exposes NHS Institutional Racism Against Black and Asian Staff and Patients - 4th Aug 20
How Sony Is Fueling the Computer Vision Boom - 3rd Aug 20
Computer Gaming System Rig Top Tips For 6 Years Future Proofing Build Spec - 3rd Aug 20
Cornwwall Bude Caravan Park Holidays 2020 - Look Inside Holiday Resort Caravan - 3rd Aug 20
UK Caravan Park Holidays 2020 Review - Hoseasons Cayton Bay North East England - 3rd Aug 20
Best Travel Bags for 2020 Summer Holidays , Back Sling packs, water proof, money belt and tactical - 3rd Aug 20
Precious Metals Warn Of Increased Volatility Ahead - 2nd Aug 20
The Key USDX Sign for Gold and Silver - 2nd Aug 20
Corona Crisis Will Have Lasting Impact on Gold Market - 2nd Aug 20
Gold & Silver: Two Pictures - 1st Aug 20
The Bullish Case for Stocks Isn't Over Yet - 1st Aug 20
Is Gold Price Action Warning Of Imminent Monetary Collapse - Part 2? - 1st Aug 20
Will America Accept the World's Worst Pandemic Response Government - 1st Aug 20
Stock Market Technical Patterns, Future Expectations and More – Part II - 1st Aug 20
Trump White House Accelerating Toward a US Dollar Crisis - 31st Jul 20
Why US Commercial Real Estate is Set to Get Slammed - 31st Jul 20
Gold Price Blows Through Upside Resistance - The Chase Is On - 31st Jul 20
Is Crude Oil Price Setting Up for a Waterfall Decline? - 31st Jul 20
Stock Market Technical Patterns, Future Expectations and More - 30th Jul 20
Why Big Money Is Already Pouring Into Edge Computing Tech Stocks - 30th Jul 20
Economic and Geopolitical Worries Fuel Gold’s Rally - 30th Jul 20
How to Finance an Investment Property - 30th Jul 20
I Hate Banks - Including Goldman Sachs - 29th Jul 20
NASDAQ Stock Market Double Top & Price Channels Suggest Pending Price Correction - 29th Jul 20
Silver Price Surge Leaves Naysayers in the Dust - 29th Jul 20
UK Supermarket Covid-19 Shop - Few Masks, Lack of Social Distancing (Tesco) - 29th Jul 20
Budgie Clipped Wings, How Long Before it Can Fly Again? - 29th Jul 20
How To Take Advantage Of Tesla's 400% Stock Surge - 29th Jul 20
Gold Makes Record High and Targets $6,000 in New Bull Cycle - 28th Jul 20
Gold Strong Signal For A Secular Bull Market - 28th Jul 20
Anatomy of a Gold and Silver Precious Metals Bull Market - 28th Jul 20
Shopify Is Seizing an $80 Billion Pot of Gold - 28th Jul 20
Stock Market Minor Correction Underway - 28th Jul 20
Why College Is Never Coming Back - 27th Jul 20
Stocks Disconnect from Economy, Gold Responds - 27th Jul 20
Silver Begins Big Upside Rally Attempt - 27th Jul 20
The Gold and Silver Markets Have Changed… What About You? - 27th Jul 20
Google, Apple And Amazon Are Leading A $30 Trillion Assault On Wall Street - 27th Jul 20
This Stock Market Indicator Reaches "Lowest Level in Nearly 20 Years" - 26th Jul 20
New Wave of Economic Stimulus Lifts Gold Price - 26th Jul 20
Stock Market Slow Grind Higher Above the Early June Stock Highs - 26th Jul 20
How High Will Silver Go? - 25th Jul 20
If You Own Gold, Look Out Below - 25th Jul 20
Crude Oil and Energy Sets Up Near Major Resistance – Breakdown Pending - 25th Jul 20
FREE Access to Premium Market Forecasts by Elliott Wave International - 25th Jul 20
The Promise of Silver as August Approaches: Accumulation and Conversation - 25th Jul 20
The Silver Bull Gateway is at Hand - 24th Jul 20
The Prospects of S&P 500 Above the Early June Highs - 24th Jul 20
How Silver Could Surpass Its All-Time High - 24th Jul 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Money Supply Bubble, Credit Squeeze and A Lender Who Will ....

Interest-Rates / Money Supply Mar 16, 2007 - 03:54 PM GMT

By: Adrian_Ash

Interest-Rates

"...The bold step in finance - the market-leading decision - now comes by retreating from credit and refusing all risk..."

INNOVATIVE new debt products so ften sound scary.

Credit default swaps, negative amortization mortgages, synthetic collateralized debt obligations...

Doesn't Wall Street ever get its marketing guys to work on these things? You know, just to make them more friendly.

Because the truth is, innovation in finance isn't scary at all. Entrepreneurs and investors should embrace it if they want to get rich. Money loves innovation, and their offspring's called credit.


In fact, what's really scary in finance is failing to innovate. Refuse to offer easy new products on new, easier, terms...and your business will wither and die.

  • If your stock broker won't give you a margin account, then in the end he'll go bust - losing business to brokers who will.

  • If a Wall Street bank won't float a new issue of high-risk junk bonds, then the bank will lose out - and the commission fees will just go to Europe.

  • And if your mortgage lender won't give you 125% of a property's value - leaving you short of money for buying furniture once you've moved in - well, then you'll just go and find yourself a lender who will.

The same applies to mutual funds, credit card companies, department stores, auto retailers...you name it. If they're dealing with money, then their success is driven by credit.

And being driven by credit always means you need to drive faster. Just so long as the cycle points upwards.

Call it a race to the bottom in terms of security. As the supply of credit increases, financial firms need to sit right on the cusp, out on the leading edge. Either that, or they'll lose out to competitors who will.

You need to "push the envelope" and think "outside the box" of underwriting standards, sensible lending and proof of income. Just look at the opportunities that await!

"As many as 22 million households - 20% of US households - are unbanked," noted a 2005 report from the Center for Financial Services Innovation in Chicago. Experian put the total number of "unbanked" Americans at 55 million, nearly one-fifth of the population.

"At least 53% of Mexican immigrants are unbanked," the CFSI report went on. "The combined unbanked and subprime credit population may be 30-40 million households."

Fast forward two years to early 2007, and credit has now gone where credit never dared tread before. Innovation has made sure of that.

"Creative new subprime loans - 'piggyback', 'interest-only', and 'no-doc' loans, among others - accounted for 47% of total loans issued last year," reported the Wall Street Journal recently.

"At the start of the decade, they were less than 2% of total mortgage loans."

But that's the nature of innovation. It either accelerates...or grinds to a halt. Scream if you wanna go faster!

"As long as lenders made loans available on virtually non-existent terms," writes Paul McCulley, managing director at Pimco, "the price didn't really matter all that much to borrowers. The availability of credit trumped the price of credit. Such is always the case in manias."

Hence the Fed's failure to touch the US credit bubble with its 17 hikes in interest rates. For as long as credit remained innovative, the inflationary trend would stay on track.

And now?

"The ongoing meltdown in the subprime mortgage market," says McCulley, will "unambiguously render any given stance of Fed policy more restrictive...Just as mortgage demand seemed inelastic to rising short rates when availability was riding relaxed terms, so too will demand seem inelastic to falling short rates when availability faces the headwind of restrictive terms."

In short, the Fed couldn't stop lenders from lending simply by raising its rates. Nor could the Bank of England, ECB or anyone else.

The Bank of England began raising its rates at the end of 2003. So did the Australian and New Zealand central banks, too. The US Fed started to hike Dollar rates in 2004, and a year later, the European Central Bank tagged along too.

Japan and Switzerland finally began hiking rates - albeit from near-zero - in 2006. But the effect on world money supply has been negligible up until now. Indeed, the "reflation" unleashed by record-low interest rates starting in 2003 just couldn't be tamed, not by a few measly basis points at least.

A quarter-point here and a quarter-point there was nothing against the forces of financial innovation.

Seventeen hikes in US rates? So what! US broad money, according to John Williams at ShadowStats.com, is growing by 11% annually. Eurozone money supply has been growing at 9.8% year on year. Britain's enjoying a 14% year-on-year bubble in money, even though short Sterling rates have risen by one half.

The global money supply has come to have little to do with interest rates, or so it would seem. Some three-quarters of all liquidity comes in the form of derivatives and securitized debt, as the analysts at Independent Strategy have observed. And if raising rates did nothing to slow it, the bubble in money might just start to deflate even if short-term rates now get clipped back towards zero.

The top of the credit cycle may be in - not because real Dollar rates have finally turned positive (which they haven't, by the way...), but because the lenders themselves are shuffling back from the edge.

Leave the market-leader's position to somebody else. The innovative step in finance today is to retrench...ask for secure credit ratings...demand proof of income...switch from digital and paper promises to hard, physical assets.

Once everyone's crept back to tight lending standards and a hatred of credit, the time will have come to step forwards again - and clean up in finance by lending on easy terms yet again.

But that time's not now. The retrenchment has only begun. Be brave - and step back.

By Adrian Ash

Adrian Ash is head of research at BullionVault.com , the fastest growing gold bullion service online. Formerly head of editorial at Fleet Street Publications Ltd – the UK's leading publishers of investment advice for private investors – he is also City correspondent for The Daily Reckoning in London, and a regular contributor to MoneyWeek magazine.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules