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Macro Economic Trends and Risks
Where Has the Money Gone?

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By EddieLuck
February 22, 2008

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I have read all sorts of accounts lately of credit markets of various kinds "freezing up". Every account had a reason for the market in question ceasing to function efficiently, and it was usually something to do with human emotion - "lack of confidence" or some such.

Sometimes it was something like "lack of bids due to difficulty in pricing".

As I have been saying for a long time, now that we have mostly credit and very little money, when someone takes a loss, no one else has to take a gain, as would be the case with real money. With a lot of the recent credit market problems, credit has simply disappeared. People say there is a lot of "cash" on the sidelines, but it's not cash, it's short-term credit, and that is starting to go up in smoke lately too, as in the auction-rate preferreds and so on.

With these auctions, it has been touted about that the banks have withdrawn their bids and allowed the auctions to fail due to lack of confidence they will find buyers on whom to unload the securities, or to conserve their capital for other purposes. Yeah, right! I guess the tens of billions all the big outfits are borrowing from abroad (at outrageous terms) are to make them feel more confident. Ha Ha Ha. I guess they didn't borrow the money here because 13% convertible preferred was just too measly a deal to interest all the big holders of ready money in the US. Ha Ha Ha. The Port authority bonds going to 20% are a sure tell. Any bank with credit available would have been very happy, eager even, to snap these up at say 7%or 8%. What a deal! But no, they stood back and let them go to 20%. NO WAY they would have done this if they had had cash available. No way. And again, at this week's auctions, there are few takers and failed auctions again with red hot bargains up for grabs.

Allowing these auctions to fail has killed a nice little steady business that had run like clockwork for twenty years. Maybe some other bank businesses are more profitable, but if so, what areas are banks plowing extra credit into lately? That must be a secret, because it's not in the newspaper.

Well, folks, let me tell you the real reason these markets are failing. The reason is that enough "money" has been destroyed ALREADY that financial companies and individual investors are RUNNING OUT of credit that they can draw on to buy stuff. People are cutting their losses and moving out of hedge funds into money market funds, but some components of money market funds are in trouble already too. For example, mortgage ABS and the auction - rate stuff already.

Every single area of the credit markets is now losing value, even including treasuries if you allow for inflation. This is the spiral getting started, and the reasons we are hearing are not true: they are being dreamed up by people who don't understand the situation, or being put out as propaganda to calm the markets.

Remember what your Grandpa told you when you were little. You can't believe what you read in the paper: it's just copy.

It's not a lack of confidence, it's a lack of credit/money. The financiers are going broke, and I think the fed was about six to eight months too late to stop it. I hope so, as it will only be worse next time if the fed and govt. and the Sovereign Wealth Funds manage to pump it all up again without a cleansing recession first.

Of course, what we really need is a sane and stable monetary system, where money is money and cannot just disappear like this.

Good luck,

Ed.