The Economy

Credit never stopped flowing. ... but prices have risen due to the fiscal and monetary stupidity.

People are confused. They go to the grocery store and their bill is way up. They go to get a car, and the monthly payment is double what it was 3 years ago.

But everyone who wants a job has one (for the time being) and there is actually a surplus of jobs available. ... and most importantly, they are still running up debt. Banks were lending.

Credit is about to dry up -- it's a done deal. Everything just changed. I'll bet you those 61 percent of respondents (who have no clue what the drivers are in their lives) feel very differently relatively soon.

 

Not COULD happen. Is happening. The ONLY question is if the Fed can get credit flowing and create an even BIGGER credit crisis later for the illusion of stability today.

Part of what caused this is the Fed was trying to extricate itself (to deal with consumer price inflation). They VERY slowly (because they knew what was going to happen; their only strategy is hope) were letting some of the assets they purchased with all of the QE roll off their balance sheet. Last night, they released their holdings (they do this weekly) and they undid the last several months of decreasing their balance sheet in less than a week! They expanded the balance sheet by $300 billion.





This is the ONLY thing they have to prevent a credit crisis. ... creating money out of thin air and injecting it into the banking system (in the latest scheme, they are accepting collateral and valuing it at par when it is worth WAY less).

 

People are clueless about what is going on out there.

Right now, you have a lot of people looking at bank balance sheets, seeing who has a lot of uninsured deposits, and they are buying credit default swaps to try to bring those banks down. Those banks are sitting on big portfolio losses (on a marked to market basis).

This is not going to go away.

Worse, the Fed meets next week and right up until SVB failed, Jay Powell (who was clueless) was signaling a possible 50 basis point hike at their meeting (because inflation as measured by the CPI is running at 6 percent year over over)!

They are beyond fucked. They have tw choices: global financial crisis / credit crunch. ... or try to prop up trillions of dollars of bad debt with more credit (which requires them intervening in markets) and fuel the price inflation they now have zero control over.

The banking crisis that is forcing their hand is all due to duration risk (caused by zero interest rate policy for a decade and a half!) that made those banks vulnerable.

It wasn't a problem as long as they could keep the distortions in effect. Consumer price inflation forced their hands. Now they are backed against a wall. I kept trying to explain that in posts when they started to hike. ... there was no way this WASN'T going to happen if interest rates normalized just a little.

 

The next shoe to drop is going to be what higher funding costs do to the TRILLIONS of dollars of mispriced debt their "policy" let loose.

The world is filled with zombie companies that have been able to borrow way too cheaply and keep rolling over that debt cheaply for more than a decade. Credit hasn't just been mispriced, what the party did was make it too easy to get. It's all of the junk debt that is going to become a massive problem when credit dries up now, because it has relied on just being able to roll itself over at little cost and keep growing bigger. What now?

This was from something that "Grant's Interest Rate Observer" sends out every night. It's about how borrowing costs are rising in speculative-grade credit. It points out that we are starting to see defaults pick up.

The party is over, folks. It's crazy to me that the typical person doesn't even realize there HAS been a party.