CC News – Notes and Thoughts.

[Sapiens]

There are not many people calling for a credit contraction for the time being. Some are mentioning a credit crunch from the fallout of the sub-prime mortgage market but that’s about it.

What’s going on?

Most pundits can’t fathom a credit contraction because of all the present liquidity. This tells me how they have failed to grasp the mechanics of how Money works in the present macro-economic system.

The present conditions we are experiencing are the result of the structural shift the Unites States has taken by implementing the so called Free-Trade policies and Globalization ideology.

The inflation of the late 1960’s and 1970’s were caused by the Vietnam War and the subsequent spending that led to the closing of the Gold window by Nixon. In addition, the tremendous investment the petroleum rich countries of the middle-east made in infrastructure with all the petro-dollars from the oil shocks. Those petro-dollars were shipped all over the world in payment for goods and services for the development of OPEC countries’ infrastructures. Back then, those Dollars were spent, not lent. Today petro-dollars are lent to treasuries where they now earn sizeable sums in interests.

Next, the Japanese bubble of the 1980’s was not cleaned up by writing off all the defaulted and worthless loans. Japan with its high savings rate and export driven economy is another source of credit and therefore high liquidity.

China is following the Japanese economic transformation model of Mercantilism; with about 1.2 Billion people, they are certainly poise to keep their people employed for the sake of political stability. With the Globalization ideology, China will drive down labor costs to the detriment of living-standards in all other countries that participate in “Free-Trade”.

I need also to address Russia, Europe, Africa and Latin America; although at the present time they only play a supporting role, Europe with capital and the others with natural resources.

The coming credit contraction will not happen for a lack of money, it will happen because the population of the United States will not have the cash flow to service their present debts.

This will open up the opportunity to examine our political economy philosophies of constant growth in a finite world and our understanding and views of property rights.

-Sapiens

[Sapiens]

Rolling in money

http://www.fxstreet.com/fundamental/...007-03-02.html

Excessive. The world is literally awash with liquidity. According to our calculations, global money supply has risen much more rapidly than the corresponding nominal GDP over the last ten years. The ratio increased by a stunning 25%!
Origin. Roughly one third of this liquidity overhang stems from the eurozone with a still rising trend. But Japan and China also made a substantial contribution. In contrast, excess liquidity in the US declined during the last Fed tightening cycle. Recently, however, US money supply growth has also accelerated again, leaving most borrowers with sufficient liquidity.
ECB. Against this backdrop of rapid money and credit growth and the still favorable EMU growth prospects, the ECB will hike its key rate further. We expect the next move this coming Thursday. And whether the final hike will really come in the summer at a refi rate of 4% is becoming increasingly uncertain.
Reduction. The Bank of Japan would also be well advised to continue to raise its key interest rate steadily and communicate its intentions to the market in order to gradually reduce global excess liquidity. At the same time, China should revalue its currency further. This way, an abrupt end to the liquidity boom could be avoided – despite considerable risks from carry trades and Hedge Funds.

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Mortgage Flight-to-Quality, Rates Fall
http://www.hshmarkettrends.com/trends/1172885698.html

The rout for equities was sparked by, among other things, concerns that China would soon crack down on investors holding the riskiest investments. The Shanghai stock index lost almost 9% in a single day as a result.

The trouble in subprime mortgages has sparked all kinds of responses on Wall Street, as any number of firms reported losses, stock price troubles, and a belated tightening of lending standards. Less-easy credit found a new champion in Freddie Mac this week, which announced that it would stop buying subprime loans with certain characteristics by September 2007. The company also announced that non-subprime borrowers will need to be qualified at the fully-indexed, rather than introductory, interest rate for ARMs.

Qualifying a borrower at a higher interest rate, weighed against the same income, doesn't mean that the borrower cannot get a loan, but it does have the net effect of lowering the maximum loan for which that borrower can qualify. That smaller loan amount, in turn, means that although the borrower can get a loan, it might not be enough to afford available properties -- which would effectively shut that borrower out of the market.

From a risk standpoint, that's a reasonable stance, but along with other tightening measures coming into play in the market, this will have the effect of lessening the demand for homes. As the housing market is stumbling a bit already, with just the barest signs of stability evident, that's not particularly good news.

...

Excessive mortgage liquidity served to extend and expand the housing boom, and at least some of that liquidity -- perhaps a lot of it -- is on its way out of that segment of the market. Lessening liquidity may also begin to affect the gray area of mortgage finance between prime and subprime, known collectively as "alt-A" lending. To what degree that may occur, we'll need to wait and see. At the moment, subprime lending changes are happening and those will likely continue.

Of course, more credit-related troubles are likely if the economy weakens. Next week's employment report is shaping up to be a rather weak one, if the weekly series covering new unemployment claims is any indication. For the week ending Feb. 24, some 338,000 new applications for benefits were filed, and looking over February as a whole, the numbers for the month were elevated when compared to January. It's our guess that perhaps only 100,000 new hires occurred in February, if that many. In addition, according to outplacement firm Challenger, Gray and Christmas, there were 84,014 announced layoffs during the month, up from 62,975 in January.

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