There is an interesting mix of deflationary and inflationary pressures emerging in this economy, making for a particularly dangerous set of monetary crosscurrents and riptides.
Not to overcomplicate it, the banks are basically stuck with a load of dodgy debt, having had the music stop while they were still holding on to some of the bags of bad debt they were passing around.
Now the banks are refusing to lend to one another, because they at least understand how shaky they are, and what a load of rubbish their public talk is compared to their real state.
They are also fearing a recession and a rush of corporate requests to fill existing credit lines.
With the Central Banks adding liquidity through 'special facilities' at record rates and monetizing bad debts through other agencies such as the GSEs, FHA and FHLB in the States, there is a funny mix of hot money just not quite flowing yet to the places where it can do any real good.
We suspect strongly that another trigger event will shake the global financial system to its foundations, and that the Central Bankers are losing a great deal of sleep as they wonder where the Anglo-American financial hegemony has brought them.
This will end badly. But it will end. And we will begin to build together again.
Bank of England warns that credit crisis far from over as banks hoard cash
By Edmund Conway,
Economics Editor
12:33am BST 16/06/2008
UK Telegraph
Conditions in the money markets remain "stressed", with banks reluctant to lend to each other for longer than a month, the Bank of England has said.
In a further sign that recovery from the financial crisis is still at a very early stage, the Bank used its quarterly examination of the markets to warn that many areas are almost frozen, as banks continue to repair their balance sheets.
It comes after Bank Governor Mervyn King warned that the crisis is not over, and amid fears that central banks around the world are preparing to raise their interest rates.
The Bank said: "Conditions in global money markets remained somewhat stressed. In particular, the cost of unsecured bank funding remained elevated and forward spreads indicated this would persist for some time.
"Contacts reported continued limited appetite among banks to lend to each other for periods longer than one month. Instead, banks were opting to hold more liquid assets and to conserve balance sheet capacity, partly as a buffer against corporates drawing on committed lending facilities. (In other words banks are preferring to lend commercially or sit on the cash rather to lend out to other banks who are struggling to maintain their liquid asset ratios - Jesse)
"This was seen as more likely if macroeconomic conditions deteriorated and, in this eventuality, corporate defaults could rise rapidly, putting further strain on credit markets."
The cautious behaviour comes despite many commentators' claims that the markets are now through the worst of the crisis. The Bank said that while sentiment had improved since its last Quarterly Bulletin in March - particularly in the most recent months - conditions were far from normal.
Indeed, interbank borrowing rates have remained high in recent months, despite the Bank's Special Liquidity Scheme to pump extra cash into the markets.
Concerns about tight credit have in some quarters been replaced by worries about the soaring price of oil, which recently peaked at just below $140 a barrel. The Bulletin acknowledged that the activities of hedge funds and other investors may have pushed it a little higher, saying: "Speculative activity was not widely thought by contacts to have been the primary cause of upward price pressures in energy markets, although it is possible that it played some role in the short run."
The Bulletin also examined the recent jump in surveys of households' inflation expectations. The Bank's own survey showed last week that families currently believe the inflation rate is 4.9pc, while the official CPI level is 3pc.
The report concluded: "So long as people still expect the [Monetary Policy Committee] to meet the 2pc CPI target over the medium term then the monetary policy implications of higher short-term inflation expectations are limited. But if any of the recent increase in inflation expectations were built into higher wages and prices, inflation could persist above the target for longer."
