Total Consumer Credit Outstanding in the US is contracting at a year-over-rate of almost 5 percent, which is a record for the post 1960 economy.
The challenge facing Bernanke and the Obama economic team is how to get the US consumer spending again, if they cannot be paid a living wage, and if they can no longer be encouraged to borrow beyoned their means, by using their homes as a cash machine with variable interest rates, as they were encouraged to do by Fed Chairman Greenspan.
This is as much a public policy question as it is an economic question. Large segment of the population which are homeless and and jobless tend to be destabilizing to the community. The liquidationist school is not without its attraction to the let-them-eat-cake frame of mind, but from a societal perspective it is fraught with peril and unintended consequences.
For now the remedy being utilized by Bernanke and associates is to prop the financial system and allow the dollar to decline while artificially supporting the long bond. They may also be attempting to control certain indicators of monetary inflation such as gold and oil by using position limits exclusively on long positions and 'speculation.' while exempting the naked short selling. Similarly, pumping up equities provides a flowback into financial assets that helps to support the banks.
This is obviously no solution. The Fed is in maintenance mode, trying to coddle the banks through their ongoing crisis despite the recent appearances of vitality, which are an illusion.
The Obama Administration is not engaging in the systemic and financial reform that really is their responsibility. So what we have here is a bit of a mess with no clear way out at least to us, except to weaken the dollar, and perform their particular version of 'pray.'
I believe the colloquial American characterization of Team Obama's current policy might best be described as 'throwing shit at the wall and hoping something sticks.'
Yes, there is often a lag between credit contraction and the appearance of decline in the broader money stock. This may be a direct correlation with a lagged, or a colinearity resulting from the effects of the recession in the real economy on both, again with uneven impacts over time.
There can be no denying that the Fed is promoting money supply growth in ways never seen before in the US. Whether they can be successful is open to question. We think they will keep at it until they break something.
Wall Street has a gun to the head of the public, in the form of derivatives positions that are 'weapons of mass destruction.' For now it is a standoff. But there should be little doubt that this is artificial and unsustainable, and that something has got to give.
