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Archive for October, 2008

Do You Like a Good Scary Story? Read This One Anyway…

I am not, by any stretch, a conspiracy person.  I think the probability of a conspiracy succeeding is inversely tied to the number of people involved.  That makes me especially dubious of government conspiracies.  The bottom line for me is this: people are smart, groups are dumb.  If you want to understand something just follow the money.

But I am getting a little scared.

You may have heard about the various bailouts and financial manipulations the government is engaged in lately.  It has been in the news.  There was a $750 billion bailout, followed by another $500+ billion bailout.  A number of investment banking firms were bailed out (and, curiously, some were not) while AIG continues to be handed money.  Banks are being force fed money and there are more stimulus packages on the way.  All done, we are told, to save us from a world economic collapse.

But is it true?  This week the Fed lowered the fed funds rate… again.  Lowering the rate didn’t do a damn thing a month ago, so why are they trying again?  Here’s a better question: Why are they lowering the rate at all?  Lowering the fed funds rate effectively lowers the “cost” of money.  When do you lower the cost of something?  When their is a demand problem.  From everything you have read, do we have a demand problem or a supply problem?  We are being told that everyone needs money and no one will lend it.  So why in the world would you lower the price of money?

Let’s leave that alone for a minute and move on to the credit crunch.  As I mentioned previously, the world economic collapse is precipitously close and liquidity is the problem.  “No one is lending money.”  “Commercial paper has dried up.”  “Our financial system is grinding to a halt because cash is being hoarded.”  I have not taken the time to actually go out and find these headlines and link to them.  I trust this is now such common wisdom you will take it on face value.  But take a look at the following graph:

Interbank Loans

That represents the loans, in billions, flowing between banks.  It is near record levels!  Money is not flowing between banks?  I don’t get it.  Alright, let’s leave that alone for a minute too.

What about commercial paper?  What about the actual short term debt that allows companies to function.  This is the greatest problem we have, right?  We are being told that if the government can not get this money flowing again quickly there will be a devastating effect on the economy: companies closing down, unemployment going up, recession turned in to depression and so on.  Sounds dire doesn’t it?  But take a look at this graph:

Commercial and Industrial Loans

Yes that’s right.  Here again we are looking at record levels!

Take a closer look at the source for these graphs… the Federal Reserve.  The same Federal Reserve that is telling us the sky is falling is publishing information (albeit not with any fanfare and not easily digestible) that contradicts the very statements they are making to justify their actions.

So lets summarize: we have the Fed lowering the cost of something that is already in high demand.  We have the government printing and pouring billions of dollars into some businesses that are already lending each other money at record rates… and parsing others out to corporations who have secured “most favored” status.  We have the Treasury forcing billions into banks that are already lending money to each other at record levels, whether they want it or not… and taking ownership shares in those banks.

Is it just me?  Or is this an old fashioned power grab?  Could there really be a conspiracy to move us to the “one world economy” non-sense that is slowly bringing European nations to their knees?  I admit, I am one of those weird people that follows economics and the markets.  I “get” this stuff.  But I don’t mind telling you that what I am seeing and what I am hearing does not make sense.  I am no longer confused…  I am scared.  Are you?  Are you paying attention?

(These graphs were first brought to my attention on the must-read Coyote Blog.)

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