Ambrose Evans-Pritchard writes in the Telegraph: “US credit shrinks at Great Depression rate prompting fears of double-dip recession“. From the article:
Professor Tim Congdon from International Monetary Research said US bank loans have fallen at an annual pace of almost 14pc in the three months to August (from $7,147bn to $6,886bn).
“There has been nothing like this in the USA since the 1930s,” he said. “The rapid destruction of money balances is madness.”
The M3 “broad” money supply, watched as an early warning signal for the economy a year or so later, has been falling at a 5pc annual rate.
Similar concerns have been raised by David Rosenberg, chief strategist at Gluskin Sheff, who said that over the four weeks up to August 24, bank credit shrank at an “epic” 9pc annual pace, the M2 money supply shrank at 12.2pc and M1 shrank at 6.5pc.
“For the first time in the post-WW2 [Second World War] era, we have deflation in credit, wages and rents and, from our lens, this is a toxic brew,” he said.
This can’t be inflationary.
At the same time, one wonders how the dollar carry trade fits into the picture. Does the money created by the dollar carry trade (or other carry trades, for that matter) show up as bank credit or money? If not, could financial speculators drive asset price inflation, even while the real economy is starved for money and credit?
It turns out that Peter Boone and Simon Johnson discussed the risk of a bubble-blowing dollar carry trade back in June. From their article “The Bubble Next Time” in the New York Times Economix Blog:
The next global bubble is already under way. What happens when the most powerful nation in the world, with a reserve currency everyone trusts and holds, decides to push a big credit expansion — again, at the instigation of our financial sector? The creditworthy borrowers this time are not in the United States — they are in Asia, Latin America, and even Africa. They have little debt and great prospects; for a mere 1 percent per year they can borrow American dollars, spend the funds at home, and turn paper money into real assets. Every great bubble begins with a truly convincing shift in fundamentals.
… The coming American carry trade … weakens the dollar, lifts the economy out of recession through exports, and creates inflation that reduces the real value of our debts. This can last quite a while — both the Treasury and the Fed are sure that early attempts to tighten policy prevented serious recoveries in Japan in the mid-1990s and in the United States toward the end of the 1930s.
… are we laying the foundation for a truly massive international debt crisis?
All the more reason to keep an eye on this.
It’s probably too early to tell how significant this is, but observers are calling attention to a growing dollar carry trade. Since dollar interest rates are being held extremely low by the Fed, and massive fiscal deficits are fueling expectations that the dollar will continue to decline, investors are funding speculative positions with cheap dollar debt. Liam Halligan writes in the Telegraph that “Cheap dollars are sowing the seeds of the next world crisis“. From the article:
The dollar is now being used as a “carry” currency. Traders are using low Fed rates to take out cheap dollar loans, then converting the money into currencies generating higher yields.
“Carrying” credit in this way is currently the source of huge gains. No one knows the true scale, but the world has, of course, been flooded with cheap dollars.
This presents serious systemic danger. A dollar weighed down by Chinese divestment, then suppressed further by carry-trading, could easily spring back. Those who had borrowed in dollars would owe more, while their dollar-funded investments would be worth less. This “unwinding” could send financial shock around the globe.
Speculators with positions funded by the dollar carry trade could be dealt a one-two punch if U.S. interest rates rise and drive up the value of the dollar. Depending on the scale of the positions, this could confront the Fed with an extremely awkward decision: either leave interest rates low, leading to inflation, further devaluation of the dollar, and ever larger asset bubbles; or raise interest rates, thereby choking off the dollar carry trade, potentially causing asset fire-sales, corporate bankruptcies, or even currency crises.
To determine the seriousness of the problem would require reliable data on the dollar carry trade. Unfortunately, given the state of our regulatory infrastructure, it seems unlikely that we’ll know much about the dollar carry trade until it shows up in macro-economic measures, at which point it will probably be to late to do anything except short baskets of non-dollar currencies and brace for impact.
It’s a trend worth watching.