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Generational Dynamics Web Log for 27-Nov-07
International credit markets are nearing "virtual panic mode"

Web Log - November, 2007

International credit markets are nearing "virtual panic mode"

Markets in Europe, America and Asia have fallen sharply on Monday and Tuesday, as the evidence builds that a major new international "credit crunch" crisis is about to begin.

Banks are hoarding cash, refusing to lend money to other banks. The interest rates tell the story:

Interest rates on US Treasury bills have fallen sharply. Here's the table:
```
Maturity   Yield   Yesterday Last Week Last Month
--------   -----   --------- --------- ----------
3 Month    2.99    3.10      3.23      3.80
6 Month    3.14    3.23      3.33      3.87
2 Year     2.88    3.07      3.16      3.76
3 Year     2.81    3.01      3.06      3.77
5 Year     3.20    3.41      3.55      4.05
10 Year    3.83    4.00      4.07      4.40
30 Year    4.29    4.42      4.48      4.70
```
In the above table, the "Yield" is the interest rate. Remember that the yield on Treasury bills goes down as the price goes up, and vice versa. The above table shows that yields are falling sharply, which means that prices are increasing sharply, which (by the law of supply and demand) means that demand is increasing sharply.
If demand for Treasury bills is increasing sharply, it means that banks are purchasing them in higher than expected volume. (This is what the phrase "hoarding cash" means. If a bank has cash and wants to keep cash, it still invests it in Treasury bills, since even a 2.99% interest rate is better than 0%.)
This is a very exceptional situation. Recall that the Fed Funds Rate is now at 4.75%, which is the interest rate set by the Fed for overnight loans. The 3-month interest rate would be fairly close to 4.75% in normal times. At 2.99%, it's very unusual.

On the other hand, the interest rates on interbank loans is very high. The value of Libor (London interbank offering rate), which is normally close to the Fed Funds rate, went from 5.04% to 5.05% yesterday (euro, 3-month contract). This means that a bank wanting to borrow money from another bank in euros will have to pay a much higher interest rates. The Libor rate is even higher for loans in pounds sterling.

This is exactly what happened in July and August, when the "credit crunch" almost shut down the entire banking system.

This time, however, the Fed and other central banks are trying to stay ahead of it. The Fed is pumping $8 billion into the economy, to head of a new credit crunch. The European Central Bank (ECB) announced a similar policy last week.

However, it's not clear that the central banks can do much more than they have, and what they've done isn't very much.

According to a JPMorgan economist, the markets went into "virtual panic mode" last week. "Pressure is building for central banks to become a lot more active and vocal [this] week if they want to avert a collapse in credit markets."

Whether the central banks and the Treasury Dept. can pull of some spectacular policy change to postpone the inevitable remains to be seen.

From the point of view of Generational Dynamics, there's no question about what's going to happen. As I've been saying since 2002, the stock market is overpriced by a large factor, currently almost 250%, same as in 1929. A full-scale generational panic and crash must come before too much longer. (27-Nov-07) Permanent Link
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Generational Dynamics Web Log for 27-Nov-07 International credit markets are nearing "virtual panic mode"

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Generational Dynamics Web Log for 27-Nov-07
International credit markets are nearing "virtual panic mode"