What happens when Banks don't and won't lend and borrowers don't either want to borrow or cant. Borrowers have totally changed the way they mange their finances. This is the central seismic systematic sea change that has occurred since the end of the credit cycle. Its this change in consumer mechanism that will make it very hard for global central bankers to unwind all of the Quantitative Easing that has gone on to prop up failed zombie financial institutions. How are they going to even raise rates in this environment less unwind money from the system.
Money supply growth has exploded, but the velocity of money is at a standstill. Money is going no where except to cover up bad trading bets and even worse loan activity. But this money needs to be paid back and its ordinary citizens on the hook.
Economies around the world are still contracting, and the there is still need for more quantitative easing I am thinking because the ones who are in charge of fixing the problem have only dumped more petrol on the problem.
Printing machines here and in Britain, which happen to be the two biggest financial capitals of the world are working overtime. Britain has been especially aggressive in quantitative easing, creating money equal to about 12.5% of GDP thus far, because Britain was extremely over-leveraged, its banks and borrowers are in the same boat. The same here in the states where the numbers are more numbing.
In the most recent BOE Minutes, these were two interesting facts:
"The rate of money growth could also have been weak as a result of the restricted supply of bank lending," the Bank said in minutes of its last meeting".
"The spread of new lending rates over Bank Rate and Libor remained elevated. It was also likely that the demand for bank lending had declined as the recession had taken hold."
The banks even though they are trying to rebuild their balance sheets are not doing much lending, and the lending they are doing is basically with central banks.
Take a look at the Federal Reserve's July Senior Loan Officer Survey below.
www.federalreserve.gov/boarddocs/snloansurvey/
This basically shows that banks have tightened lending standards considerably not because they want to, the demand for consumer loans is not there.
Demand for commercial loans is falling, as it is for commercial real estate loans, mortgage loans and real estate loans.
One reason cited by banks for a falloff in demand for business lending was less need to finance inventory. This makes sense, as inventories were being run down by companies frightened by the very rapid fall in the economy. Whats more frightening is that in this report was an overall softness in direct investment. All the evidence is there right in front of central banks eyes, but they fail to take any reasonable action. Its all politics.
The consumer is in a prolonged state of deleveraging. The Banks are trying to deleverage, but cant for many reasons because they really have no clue to do so. The government has become agnostic to deleveraging. You have both banks, non banks, shadow banks, and governments around the world in a vicious cycle of ever more credit issuance. Its really governments fault here of not knowing the ultimate customer. The customer is the consumer, and the consumer has tapped out.
Falling demand for any type of financing is the main issue that is hampering any type of real recovery. Falling demand brings in deflationary pressures that eventually get worked out through the economy as equilibrium is met.
This is exactly the type of deflationary deleveraging that quantitative easing is supposed to fight, but so far its done nothing but to prop up zombie bankrupt insolvent financial institutions.
We have already seen some upcoming political pressures stemming from Britain, as the head of the BOE requested more QE, but was shot down by his peers. It looks like European policy makers are getting in the game and seriously taking aim.
The sum of all this is business as usual here in the states. Rates will stay low for some time as more money is printed to keep banks afloat.
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