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Savings 'Mania' A Fed Nightmare

By: Rick Ackerman, Rick's Picks

-- Posted Wednesday, 26 September 2007 | Digg This ArticleDigg It! | Source:

Rick’s Picks

Wednesday, September 26, 2007

“Phenomenally accurate forecasts” 

The chart below shows what the Fed is up against in trying to resuscitate a U.S. economy already dangerously glutted with debt.  The dip at the right edge reflects a decline in money velocity to multiyear lows.  What it implies is that the “multiplier effect” of fresh credit is not working with nearly as much vigor as it did in recent years. When money velocity is high, and customers are – so to speak – queuing at the banks’ doors to borrow, it is possible for a single dollar of new deposits to engender dozens of new credit dollars throughout the banking system. Because banks are required to hold only a small fraction of each newly deposited dollar in reserve, the rest of it is available to be reloaned and further multiplied by bankers and their clients.

But this magical ability to create money from thin air only works to the extent there are borrowers eager to take advantage of it.  Let borrowers become the slightest bit skittish, though, and money velocity plunges in the way the chart shows. The result is that lenders find themselves pushing on a string, unable to get customers to borrow.

We read that the Fed has gone all out to stimulate the economy, but the effect will be muted at best if consumers are reluctant to binge on credit once again. Far from binging, though, and with home prices falling across the U.S., we think consumers at this point are frightened at the very idea of going deeper into hock. As a result, they can be expected to ramp up savings in the coming months at an extraordinary rate, causing money velocity to fall to levels not seen in many years. What the Fed will do then is anybody’s guess, but in theory at least, if they can’t get consumers to step up their borrowing, they may simply have to give the money away.


Information and commentary contained herein comes from sources believed to be reliable, but this cannot be guaranteed. Past performance should not be construed as an indicator of future results, so let the buyer beware. Rick's Picks does not provide investment advice to individuals, nor act as an investment advisor, nor individually advocate the purchase or sale of any security or investment. From time to time, its editor may hold positions in issues referred to in this service, and he may alter or augment them at any time. Investments recommended herein should be made only after consulting with your investment advisor, and only after reviewing the prospectus or financial statements of the company. Rick's Picks reserves the right to use e-mail endorsements and/or profit claims from its subscribers for marketing purposes. All names will be kept anonymous and only subscribers’ initials will be used unless express written permission has been granted to the contrary. All Contents © 2007, Rick Ackerman. All Rights Reserved. 

-- Posted Wednesday, 26 September 2007 | Digg This Article | Source:


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