January 13, 2010

A creditless recovery? Raising interest rates is a must!!

By Timothy Stull (http://www.fresh-start.co)

Many economists have talked about a jobless recovery….I personally don’t see that happening. Companies have trimmed all the fat, fired everyone & can’t cut costs any more. It will be top line growth for the next 2 years…companies need to figure out how to increase sales….if you work in sales, you will soon have your pick of top jobs…if you work in support, you will need to wait a bit longer. However, there is another very serious issue that will hinder an aggressive recovery….lack of credit. In Latin, the word “credit” means “to believe”….esentially if banks don’t believe they will be paid ~ there is no credit. Right now there is an enormous of amount of debt is collections ~ enough to take 10 to 15 to pay back ~ if we are in a cash based economy ~ like we are now.  Lag in wage increases will mean even a slower pay back on all of the debt. Unlike the recovery from the last 2001 recession, there is no immediate credit to refinance the debt. This presents a huge problem ~ banks esentially turn themselves into giant collection agencies & hoard all the current available cash. They have been able to reach through the Fed discount window borrow all $ at 0% and park the money in treasuries. Esentially, the only way to break this cycle is to raise interst rates significantly….banks will be forced to absorb risk & seek high leveraged profits.  All the problems we are currently facing in the credit markets are a direct result of complex derivatives from other economic issues.  Only changing what we have control over will break this nasty creditless cycle.

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