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The credit crunch's effects over the real economy

Written by A Forex View From Afar on Wednesday, July 09, 2008

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The credit crunch is here and despite most analyst estimates, including Fed economist, the credit crunch has not been contained and it did spill over the real economy.

Excluding the credit crunch’s effects we see on a daily basis, like a weak dollar, high gas and oil prices, and a bear stock market shaking at the smallest sound of trouble ahead, the credit crunch is starting to reach were it hurts the most: in the money supply side.

A chart provided by Bloomberg, tracking the Fed’s loan officer surveys, shows that credit is harder to get and especially more expensive then ever. That is quite strange to have the highest borrowing cost in the last few years at the same time that the Fed Funds are at 2%, near their historical lows; this is the crude reality, interest rate cuts do not impress a credit decimated market it seems. Banks are crippled by the credit crunch and this is reflected in the credit cost.

credit crunch's effects over the real economy

The easing in Fed Funds was used to promote a cheap money policy (flooding the financial arteries with money) but it seems that these lower rate funds never reached the end-user, the consumer, and will not reach them in the coming period either.

Cutting the consumer’s safety net- their credit line- especially in a country like the U.S. where the saving rate is negative, does nothing more then fuel even more the economic slowdown. An large part of the economy relies on consumer spending, about 70% and that GDP component will soon have a surprise; a consumer with no money in their pockets complaining about the high prices. Add to that, gas running near $4 per barrel.

Putting this all together reveals that the slowdown will continue far into 2008 and maybe in 2009 despite all of the 2-4% GDP in Q4 headlines that we are seeing. The U.S. is not alone, the same credit crunch is happening in Europe and in the UK, so the dollar won’t get too much weaker than it is right now. My long term view remains stable at this point in time; a prolonged range on the euro, having two economies in a visible slowdown, but one of them ahead of the Credit Crunch curve, the U.S.

Bloomberg: U.S. Credit Crunch Is Worsening, Nomura Says: Chart of the Day

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