The Economy Is Running Out Of Credit
Written by A Forex View From Afar on Tuesday, November 11, 2008Markets plunged today as earnings forecasts for almost every company listed has been cut, while others are taking large strides towards possible bankruptcy (read GM).
There is no big surprise here since most of the U.S. economy runs on consumption which is sustained by credit lines. But it is important to understand how it all ties in. In the first place, the credit crunch means harder access to credit lines, which in time erodes consumption.
The most affected industries are obviously the ones in which consumers need credit lines in order to raise the necessary funds to pay for services or assets. Two of those industries are easily identifiable as the housing the auto industry, but they are by no means the only ones.
Generally speaking, companies first need to see (or anticipate) demand picking up before they will start making investments and hiring new people again. However, this is not happening now, as the unemployment rate is set to rise a few full percentage points in the coming year. As the unemployment rate grows, consumption will lessen, since the two factors usually move in a vicious cycle.
To make a long story short, no credit means sluggish consumption, which results in labor cut offs. As unemployment rises, the consumption continues to decline. What can break this cycle is cheap and easy credit, but it looks like this will not happen in the near future. So please Mr. Wall-Street-Banker, start to do what you are supposed to do, lend money
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