Tuesday, September 30, 2008

Don't Be Fooled

There are those who are watching the stock market today, where the Dow was recently up more than 250 points, and getting the mistaken impression all is well with the world on the Tuesday after the latest Black Monday. Don't be fooled. Overnight dollar Libor rates more than doubled to 6.875%, as banks are hoarding cash, most probably for the end of quarter that is fast approaching, but still this is another sign that the financial crisis is spreading.

I think some people are fooled by the Great Depression, and what is going on now. They remember looking at their history books and reading about the stock market crash, and seeing pictures of bread lines, and then look around and do not see the same things today, and think well we are not really in trouble.

Yes the disaster that is facing America is not clearly visible, if you look outside today you see people at the grocery store, buying a Big Mac, and getting on with life, but this is just the surface, and there is a lot of turmoil in the economy right now. Take for example the Libor rate, something most people don't know about, but last night banks were so desperate for funds that they paid 11% for $30 billion in overnight funds from the European Central Bank (ECB), up from 3% just Monday. This premium for overnight liquidity is "out of control," and will make it hard for central banks to instill confidence in the future.

Yes a second round of dollars from the ECB and a 28-day injection of funds from the Fed Reserve helped calm some of the worst panic in the markets, but the world economy is a long way from normal.

Credit is near frozen, in part because institutions are hoarding liquidity for the end of the quarter. Problems with the credit market will make it harder for stores who are setting inventory for the upcoming holiday season. Do you see the problem we could be facing?

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