Come to think of it, if the Banks don't trust each other with lending funds, why should you? Surely a risk premium on your savings, giving you a higher yield, should be in place? Maybe its time to check out your Bank, do a bit of research and confirm its health and what protection your cash has?
So if Banks are having to pay higher yields to each other and will be forced to pay higher rates to savers, whats going to happen to the rates charged by Banks on borrowings, you know, mortgages, loans and credit cards? How much higher will rates have to go to keep the system running? Maybe its time for a look at real yield curves, rather than the yield curve produced by US Treasuries.
This leads us back to a rather large problem. In fact its huge problem and its not being talked about out there in Medialand. What happens to a tapped out consumer, loaded with debt, trying to roll a teaser/innovative (thanks AliG) mortgage if rates are going up? Its not going to happen, its a train crash. Borrowers are already operating under tighter credit controls so the ability to re-fi is curtailed for many. Add in much higher rates and the situation becomes impossible. Banks are going to suffer from a curtailed income stream, as debt default rises, just as the teaser rates for the Banks? borrowings come to an end and reset much higher. Can you see the irony?
Banks are no better off than over stretched sub-prime mortgage borrowers. They need an income stream from lending to ensure they can pay the liabilities they owe to savers, savers that will demand higher yields. Its unsustainable and its going to stop, soon.
An enormous amount of money (liquidity) is just going to disappear as the debts are defaulted. Credit will become a luxury, given only to those who can truly afford it (and probably don't need it). When credit is withdrawn from a fiat money based economy then the dynamics of money change. The withdrawal of credit based liquidity means that a fiat based currency has to realign to the fundamentals. That means deflation.
You can see the end game clearly now.
The Banks will have no option but to drop saving rates, they simply will not be able to afford to pay higher yields. Savers will move cash into assets that provide a higher return, shunning deposit accounts. Banks are hit with a double blow, as a lack of income leaves them either unable to service their own debt and default or forces them into repaying the debt using capital holdings or returns from assets sold in the markets. Either way, credit for business and consumers becomes impossible to provide. A massive contraction of activity is a given.
Its been noticeable of late to see the recession word crop up, even in the mainstream media. I think they are wrong. I think the future contains a scenario much worse than a recession.
So, my forewarned reader, will you be leaving your money in a "sub-prime" bank?
Mick P (Collection Agency)
AboutCollection Agency
An Occasional Letter From The Collection Agency In association with Live Charts UK.
For some years now I have written an ongoing letter, using macro-economics, to try and peer into the economic future 6 to 18 months ahead. The letter was posted on a financial bulletin board to allow others discuss its topic.The letter contains no recommendations to buy or sell, indeed I leave that to all the other letters out there and to the readers own judgement. The letter is designed to make us all think about what may be coming, what macro trends are occurring and how that will affect future trends and how those trends will filter down to everyday life and help spot weak or strong areas to focus on for trading or investing.
To contact Michael or discuss the letters topic E Mail mickp@livecharts.co.uk.
