The US economy that is running largely on a credit cycle needs to accelerate credit expansion in order to maintain stability and move forward. Please remember, I’m referring to the real economy here, not the world of financial markets (specifically equities). For that to happen, the credit production engine needs to be restarted and accelerated. And that means collateral values need to be trusted, or at least obtainable in a market quote, not that “models” have shown themselves once again to be a bit lacking. After all, just how many banks do you believe are willing to lend forward against collateral values produced by a mathematical model at a hedge fund? Just how many university endowments or pension funds will be willing to commit capital to investments whose return, or price, is derived from a model each quarter, as opposed to a quote on the Bloomberg screen? You get the point. The KEY issue for the credit markets – price discovery – has not been yet addressed. I’ll leave you with one last table of numbers that really says it all for an economy running on a credit cycle. It’s either ever faster….or else. Capiche?
| Credit Market Debt And GDP Growth By Decade | |||
| Decade | Total Credit Market Debt Growth ($billions) | GDP Growth ($billions) | Dollars of Credit Market Debt Growth For Each Dollar Of GDP Growth |
|
| |||
| 1960's | $ 754.45 | $ 491.40 | $1.54 |
| 1970's | 2,791.29 | 1,655.90 | 1.69 |
| 1980's | 8,546.03 | 2,923.80 | 2.92 |
| 1990's | 12,819.27 | 3,729.20 | 3.44 |
| 2000's To Date | 20,923.93 | 4,255.40 | 4.92 |
Brian Pretti
