First with Financial Comment from Arabia

US bank credit contracts by record 16%, China dumps US debt

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US bank lending contracted by an annualized 16 per cent in January, the biggest contraction of credit in history, with $100 billion in credit wiped out.

The Daily Telegraph reports that since the credit crisis $740 billion in bank loans have evaporated or 10 per cent of the total, another historic record. Meanwhile, it has emerged that China is pulling back on US treasury holdings which dropped by $34.2 billion in December to $755.4 billion.

Borrowing falls

ArabianMoney can only point out that by cracking down on subprime lending and eliminating bad debt lending practices then a fall in bank credit was inevitable. You cannot have your cake and eat it. Besides in a recession people are bound to borrow less.

However, the scale of the contraction is substantial, and it seems to confirm what we have been arguing is inevitable: namely a double-dip recession. You simply do not pull out of the enormous hole into which the US has stumbled with a single leap.

The Wall Street refrain of economic data confirming a recovery is wearing thin and highly unreliable. What about the troubled US housing market with millions of repossessions on the horizon with compulsory mortgage resets?

What about the mounting lines of long-term unemployed who spend little? What about the US consumer and why get so excited about the 0.5 per cent bounce in spending last month?

Wall Street reaction

Our friends at The Daily Reckoning are bemused by the stock market’s strength. Let us offer our opinion: this is just the calm before the storm; all it takes is one piece of really bad news to bring the whole house of cards down.

There are plenty of potential candidates. Why can we be so sure? Well, just where is the positive news that might sustain the long Wall Street rally? A lack of negative news might just do the trick for a short while, but long-term?

Usually when the bears are beginning to get an attack of self-doubt then something comes along to renew their gloom and doom. Actually it will already be there. It was credit contraction that put the ‘great’ into the Great Depression – and falling bank credit and falling bond sales to China are already here.


Written by Peter Cooper

February 18, 2010 at 8:56 am

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