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The credit market is taking no prisoners. We’ve heard of many major banks and institutions running into problems they’re not able to hide from. In fact, many of the skeletons they’ve tucked away in the depths of their balance sheets are just beginning to emerge.
What’s to come of that? Well, we’ve already witnessed billions of dollars worth of write-downs. Many are convinced there’s a lot more where those came from, too. If so, the financial system certainly has got its work cut out for it.
But if you ask how the economy will fare through all this, you also have to inquire about its main engine — the U.S. consumer.
A majority of market followers may well delight in watching mega-firms go up in smoke for making bad decisions. But I doubt you’ll hear the same shouts when their neighbors undergo a similar fate.
Today, I want to show you why the credit markets on both Wall Street and Main Street spell bad news for the U.S. dollar. Let’s start by talking about how …
The Big Borrowers Are
Getting Hung Out to Dry
The current tightness in the credit markets is no secret. And no move to alleviate the iced-up market is working.
The Federal Reserve has tried every possible fix:
- They’ve slashed their Fed Funds rate by three percentage points in roughly eight months.
- They’ve implemented money auctions through their lending facilities.
- They’ve opened up their discount window to banks and primary institutions, practically accepting a half-eaten peanut butter and jelly sandwich as collateral for loans.
- And they’ve even stepped in on an individual basis to spot JPMorgan Chase on their bailout of Bear Stearns.
But what have they actually accomplished so far?
Lenders are being given access to affordable money, but they’re stopping the flow dead in its tracks. Instead of passing that money along to would-be borrowers, they’re using it to seal up the holes left from the losses they suffered when an era of irresponsible lending practices came to a grinding halt.
One of the most noticeable changes: The end of blockbuster mergers, acquisitions, and buyouts.
Why? Because the banks that have agreed to finance these epic deals are reneging on their part of the deal or running from the potential engagements all together.
In other words, these seasoned buyers can’t get their hands on enough cash to go shopping anymore.
It’s obvious the big boys are feeling the pain, and unfortunately, the average U.S. consumer may be in for the same kind of experience …
Why U.S Consumers Could Be
On the Brink of Financial Ruin
Over the last 20 years, consumption has become the biggest growth engine in the United States. Currently, consumption accounts for roughly 70% of U.S. gross domestic product.
Just take a look at my chart, and you can see that consumption currently contributes as much to GDP as it ever has …
And up until this point, the U.S. consumer has relied on debt to fuel his spending. But this reliance is starting to bite.
You can’t even go to a baseball game these days without being offered a credit card application. Credit card companies are dishing out cards as fast as they can because consumers are using them for even the smallest of purchases.
No longer are credit cards reserved to pay for a new transmission in your car or costly emergency visits to the vet. People are busting out the plastic for Big Macs, DVDs, even six-packs at the local gas station.
And it’s not going unnoticed. Have a look at my next chart.
As you can see, the amount households are having to fork over to pay their bills is rising faster than their income.
In other words, it’s getting harder and harder for consumers to even make the minimum payments towards their credit cards and car loans!
Worse yet, credit is tightening up — or even flat-out disappearing — for many consumers.
And keep in mind, through much of this expansion of credit, Mr. Consumer has had his housing wealth to fall back on when times got tough. But housing is nose-diving and consumers are being dragged out onto the ledge.
In the end …
What Goes Boom, Must Go Bust:
Bad News for the U.S. Dollar
As I see it, this is all part of a classic boom/bust credit cycle. When times are good borrowers and lenders both feel a false sense of security. Standards grow ridiculously lax, lending is fueled by greed and hubris, and borrowing grows too quickly.
Then, when times change, the security screen swings open, revealing mountains of debt. All parties become strapped for cash; credit tightens up and sucks growth from all corners of the economy.
This is precisely why the U.S. dollar could barely sustain a five-day rally. Most every day I wake up and flip on my currency charts, I expect the buck to be weaker than the day before.
While I’m keeping an open mind on the dollar’s longer-term direction, I don’t see the current weakness changing anytime soon, and I expect things to get worse before they get better.
Best wishes,
Jack
About Money and Markets
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Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Sean Brodrick, Larry Edelson, Michael Larson, Nilus Mattive, Tony Sagami, and Jack Crooks. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include John Burke, Amber Dakar, Adam Shafer, Andrea Baumwald, Kristen Adams, Maryellen Murphy, Red Morgan, Jennifer Newman-Amos, Julie Trudeau, and Dinesh Kalera.
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