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Governments world over have issued guarantees and commitments to assure the world that they would not let any major counterparty to fail. This has created the desired impact in short term credit and lending markets, as well as the longer term corporate bond markets. It has also produced the effect that I anticipated, moral hazard (ex. the continued extreme risk taking at Goldman Sachs despite being backstopped by the US government - see The Goldman conspiracy theory is now no longer a theory) as well as the carry of corporate risk by central banks and governments in lieu of private investors.

 

As of July 29, 2009, total outstanding (seasonally adjusted) short term commercial paper (the primary method of both financial and non-Marginal companies with marginal business models are going to crackshort term funding) was down from US$2.2 trillion in August 2007 to US$1.06 trillion. With the collapse of the shadow banking system (the network of "non-bank" lending facilities), asset backed commercial paper (ABCP) has stabilized  at US$437 billion--a third of its peak volume in 2007. The Fed's commercial paper lending facility declined to US$124 billion as of June 24, 2009.

Reuters:

 The steady contraction of the key U.S. commercial paper market for short-term corporate borrowing suggests the much heralded economic recovery may still be a distant dream.

The IOUs that companies write for periods of three months or less, known as commercial paper, enable funds to be raised for running businesses on a day to day basis to pay workers and stock shelves with fresh goods.

The decline in borrowing by corporations in this market in the past year reflects weak demand in the economy as a whole, meaning there is little need for companies to borrow to build up stocks or take on extra staff.

The labor market is still languishing, even if the pace of job losses is slowing slightly. Consumer confidence surveys are recovering from the depths of despair seen last year, but U.S. consumers have yet to put their money where their mouth is.

Companies usually borrow in the commercial paper market to rebuild inventories in anticipation of rising sales, but sales have fallen even faster.

"That shows there is a long way to go," said Robert C. King an economist at the Jerome Levy Forecasting Center in Mount Kisco, New York. "Although eventually inventories will get down to some point where they will have to be rebuilt, we are not there yet."

"That could be some explanation for the commercial paper market (trends) because it is used to finance inventories," King said.

The latest weekly Federal Reserve data released on Thursday showed the commercial paper market's dramatic contraction which began when the global credit crunch erupted in mid-2007 has continued unabated.

Total U.S. commercial paper outstanding has shrunk to $1.23 trillion, the lowest level in more than eight years and close to half its $2.2 trillion peak nearly two years ago.

The contraction in the commercial paper market suggests inventories may not have bottomed.

U.S. business inventories have been declining since the autumn of 2008 and fell again in the latest data for April this year.

 The Business Insider on Krugman vs. Ferguson:

We've broken the credit markets. Where once we could learn a lot about investor sentiment and expectations from the credit markets-including the markets for treasuries-the signaling function now is by and large useless. That's because there are now way too many debt instruments that are the functional equivalent of treasuries. We have a lot of bank debt floating around that is backed by the FDIC explicitly, for example. And even the new debt that banks are issuing without explicit government guarantees is backed by a semi-explicit guarantee voiced by politicians who have promised "no more Lehmans." In other words, every large, complex systemically important financial institution is a government sponsored entity these days. Why buy treasuries when you get a better return from bank debt that is just as safe? In short, the short term fluctuations in treasury yields now result from way more factors than they once did, and the signals about market expectations they through off are far less transparent.

Pimco's Mohamed El Erian, Beware the "business as usual" mindset shares similar concerns.

See also: Marginal companies with marginal business models are going to crack and Credit shrinkage will continue throughout the recession and into the recovery.