The last few weeks have been truly unprecedented. Banks literally are not lending money. They won’t even lend overnight to each other because they don’t trust the counter party. It’s a crisis of fear and trust and it’s the result of the deflation we’ve been speaking of for months. Deleveraging by nature is deflationary and that has resulted in high fear levels and low trust levels. If the government does not do something soon to shore up the banking sector the patient will almost certainly die and the US will certainly enter its worst recession since 1929.
The severity of this issue must not be downplayed. Auto dealerships can’t get loans to finance sales. Ships are being held in port because the shipping companies can’t get short-term loans to purchase fuel. The system has been ground to a halt for 2+ weeks and our politicians are fiddling around fighting over FDIC insurance and other such unimportant things while the system flails. It’s ridiculous and its embarrassing.
The last time the TED Spread was this high was just before the 1987 market crash. Now, I’m not implying that the market might crash, but we certainly have all the ingredients.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.