Finweek English Edition - - News -

The arith­metic is sim­ple. If V falls and M re­mains con­stant, prices (P) or real eco­nomic ac­tiv­ity (T) must fall in or­der for the equa­tion to bal­ance. That’s pre­cisely what’s hap­pen­ing. Credit ex­ten­sion by the banks has dried up, which can be seen as the same as the old prac­tice of sav­ing money un­der the mat­tress.

Prices have al­ready fallen sharply – es­pe­cially those of com­modi­ties, the re­sources nec­es­sary to keep the econ­omy go­ing. Reuters’ pop­u­lar com­mod­ity in­dex has been down for the past two months, from around 600 to cur­rently just more than 400. But re­mem­ber that it also rose in the pre­vi­ous nine months from 400 to 600. So that has so far only been a small bub­ble burst­ing.

If the ve­loc­ity of cir­cu­la­tion or the use of money and credit (V) falls a lot (such as now) that will spill over to the num­ber of trans­ac­tions (T), also called real eco­nomic growth. And there’s now no longer any doubt the world – from rich to poor – is head­ing for a fairly sharp re­ces­sion next year. The re­ces­sion has prob­a­bly al­ready started, but ev­ery­body is still too busy looking at mon­e­tary af­fairs rather than at the real econ­omy.

The gov­ern­ments of all the world’s ma­jor coun­tries are pump­ing a lot of money into their fi­nan­cial sys­tems. They’re in­creas­ing money sup­ply (M) a great deal in an at­tempt to make up for the fall in V and there­fore try to pre­vent P and T from fall­ing too much. So far, they haven’t had much suc­cess and busi­ness prospects don’t only look sub­dued, they look som­bre – very som­bre.

The cur­rent high Libor – the in­ter­est rates on the Lon­don in­ter­bank mar­ket, plus the risk mar­gins added to it – tell ex­actly how ex­pen­sive money has now be­come for or­di­nary trade and in­dus­try, and even for in­di­vid­u­als, in var­i­ous coun­tries. The Libor rates in the ta­ble ap­ply to the few banks that still lend money. Add be­tween four and eight per­cent­age points – that is, 4,32% plus 8% – to give 12,32% for the or­di­nary Amer­i­can who wants to bor­row money. The same mar­gins ap­ply to other coun­tries, such as Aus­tralia, to men­tion just one.

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