Five years after U.S. investment bank Lehman Brothers collapsed, triggering a global financial crisis and shattering confidence worldwide, families in major countries around the world are still hunkered down, too spooked and distrustful to take chances with their money.
An Associated Press analysis of households in the 10 biggest economies shows that families continue to spend cautiously and have pulled hundreds of billions of dollars out of stocks, cut borrowing for the first time in decades and poured money into savings and bonds that offer puny interest payments, often too low to keep up with inflation.
"It doesn't take very much to destroy confidence, but it takes an awful lot to build it back," says Ian Bright, senior economist at ING, a global bank based in Amsterdam. "The attitude toward risk is permanently reset."
A flight to safety on such a global scale is unprecedented since the end of World War II.
The implications are huge: Shunning debt and spending less can be good for one family's finances. When hundreds of millions do it together, it can starve the global economy.
Some of the retrenchment is not surprising: High unemployment in many countries means fewer people with paychecks to spend. But even people with good jobs and little fear of losing them remain cautious
RETREAT FROM STOCKS: A desire for safety drove people to dump stocks, even as prices rocketed from crisis lows in early 2009. Investors in the top 10 countries pulled $1.1 trillion from stock mutual funds in the five years after the crisis, or 10 percent of their holdings at the start of that period, according to Lipper Inc., which tracks funds.
They put more even money into bond mutual funds - $1.3 trillion - even as interest payments on bonds plunged to record lows.
- SHUNNING DEBT: In the five years before the crisis, household debt in the 10 countries jumped 34 percent, according to Credit Suisse. Then the financial crisis hit, and people slammed the brakes on borrowing. Debt per adult in the 10 countries fell 1 percent in the 4½ years after 2007. Economists say debt hasn't fallen in sync like that since the end of World War II.
People chose to shed debt even as lenders slashed rates on loans to record lows. In normal times, that would have triggered an avalanche of borrowing.
- HOARDING CASH: Looking for safety for their money, households in the six biggest developed economies added $3.3 trillion, or 15 percent, to their cash holdings in the five years after the crisis, slightly more than they did in the five years before, according to the Organization for Economic Cooperation and Development.
The growth of cash is remarkable because millions more were unemployed, wages grew slowly and people diverted billions to pay down their debts.
- SPENDING SLUMP: To cut debt and save more, people have reined in their spending. Adjusting for inflation, global consumer spending rose 1.6 percent a year during the five years after the crisis, according to PricewaterhouseCoopers, an accounting and consulting firm. That was about half the growth rate before the crisis and only slightly more than the annual growth in population during those years.
2--Bond Market Jitters, -"A technical default by the US government may result in these funds becoming frozen for some period of time", sober look
Treasury bill investors are also increasingly concerned about not being able to get their money back on time (see post) - which is causing the one-month bill rate to rise as it did in 2011..
There is anecdotal evidence that a few investors are taking funds out of treasury money market accounts. Even though nobody is doubting that investors in such funds will ultimately get their money back, the concern is legitimate. A technical default by the US government may result in these funds becoming frozen for some period of time. There will simply be no liquidity to fund large redemption requests. What these investors fail to realize however is that in such a scenario, treasury money market funds will be the least of their problems.
3---US loan-to-deposit ratio the lowest in 30 years and falling, sober look
(wasn't QE going to get the banks lending again?)
The chart below shows US total loan balances relative to bank deposits over the past couple of years. The total loan growth rate continues to deteriorate while deposits grow.
In fact the ratio of these two measures, the so-called loan-to-deposit ratio is now at the lowest level in some 30 years
|Note that the jump in early 2010 is not real - it's an accounting adjustment|
This creates material headwinds for economic growth. Unfortunately there is no evidence that the current monetary policy will reverse the trend of weakening loan growth. And as we all know, the US fiscal policy (if one could call it that) is not going to help much either...
4---Are the current market conditions favorable to house buyers?, oc housing
Only 5 Percent Expect Home Prices to “Rise a Lot,” Down from 44 Percent in First Quarter
For the latest Redfin Real-Time Agent Survey, we surveyed 522 Redfin agents across 22 major metro areas in the U.S. This quarter, our agents feel that the housing market has softened considerably since the spring and that home prices will have more modest gains in the coming months.
Redfin real estate agents:
- Indicate that sellers are losing market control: 72% of agents surveyed described now as “a good time to sell,” down from 86% in the second quarter. Meanwhile, 55% said it is “a good time to buy,” up from 46% in the first quarter.
- See challenges for both buyers and sellers: Agents believe that limited inventory (87%) and bidding wars (79%) remain the biggest challenges for buyers.
Q. Why is there such concern about the interest payments on Treasury bonds?
A. At the most basic level, if the government shows any hesitation in making scheduled interest payments on its outstanding bonds, investors will demand higher interest payments when the government borrows money in the future. That would add significantly to the federal budget.
Treasury bonds are also used as a benchmark against which most other financial assets are priced. If the government was forced to pay higher interest rates, the borrowing costs for businesses and homeowners would rise as well. This would lead to less borrowing, which would put a brake on economic growth.
Banks, meanwhile, already have large holdings of Treasury bonds. If the value of those bonds suddenly dropped, banks would have less money on hand and would be less likely to lend to one another, potentially causing a freeze in the credit markets like the one in 2008.
More broadly, because investors have long believed that the United States government would always be able to pay its bills, Treasury bonds have become the bedrock of the global financial system and the dollar has become the most widely used currency in the world. If investors come to doubt the ability of the United States to pay its debt, the dollar could lose its special status and the basic plumbing of the financial system could become jammed.
As the Treasury Department put it in a report released Thursday, “a default would be unprecedented and has the potential to be catastrophic
7---Afghan civilians reportedly killed in NATO airstrike, al jazeera
At least five civilians, including three children, targeted while hunting for birds, local officials say
8---Obama's historic "pivot to Asia"; Capitalist crisis intensifies military build up and threat of US aggression, wsws
* The stationing of a second X-band early warning radar in Japan near Kyoto, as part of joint anti-ballistic missile systems. While nominally directed against North Korea’s primitive nuclear capabilities, these weapons are part of the Pentagon’s preparations for nuclear war against China and Russia.