In this morning’s Breakfast With Dave newsletter, Gluskin Sheff Chief economist David Rosenberg talks about how in today’s economy, growth and the credit market remains stagnant. As a result, many businesses are finding their operations constrained by cash flow concerns.
Gluskin Sheff: “Look at the charts below and you will see how little effect the policy stimulus is exerting leaving the government continuing with demand-growth policies, such as extended and expanded housing tax credits, and the Fed, Treasury and the FHA doing all it can to keep the credit taps open … and for marginal borrowers at that. So the charts below show what, exactly? That the transmission mechanism from monetary policy to the financial system and the broad economy is still broken fully 2½ years after the first Fed rate cut. Cash on bank balance sheets as a share of total assets is at a three-decade high.
Bank lending to households and businesses has contracted more than 7% from a year ago, an unheard-of rate of decline unless you want to go back to Japan in the 90s or the U.S.A. in the 30s.
According to Rosenberg, with money velocity remaining at very depressed levels, deflation will be the principal risk in 2010.