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International trade crashing…

The Baltic Dry Index is a commonly used indicator for international trade. This index has now fallen to its lowest level in 5 years. Some are attributing the problem to difficulty of international shippers to get letters of credit which guarantee payment for their shipments – a sign of deteriorating international economic conditions.

According to Mish Shedlock, this makes sense because, “demand is falling like a rock. Who in their right mind is not cutting back production in the face of the biggest consumer led recession in history?” Those banks who are lending, without concern for whether they will get their money back, “are the precisely the ones who will not get their money back.”

Thus, Washington’s erratically evolving plan to force banks to lend is worthless. Mish asserts:

The smart banks should be closed for new business. I am sure there are some exceptions in medical businesses, bankruptcy related businesses, or small niche markets in other places, but for the most part, Compelling Banks To Lend At Bazooka Point is exactly the wrong thing to do.

The US is in a recession, consumers are cutting back discretionary spending, there is rampant overcapacity in every sector but energy, and there is no reason to go on a lending spree. Furthermore, there is no reason for any qualified buyer to want to borrow. Why would any responsible party want to expand in this environment? The only people who want to borrow significant sums of money now are the very people banks should not want to lend to. Thus the best thing banks can do with that money is sit on it.

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