If Robert Frost were still around today, perhaps as an economist or a banker, he would have probably been caught saying, “Money, money, everywhere, but no one wants to lend.” Yes, this has been the theme this year ever since the Fed began cutting rates and using alternative methods to thaw out the credit markets. America is literally printing money and handing it out, yet no one is happy with what they have and are refusing to lend. Banks are unwilling to issue credit and investors are scared to buy corporate paper, leaving only the government to step in to facilitate the smooth operations of both the American and global financial system.
The credit crunch has left banks stingy and unwilling to lend, unsure whether to offer credit to populations not only across America but also across the world. Central banks across the world have simultaneously worked to pump billions of dollars into the world financial system to heat up the cold credit conditions. Unfortunately, the numerous days without sleep and the hours of painstaking negotiations have not yielded any immediate results. Many feel the problem is that banks are being told two different things: lend on one side but build up tier 1 reserves on the other. During this time period, oil plummeted from highs of $147/barrel to below $100, leaving Russia on the verge of defaulting on the ruble, Venezuela struggling to operate with low oil, and many of the OPEC nations adjusting to a shortage of oil income. Gold also saw a massive rundown from highs around $1000 to present day prices of $868. This was after gold had retreated to the low $700 levels. Combine this sudden lack of cash inflows from oil with large scale government spending to prop up key sectors in the economy, and you have yourself a bunch of bad news.
The type of government spending witnessed today may help solve our problems in the short term, however in the long run the excess money supply will only stoke inflation. We are currently in a deflationary environment as commodity prices have pulled back, allowing the Federal Reserve and the ECB (European Central Bank) to slash rates to help offer liquidity to their respective regions. Now that we have established that money supply is ridiculously high to fix our credit problems, what can investors seek to battle this? How about gold and oil? Yes, I said gold and oil. Since the beginning of the year through December 22nd, gold is up 2.59%, unlike the broad commodity index, the iPath DJ AIG Commodities Index (DJP: 36.58, 0.00 (0.00%)), that is down almost 42% during the same time period.
