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Tags: credit | debt | fed | borrow money

Credit Where Credit Is Due: In Debt We Trust

Credit Where Credit Is Due: In Debt We Trust
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Dr. Edward Yardeni By Tuesday, 19 July 2016 03:03 PM Current | Bio | Archive

The official motto of the United States, “In God We Trust,” was adopted in 1956 to replace the unofficial motto, “E Pluribus Unum” (or “Out of Many, One”), which had been used since the Great Seal of the United States was created and adopted in 1782. “In God We Trust” first appeared on US coins in 1864 and has appeared on paper currency since 1957.
 
Fed officials have been trusting all of us to borrow more and spend more so that they can proceed with normalizing monetary policy by continuing hiking the federal funds rate. We haven’t let them down, yet they continue to find excuses for postponing further rate hikes, both at home and more recently overseas.

The problem may be that real GDP has been growing around 2% y/y since mid-2010, which many economists, including those at the Fed, believe is too slow and not self-sustaining, especially if interest rates are raised too rapidly.

The credit numbers suggest that the US economy has responded better to easy money than overseas economies:
 
(1) Bank credit soaring. Short-term business borrowing has increased by $1.0 trillion since its previous cyclical trough during June 2010. Some of this credit financed inventories, which increased about half as much over this period.
 
(2) Bond issuance strong. Over the past 12 months through May, gross bond issuance by nonfinancial corporations totaled $784 billion. That’s down from the record high of $954 billion during October 2015, but it is bound to remain strong now that bond yields have declined to new lows. Roughly half of the funds raised have been used to refinance existing or maturing bonds at considerably lower yields, which boosts profits. Some of the funds, along with ample cash flow, are being used to buy back equities, which also boosts earnings per share.
 
(3) Mortgages easier to get. The recent drop in mortgage rates is stimulating another round of mortgage refinancing as well as boosting new and existing home sales. The mortgage refinancing index compiled by the Mortgage Bankers Association has nearly tripled since the start of the year, while the new purchase index is up 54% since the start of 2015 through early July of this year. (See our Mortgage Applications.)
 
Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research. To read more of his blogs, CLICK HERE NOW.

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EdwardYardeni
The official motto of the United States, "In God We Trust," was adopted in 1956 to replace the unofficial motto, "E Pluribus Unum" (or "Out of Many, One"), which had been used since the Great Seal of the United States was created and adopted in 1782.
credit, debt, fed, borrow money
397
2016-03-19
Tuesday, 19 July 2016 03:03 PM
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