Thursday, May 31, 2007

[Latest Global Dollar Liquidity Measure: +14.16% annual growth rate; latest Endogenous Liquidity Index: +13.14%]

To understand how credit markets work and how interest rates are set, the first thing to do is to dump academic textbooks. Instead, read material written by people actively involved in markets. My preferred article is already 19 years old: "Determinants of interest rates", by Horace W. Brock (Euromoney, 1988). Absolutely fantastic in its realism and simplicity. When contemplating today's credit markets from a global liquidity perspective, one tends to focus on the supply of loanable resources. But what about the demand side of the equation?

To the best of my knowledge, there are four major arguments to explain the tepid pace of credit demand worldwide. [1] Long-term inflation expectations under control; [2] Improving state of public finances worldwide; [3] Poor governance in developing countries; [4] Wikinomics and the iPod economy. Looking for signs of change in this blissful state of affairs, Bank Credit Analyst raises the possibility of a global capex boom that "would place upward pressure on real borrowing rates". Interesting stuff.

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