Friday, December 21, 2007

One Little Indicator

If economics makes you immediately look away, don't be afraid of this post. It's a simple explanation of what it means when credit markets "seize".

If you pay attention to economic news, even on a cursory basis, you've likely heard there's a lot of "fear" or "lack of confidence" in the credit markets. What exactly does this mean?

This chart (click to enlarge) looks daunting, but it's really quite simple. It's a chart that measures the difference between the cost of money lent to high quality companies vs. riskier companies. As you can see, that "spread" has grown and is getting worse again. The spreads increase when economics look shaky.

This means that financial markets are getting very afraid that companies will fail, that defaults will grow and are therefore not lending. Think of it another way. This chart is a measure of the fear and lack of confidence by those in-the-know about how well business is doing.

Why does it matter to us? Because if these folks are afraid, then you should be afraid that there are really serious problems in the economy which could affect your job, your investments or your personal finances. This is why the Fed, Congress and apparently Bush are looking at ways to restore confidence. It's also why no one should ever buy Alan Greenspan's book.

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