The Liberty Papers

Yep… Worried of a liquidity crunch similar to that in the early 1930s, there’s been quite a bit of movement in the last week. Starting with last Friday’s $700B Treasury bailout of toxic debt, followed by yesterday’s $900B+ short-term lending backstop, markets still weren’t assuaged.

So what happened? A big drop from the Fed in short-term interest rates, to nearly the lowest levels since 2003. And this isn’t just an American move, this is worldwide:

The Federal Reserve, the European Central Bank and other central banks from Britain and Switzerland to Canada and China announced rate reductions within seconds of one another. The British government separately announced a plan to pump billions of pounds into the country’s leading banks as part of a plan that would result in considerably greater government influence over the financial sector there.

The Fed said in a statement that, because of weakening economic activity, it had cut the Federal funds target rate by half a percentage point, to 1.5 percent. It also cut its discount rate by the same amount. The vote was unanimous.

So don’t worry. We’re not going to have a depression caused by lack of liquidity. We’ll have all the problems attendant with too much liquidity instead.

Want an example? As I’ve pointed out before, the unwinding of leverage is an inherently deflationary process. Gold, in its retreat from highs during July as that credit crunch started setting in, dropped from a high very near $1000/ounce to about $840 an ounce late last week. With the news of the bailout, the short-term lending program, and the rate cuts, it has since rocketed back up over $900. I have a feeling it’s headed farther up in the very near term.