Real Economics~Does this mean the end of M3? BANKS NOT LOANING!!!

Greetings!

From David’s Desk

Gold is now consolidating its back-to-back new record highs that it made in May and June. Gold is building a strong base and the short, intermediate and long-term indicators are very bullish. Gold is setting its sights on $1,350. However, it won’t be a straight line up. There will be zigs and zags higher. Important support lies at $1,212 followed by $1,149 but I think the odds of testing these lows are remote.

Let’s get a loan

One of the topics that I’ve covered is that M-3 is collapsing because the banks are parking their funds in Treasuries instead of making loans. But there is a difference between making an “abstract” statement like that, and actually going out and applying for a loan.

Since I started Miles Franklin, 20 years ago, I have never taken out a business loan and other than the mortgage on our house, haven’t taken out a personal loan either. Recently, I needed some extra cash and considered selling some of my mining shares or precious metals to raise the funds. I decided that it was a foolish way to raise the cash, since I expect the price of these assets to rise dramatically in the next 12 months, so I paid my banker a visit. I am a highly qualified applicant. My company runs around $100 million a year through the bank, and I have been a customer there, with both personal and business accounts, for the past six years. My credit is unblemished. My net worth and salary are well beyond what is necessary for the size of the loan, plus, I have lots of collateral to cover the loan.

I sat down with the President of the bank, who I know personally. He worked directly with me six years ago when I took out a $450,000 pre-construction loan on the house Susan and I were building. We had a friendly conversation, I gave him all of the paper work that I had filled out in advance, including my last two years tax returns, both personal and corporate, and I even offered to give him, on the spot, his choice of stock certificates or physical gold to fully cover the amount of the loan I was asking for.

Naive me, I actually expected to walk out of the bank with the loan. Not so – he told me it would take two days to go over the paperwork and they would get back to me. That was last Monday. On Friday, I still had not heard back from the bank so I called and found out that the request had to go through their Loan Committee, which caused the delay, and that they would give me the loan and would accept my collateral as follows: twice the value of the loan if it was in gold coins; if I used my stock certificates of gold and silver mining companies they would value them at 33 cents on the dollar.

I am one of the banks top rated customers, yet I felt like I had to beg for a rather small loan and then, had to put up solid collateral worth two to three times the amount of money that I was asking for. It seems the only way to get a loan these days is to prove that you don’t need it, and I really don’t – except it would be foolish to sell gold for $1,300 today knowing full well it will be worth $2,000 a year from now.

Friday night, we had dinner with some friends. I told my tale to one of them and he said he had experienced the same thing at his bank recently too. He is worth tens of millions of dollars and has been doing business with his bank for decades. He is always borrowing money from his bank to purchase expensive “collectables,” and always repays his loans. He was as surprised as I was at the difficulty he experienced in raising money.

Now I understand why bank lending has pretty much ground to a halt, at least for the consumer and the small businessman. I see why M-3 is collapsing. The broad money supply (M-3) expands or contracts based on the willingness of banks to make loans. That’s what fractional reserve banking is all about. A shrinking M-3 leads to a shrinking economy! If this does not reverse itself, Great Depression 2, here we come. If the Mogambo Guru were writing about this he would no doubt say “we’re freaking doomed!”

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