Booms, Busts, and Recoveries Message Board

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Strategies & Market Trends : Booms, Busts, and Recoveries

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To: Ilaine who wrote (10607)	10/7/2001 3:16:59 PM
From: Oblomov	Read Replies (3) of 74559

>> Non-financial commercial paper is discounted promises to pay backed by real orders. OK, if that is the case, then it could be an early indicator of improving business conditions. But, my understanding (perhaps wrong) was that CP is unlike a letter of credit in that it is unsecured credit, the primary function of which is to provide liquidity for companies with large cash turnover. In addition, the secondary market in CP provides additional liquidity to the money markets. Aside: I viewed declining CP outstanding as an indicator of liquidity problems in the money markets. Several weeks ago in Barron's, it was explained that much of the decline in CP outstanding was due to the lowering of CP credit ratings for the Big Three auto manufacturers. It thereby had become more economic for them to issue bonds rather than more CP. Perhaps this trend is stabilizing or companies with better credit ratings are causing this increase. Still, I don't think that a little debt deflation would be a bad thing, particularly in the consumer credit market. Rebuilding a bad balance sheet is usually painful, unfortunately. Now multiply this pain by 20 or 30 million households with high debt loads...

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