TED Spread

One key gauge of credit market "stickiness" is the so-called TED spread - the difference between interest rates on 3 month London interbank loans and 3 month US Treasury bills. James Hamilton has an exceptionally lucid explanation (Understanding the TED spread) of the financial significance of the TED spread and its relationship to underlying financial market dynamics. Highly recommended for the econo-geek or anyone else who just likes to know how the world works.

You really need to read the whole article, but he finishes by relating the current crisis to future developments, and the increasingly scary world out there:

. . . Here's the next shoe that could drop: the financial dislocations could lead to a perception by global investors that the U.S. is no longer a safe place to be putting their capital, which could add a currency crisis component to the present financial turmoil. Greg Mankiw notes this report:

China's government moved to calm financial markets Thursday and denied a report that it had ordered mainland banks to curb lending to U.S. banks, a day after rumors of financial stability led to a run on a Hong Kong institution.

Calm again for the time being, I guess. But if a cut in the fed funds rate leads to rapid dollar depreciation and commodity inflation, it could be pulling the trigger on something even scarier than what we've seen so far.

Not an attractive set of options on the menu for the FOMC.

The thought that Captain Hothead and the Prom Queen Ditz could be running the nation when these s***storms are hitting scares the hell out of me.

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