Actually, I have understood that it is the issuing banks that are acting cautiously, not the sellers’ banks. That at any rate is the point made by the Times Online article quoted in Yves post of Nov. 2nd – (http://www.nakedcapitalism.com/2008/11/trade-letter-of-credit-woes-finally-go.html).

A couple of quotes:

“buyers of goods are being denied access to letters of credit”

HSBC: “the cost of guaranteeing a letter of credit, a routine instrument used for payment of goods, has doubled”

Maersk Broker: “Banks’ refusal to offer letters of credit has resulted in very few fresh cargoes reaching the market”.

Have I really misunderstood this?

Hyperdeflation would probably be a good thing, because it would wipe the system clean of a lot of rubbish that’s been built up in the past 80 years, and force a rethinking of everything in our economy. Which is exactly why we won’t get hyperdeflation. Too many powerful interests would be hurt. Nor will we get hyperinflation, for the same reason. We’ll either get mild deflation or mild inflation, with the former more likely in the short run and the latter almost certain in the long run.

mft, you do not understand how L/Cs work. The L/C is issued by the buyer’s bank, at least for a documentary L/C so that the seller knows that the buyer can pay. If it is a documentary L/C, the payment is made when the seller meets the documentary requirements under the L/C. Basically, if the seller lives up to its side of the deal, the payment is made. But L/Cs are being rejected by the seller’s bank, and this is BEFORE the shipment leaves port. Banks do not want to be exposed to the risk of other banks, particularly on funky credits like L/Cs.

Could it also be that banks are not issuing letters of credit for altogether good reasons – suspicion that the cargo may not be accepted on arrival because of the rapid pace of downturn in the real economy? I suspect that banks would behave that way even if there were not a financial crisis.

“rental rates that have plunged 98 percent in five months”.

A price collapse of 98% in 5 months. If hyperdeflation is defined as a decline of over 8% in prices in a month, this is CLEARLY a deflationary microburst.

Will there be more to come?

Stay tuned.

But clearly we need the word hyperdeflation in the parlance to describe some of what we are beginning to see and the risks we need to manage.

Risks the St. Louis Fed, darling of the WSJ and the American press, does not understand.

Matt Dubuque

Net Free or Borrowed Reserves of Depository Institutions

http://research.stlouisfed.org/fred2/series/NFORBRES