The Justa & Lars Honors Bob Brinker Investment Club Message Board

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Pastimes : The Justa & Lars Honors Bob Brinker Investment Club

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To: JF Quinnelly who wrote (7770)	8/15/1999 11:31:00 PM
From: Oblomov	Read Replies (1) of 15132

The fact is that there would be less money in the system - $5.5 trillion less if the debt were paid off. The value of assets would need to fall in relation to money. In other words, the impact would be deflationary. Most of the holders of Treasuries are institutions, not consumers. The money would not necessarily move to M1, and would not necessarily be spent. The demand for corporate debt issues would increase, and as the cost of debt (interest rate) fell due to deflation, debt issuance as a coporate strategy would become increasingly attractive. In other words, the corporate fixed income market would simply expand to fill the void created by the shrinking Treasury market. Still, the short term impact could be inflationary. That confidence could be shaken in our fiat currency is an excellent point. But this seems to be more a matter of psychology than pure economics; The mainstream of modern economics regards as axiomatic the idea that an economic agent rationally acts in his/her self interest. This seems to break down when people see uncertainty ahead. Then, it becomes very difficult to tell which way the herd will go. Good discussion... AA

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