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Politics : Ask Michael Burke

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To: BGR who wrote (71375)	12/3/1999 10:33:00 AM
From: Mike M2	Read Replies (2) of 132070

BGR, there is rampant inflation in the financial markets. Inflation is the expansion of money and credit beyond the needs of economic activity and the supply of available savings. This monetary inflation may manifest itself in product prices or in the financial markets and trade deficits. People scream where the price of things rise because they pay more and get less- well buy GE you pay more and get less dividend but people are happy because the price rises because they are not aware of the accumulated illiquidity in the markets. Cash balances as a % of securities outstanding were at a record low several? years ago. I'm sure the situation is worse. To understand the full picture you need to look at the unprecedented reckless expansion of credit. Why does this matter? Because this debt must be serviced. As credit expands a greater proportion of current income must go to service this debt- curtailing your beloved Keynesean consumption . In order to maintain the stimulative effect credit must expand at an ever increasing rate. if this process is allowed to go to the limits which seems to be the current Fed policy eventually we get deflation -a contraction in credit along with severe TL & EV. This is not a difficult concept - consider your own balance sheet what if you assume debt at a rate faster than your income growth what would happen? You would at some point decide to reduce consumption and service the debt or go broke . Either outcome is deflationary . government debt can be monetized but not private debt where the current excesses are. The Fed may very well have plans for the banking system to purchase bad non bank debt when the time is necessary to delay the inevitable. it boggles my mind how people can be deluded into thinking debt is a panacea. Mike ho ho ho

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