I was trying to think my way through this "break the buck" thing yesterday.
These MM funds have been a way to allow investors to lend money very short term for commercial operations. This allowed them to get a higher rate than at the bank, with minimal risk. But if the return drops to zero, then they might as well put their money in the bank.
Maybe this has already been going on. Maybe that's why I have this zero interest credit card with a $20,000 limit that I am using like a magic wand. The bank hopes desperately to end up getting at least a few percent return out of me (which they won't).
I think maybe what we are going to be looking at is huge bankruptcies. Up till now, for example, an automobile dealership has been able to pile on increasingly heavy debt to carry inventory and to finance their "no-interest" loans. But at any moment the most cut-throat kind of competition could develop to unload "program cars," expiring leases, and abandoned repos. Suddenly the invetory would be worth a lot less than the debt with which it is being carried.
Something similar could happen (more slowly) with all this megamansion house-buying.
So the borrowers go bankrupt, default, refuse to pay, try to rengotiate, whatever. The lenders are stuck with huge nonperforming loans and go bankrupt unless we have mass denial as in Japan.
The depositors are made whole by the FDIC but with prices falling they hold back from spending.
I had not believed that there could be a deflationary collapse in the absence of a gold standard, but maybe the confidence in the dollar is sufficient to make people want to hold them, at least for a while.
But outside the U.S., the dollar could fall 25% or more pretty fast against other currencies, and this would mean immediate commodity inflation inside the U. S. --a very good thing for those farmers and raw materials producers not wiped out by rising energy prices.
Impossible to know how it will play out, but as a very small minority in the U. S. are aware, Greenspan and his minions have done much to encourage economic madness and financial irresponsibility. I wonder what Paul Volcker's true thoughts are. Isn't he supposed to be on CNBC this evening? |
