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Strategies & Market Trends : Mish's Global Economic Trend Analysis
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To: Robohogs who wrote (27147)4/8/2005 2:51:35 PM
From: Elroy Jetson  Read Replies (2) of 116555
 
That is the secret of debt for the borrower. If you are convinced of your clairvoyant ability to see the future, debt can wonderfully magnify your winning ways. But once humility or experience casts doubt on your ability to predict the future, debt suddenly seems far less attractive.

Currency cranks throughout history, including our modern currency cranks calling themselves monetarists or "supply siders", believe our nation's wealth is directly proportional to the amount of credit issued. Double the amount of credit issued and our wealth doubles as well.

This very seductive idea seems plausible to many. Double the amount of credit issued and asset prices do inflate. But in time so do the price of necessary consumables and the essential lie of currency crank magic is exposed. Doubling the amount of credit issued is merely inflation which devalues the currency. Not one penny of wealth is created.

Now, reduce the amount of credit issued and asset prices immediately decline. The price of necessary consumables will also decline, but with a delay - similar to the way in which they rose in response to increased credit issued. Reducing credit outstanding merely increases the value of the currency, making prices decline relative to money.

When a great amount of credit is issued, wealth is sometimes transferred from those with money to those borrowing money. This occurs when lending exceeds available savings - essentially introducing counterfeit money. In effect, the lending system becomes subsidized - not charging a sufficient price for borrowed capital. Thus currency crank systems, like all welfare programmes, have always been very popular with those without capital.
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