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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory
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To: daveinmarinca who wrote (104440)8/12/2009 3:00:14 AM
From: Elroy Jetson4 Recommendations  Read Replies (1) of 110194
 
Debt and money can seem interchangeable as an increase in debt increases asset prices just as surely as does an increase in money. In actuality debt is not an increase in money, but a more rapid circulation of existing money.

This difference may seem moot until you're in a situation like last September when those with money were in quite a different situation from those who had a line of credit. Unlike money, debt can vanish as quickly as it appeared.

This is why the age old rules of debt to income ratios cannot be overturned. In the short run, increasing debt levels like we created since 1980 can be accommodated with ever lower interest rates, but you eventually end up in a situation called "zero bound" where it's difficult for interest rates to become negative.

The important thing to understand is that the Federal Reserve has not created new money (Permanent Reserves) for quite a long number of years. All the new "money supply" has been debt.

We're effectively at zero bound where debt to income cannot continue to grow, which creates instability. Instability combined with maximum debt to income ratios inevitably leads to less debt through bankruptcy and liquidation.

Some pain can be mitigated by increasing government debt as consumer and business debt is destroyed, but it would be, in my opinion, a horrible mistake to replace one for the other on a one-for-one basis. That's what Monetarists would recommend, but I believe they're wholly insane even on their best days.

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