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Strategies & Market Trends : Mish's Global Economic Trend Analysis
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To: Elroy Jetson who wrote (100737)8/12/2009 2:47:13 PM
From: Claude Cormier  Read Replies (2) of 116555
 
When the original owner borrows to buy his house, money is created and goes in the system. In your example, $500K or so minus cash down.

Then he defaults. The bank balance sheet is modified: a house is added valued at $200-$300K, a receivable is cancelled, but the US money supply is intact as the initial $500K is still out of the bank in the system.

Since the banks reserves have been kept clean by the Fed, who cares about the lost of value in this asset. The bank can resell it and create a new loan and add again to the money supply.

But the fact is a foreclsoure doesn't change the money supply and is not deflationary. It affects only the bank balance sheet which can be repaired at will by the FED.

What is wrong with this logic?
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