Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Gold/Mining/Energy : Strictly: Drilling and oil-field services -- Ignore unavailable to you. Want to Upgrade?

To: Hawkmoon who wrote (88776)	3/18/2001 12:13:08 PM
From: Tommaso	Read Replies (1) \| Respond to of 95453

That's kind of like asking, "If a hydrogen bomb fell on Washington, what would the politicians say?" (They wouldn't say anything because they would be dead.) The question is too hypothetical to answer, really, but if everyone tried to convert their securities into cash, there would be no money to put into money market funds because if no one wanted to buy stocks or bonds their value would instantly drop to zero. They would be worth as much as a worn out Cabbage Patch Doll. Where did all these trillions of dollars go to that have already diappeared? Nowhere. All through that period of decline, the money supply--as measured in various ways--only rose on the order of 5% to 8%--as measured by M2, from about $4,668,000,000,000 to about $4,886,000,000,000. This is a gain of about $218 billion. The markets lost about 15 times in value what the money supply increased. Cash does not have to change hands for values to change. In the early 1930s, the effort to convert security values into gold-backed currency was profoundly deflationary. Banks stopped making loans as loans went into default, and as loans were called in or as banks failed, the supply of credit, which is the same as the supply of money, contracted. The Fed is trying hard to prevent the same kind of implosion this time, cutting interest rates but also encouraging the expansion of credit. They can do this in various ways. If they buy in government bonds from banks, they can do so simply by creating an bookkeeping entry for the bank from which they buy the bonds. If the bank lends, using this new money as a basis of credit, it can multiply that amount by creating loans. This is basically where money comes from, now. Buying and selling stocks, and buying and selling bonds, except when the fed does it, neither increases nor dcereases the amount of money; it just moves it around. The fall of the stock markets, however, is deflationary, in that it results in margin debt, which is part of the money supply, being reduced. Debtors may take other measures to try to improve their position by spending less and selling some assets. They may decide, for example, that a $150,000 house is more economical than the $450,000 house they pay mortgage on, and try to sell the house. This will be deflationary to real estate prices. If the fed did nothing, old-fashioned bank failures and bankruptcies would spread, people would cut back to subsistence levels in spending, businesses would fail, prices on everything would go into free-fall. Even with a fiat currency and easy money policies, it may be hard to maintain confidence and keep economic activity going. Maybe another way to put it is that the Fed is trying to create enough credit so that as people try to convert stocks into cash, or money market funds, they will be able to do so without causing the 90% loss of values that occurred in 1932, and leaving investors with something to spend. But if the Fed keeps doing this at a 27% annual rate, there will eventually be large amounts of money that can be spent on all sorts of goods and services, and prices will start to rise.