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To: GST who wrote (123537)	4/11/2001 8:19:18 PM
From: pater tenebrarum	Read Replies (3) \| Respond to of 164684

well, normally such a debt overhang is deflationary once a downturn eventuates, since the destruction of debt through defaults amounts effectively to a destruction of money. the corollary to the debt overhang is the currently negative savings rate, i.e. the consumer is dis-saving to finance consumption. in a downturn, the savings rate tends to rise, as both consumers and corporations attempt to right their out-of-whack balance sheets. it can only do so if consumption concurrently falls - this decline in demand meets up with the malinvestments and overcapacities that have amassed during the boom due to the too loose monetary policy that has reigned throughout the better part of it. so the decline in demand begins to travel through the entire supply chain, putting even more pressure on the weaker borrowers, and resulting in more defaults. as a consequence, banks begin to curtail their lending and capital markets seize up, with credit spreads ballooning (already happening). this leads to an (involuntary) contraction in the money supply (we're not there yet - the money supply is currently still expanding at astonishing, banana republic like rates), and falling prices. the falling prices then contribute to the above vicious spiral by further constricting consumer demand, as buying decisions are postponed in the expectation of lower prices in the future. fiancial assets tend to suffer in such deflationary contractions - it is e.g. absolutely possible that in a few years time many of the currently listed stocks will be delisted. that won't be reflected in the popular indices, but it will be reflected in investors account balances. already the stock market rout has brought us the first year of declining household net worth since this data series is kept by the Fed (last year household net worth contracted by a cool 900 billion bucks, roughly). of course this decline in wealth also impacts consumer demand. what has worsened considerably is the consumer's balance sheet, since consumer debt continues to mount, at about three times the rate of growth of retail sales. this suggests consumers are CURRENTLY resorting to "Ponzi finance", whereby new debt is incurred in order to pay off old debt (robbing Peter to pay Paul, essentially), as well as financing recurring expenditures on credit, which have been subject to strong inflationary pressures recently (utility and medical/insurance bills come to mind). this kind of behavior is consistent with the unspoken hope that the Fed will bail out the stock market, which is something the Fed is indeed attempting to do. (see Mr. Moto's weekly monetary report for more details, and why such an endeavor is ultimately doomed to fail: piraz.com. it also reflects the workings of the WS credit bubble machinery, especially the GSE's, which have usurped the Fed's power of money creation with their activities. they always expand their mortgage portfolios at an incredibly fast clip considering their size whenever the strained financial system is getting into trouble. as a result, Fannie's leverage is now an incredible 1:155 (equity capital vs. assets), which is a huge tax payer bail-out-in-waiting. of course, the GSE's activities drive the consumer deeper and deeper into debt. the same goes for credit card issuers and sub prime lenders. they account for their revenues and earnings in such a way that they look o.k. as long as new credit creation outpaces defaults. as a result, they attempt to INCREASE new credit creation whenever defaults accelerate - a sure recipe for disaster down the road. i strongly recommend reading through the entire archive of Doug Noland's Credit Bulletin (you can access the archive by scrolling down to the bottom of the page and clicking on the link - the current report is also well worth reading, and starts off with a few revealing charts). it is a valuable chronic of the credit excesses perpetrated during the boom, replete with examples from economic history, as well as data one never gets to see anywhere else, and which are scary indeed: prudentbear.com