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Strategies & Market Trends : Booms, Busts, and Recoveries -- Ignore unavailable to you. Want to Upgrade?

To: Don Lloyd who wrote (11726)	12/9/2001 8:43:17 AM
From: Ilaine	Respond to of 74559

Let's pose a hypothetical. The world has magically gone to 100% reserve overnight. Very large and powerful corporations centered in New York decide to start rebuilding the WTC so they borrow money. They have the wherewithal, so they are willing to pay double what had previously been the market rate. All the gold gets sucked into New York, and is being passed around to construction companies, etc. In the meantime, in St. John, North Dakota, wheat farmers can't borrow money to plant the spring wheat crop because the interest rate is too high to make a profit, and they give up farming. This has a ripple effect through the community. What will happen to the price of farm land in St. John, North Dakota? You know as well as I do - it's going to drop. That's deflation. And you can tell me until you're blue in the face that it is the inevitable result of previous inflation, but I won't agree. Deflation is also the result of people being unable to monetize their real wealth, like their farmland, and future crops, because they can't get credit. ~~~~~~~~~~~~~~~~~~~~~~ The seed store would probably extend credit to the farmers, if the seed company will extend credit to the seed store, and all the way up the line, but without credit, the country grinds to a halt. ~~~~~~~~~~~~~~~~~~~~~~ The process you describe is also happening, all the time, and other processes, too. Simultaneously. Prices go down because technology improves, making it cheaper to produce goods, so businesses start undercutting each other in order to gain market share. Prices go down because governments subsidize the price of goods in order to keep an industry from going under, allowing that industry to dump the goods (e.g., steel.) Prices go down because big businesses sell goods below cost in order to drive competitors out of business (e.g., Microsoft.) Prices go down because foreign exchange allows arbitrage (e.g., wood from Canada). That's all I can think of for now.