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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: gregor_us who wrote (7756)	6/9/2004 11:41:03 PM
From: Little Joe	Read Replies (1) \| Respond to of 116555

This is an area in which I am not knowledgeable, but I will make an attempt to explain what I think he is trying to say and believe me, I may have it all wrong. Essentially money is created in U.S. by the creation of debt. If people are unwilling to borrow the fed will have to find a new way to increase money supply. I think Russell is saying that we are approaching the point where people are so overloaded with debt that they will not be able to repay the debt. Debt is always paid, if not by the debtor, then by the creditor. It is paid by the creditor when the debtor defaults (and the debt becomes uncollectable) or when debtor files bankruptcy. At this point the money will not be returned to the creditor and the creditor takes the loss. If I understand the theory the debt is wiped from the books and therefore from the money supply and money supply goes down, which in turn continues to reduce the money supply. If this becomes generalized what will happen is that the supply of dollars is reduced, while at the same time debtors are scrambling for cash to pay their debts, thereby creating demand for an ever decreasing supply of dollars. I think this is in fact what occurred in the depression. If I understand this mess, the fed has got to find some way to get dollars into the economy when people can no longer borrow or the sheet hits the fan. It is my belief that they will just give money away before they let a depression happen. Remember we have recently had two tax "refunds". i.e. the government sent nearly everyone a check in the mail. Consumers did not borrow for these dollars. I think before they let us sink into depression some creative ways will be found to increase dollars in circulation. This is likely to lead to hyper inflation which would be followed by a depression. On the other hand Allan is a lot smarter than me and maybe he gets us out of this mess. Little joe