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

To: Claude Cormier who wrote (100731)	8/12/2009 2:37:53 PM
From: Elroy Jetson	Read Replies (3) \| Respond to of 116555

Imagine a home owner with a $500k home mortgage who returns this to the bank. If the bank can sell this for $300k, then $200k has vanished from the "money supply". If the bank does not immediately sell the home, but carries it on their books at $500k, the $200k has most assuredly vanished from the money supply all the same, but this will not be reflected in various accounting measures of the "money supply" until the bank becomes honest. During a period of deleveraging this game of let's pretend can allow many to assume there is not a major decline in the money supply, when there actually is. Likewise when the Fed "buys" impaired assets from banks with a repurchase agreement. The damage to the bank's balance sheet appears to be repaired, but the bank doesn't lend because they know they still own the damaged assets and their situation is still precarious. All is not what it seems. .