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.

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

To: maxncompany who wrote (100738)	8/12/2009 3:03:19 PM
From: Elroy Jetson	Respond to of 116555

Let's say that land, materials and labor to build the home cost $250k but there was an additional $100k in profits to the input owners bringing the price to $350k. That's $100k of inflation created by new debt. The home owner has refinanced the $350k up to $500k which was an additional $150k of inflation created by new debt. That's a total of $250k of monetary inflation associated with this home. We know the home is now worth $300k, regardless of whether anyone admits to this, either the home owner, or the bank after foreclosure. So $200k of the $250k of monetary inflation associated with this house has been erased. All $250k of the inflation was long ago transferred to various people in the economy (the prior landowner, the builder, and the store owner where the home owner spent his home equity), that's true. But this is offset with a $200k loss, perhaps in the retirement accounts of the prior landowner, the builder, and the store owner where the home owner spent his home equity. Was the money lost while Bernie Madoff was spending it, or was the money lost when Madoff's scheme was discovered? This is the essence of an economic depression. The capital is lost through malinvestment over a long period of time. But the economy carries on because no one knows the money has been lost. Then the realization of the cost of the malinvestment occurs suddenly over a short period of time. People who spent on the basis of believing they had plenty now spend on the basis of their actual reduced wealth. This is not a "liquidity event", it's the realization of your actual poverty. .

To: maxncompany who wrote (100738)	8/12/2009 4:04:52 PM
From: Sweet Ol	Read Replies (1) \| Respond to of 116555

Think of a simple case. There is a small economy with $100 money in circulation all of it held by the Bank. A guy named Maker wants to build and sell a widget, but he has no money. So he goes to the Bank and borrows $50. Maker then uses the $50 to pay Helper to help build a widget and then sells it to Customer for $100, who borrowed the $100 from the Bank. Maker then repays $50 to Bank. At this point, Maker has $50, Helper has $50, Bank has $0 plus a call on Customer's $100 widget. Customer has $0 plus a $100 widget. The cash money supply has not changed, but there is now a $100 widget in the economy. The widget is an asset, so the fiat money supply is increased to $200 Case 1: Customer grows a patch of marijuana and sells some to Helper for $50 and sells the rest to Maker for $50. Then Customer repays the $100 loan to Bank, who now has his $100 back. Customer owns a $100 widget, but there is no change in the cash money supply. Since the widget is a $100 asset, the fiat money supply has increased by $100, the amount of the credit created by Bank. Case 2: Customer grows a patch of marijuana and smokes all of it himself. Bank then forecloses on the widget which is worthless because it is tainted with marijuana smoke. Bank has $0, but Maker and Helper each still have $50, so the cash money supply is still $100, no change. However, Bank's asset, the widget, is worthless, so the the fiat money supply has been reduced to $100 by the destruction of debt. In reality things get more complex, but I hope this gives you the general idea how money is created by credit and destroyed by debt default. Best to all, JRH