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: russet who wrote (100746)	8/12/2009 4:41:08 PM
From: teevee	Read Replies (2) \| Respond to of 116555

When the bank sells the foreclosed house, it must write down the loan asset to the cash it sells the house for. If it only gets $200,000 for the house $300,000 in assets have disappeared so in response to this the bank must lower its maximum loans out by 10 x $300,000 or $3 million. Multiply this by the number of foreclosures and writedowns and in theory you get money supply contraction. So you can have two sources of potential money supply contractions since last year. One is the banks changing their loan to asset ratio from 40 to 1 to 10 to 1, and another by the foreclosed assets being worth less than the original loan once the asset is sold. that is precisely why banks are reducing LOC's, calling loans and making fewer new loans. Gov't spending and income (taxation) is also tied to a leveraged economy. De leveraging by gov'ts and financials will take at least a few years and will also result in lots of bankruptcies and corporate restructuring. I note that personal bankruptices are up 50% over this time last year. In short, I am firmly in the deflationary camp.

To: russet who wrote (100746)	8/12/2009 6:15:42 PM
From: Claude Cormier	Read Replies (1) \| Respond to of 116555

I understand what you say, but I think the current money supply is not necessarily reduced. If, in this situation, the bank effectively calls in $3M in outstanding loans (which I doubt as fractional reserve banking would certainly allowed them to keep the loan on the books) it would be logical to assume that most of these loans would also be defaulted on and not reimbursed. Why would they call in loans on which the borrower is making is payment. It seems to me that there is only one way for the money supply to shrink, and it is for borrowers to reimburse their loans. Is this happening on a grand scale???