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

To: Rocket Red who wrote (100815)	8/14/2009 1:26:33 AM
From: mishedlo	12 Recommendations Read Replies (6) \| Respond to of 116555

What you, Philv, and Claude keep missing is the "money" you keep referring to is not money but debt. It is not in anyone's pocket it is fiction counted over and over in various bank accounts. There is a difference between money and debt. Fannie Mae issues a mortgage for $500,000 backed by bonds. So far so good (I am being lenient assuming they did bonds for the whole amount which we know they didn't). The homebuilder deposits the $500,000 in a bank who lends it to a supplier. The Supplier buys $500,000 in supplies from a wholesaler who deposits the $500,000 into a bank and that bank lends it out to someone starting a pizza business and so on and so forth forever. So out of $500,000 in "money" $50,000,000 credit has been extended. That credit ACTS like money when times are good. It can be spent. The problem is it is spent 100 times over. Eventually, however, there comes a realization that it is impossible to pay back $50,000,000 when the only money that exists is $500,000. This realization starts once asset prices start collapsing and/or defaults soar. And for every dollar in defaults, banks need to raise 10-100 dollars from somewhere (depending on leverage) to remain well capitalized. This creates a demand for dollars, ie. a credit crunch. Credit stops expanding and continues to stop expanding as demand for dollars is high. There is a huge shortage of dollars relative to credit on the books. The dollars do not physically exist, they were never printed. Much of that credit on the books is worthless. Banks know it and you know it and so do I, but the Fed and the banks pretend otherwise. This is what happens in deflation and this is why one must take credit and credit marked to market into account. You can argue the "money" is still out there, but it's not money it's debt, and that debt cannot be paid back, and the psychology of defaults on that debt along with the corresponding collapse in new credit and the hoarding of cash is the essence of deflation. Right now, the market value of that debt is collapsing at a far faster pace than any reflation printing by the Fed. In a credit based economy, THAT IS DEFLATION. BTW, reflation printing by the Fed is useless, in and of itself unless banks actually lend the money. The Fed could print $50 Trillion tomorrow and it would not do a damn thing if no one borrowed it, except of course to create a massive exit strategy problem down the road once banks did start lending it. This thesis explains what is going on quite nicely. Other models fall flat on their faces. Mish