Wednesday, December 17, 2008

The Debts Of The Spenders: Deflation Summarized

You have to understand 5 things here and then it becomes very simple from there.

1) Excess money creation led to this problem
2) Money creation is not just limited to govt actors
3) Pvt actors can create money too (no not counterfeiting) through loan syndications and tranche bundling.
4) These pvt debts were created on leverage and fantasy accounting
5) When loans and tranches become marked to 0 money is destroyed.

Since all this private supply of money is basically 0 or in limbo land then the mkt reacts accordingly. Hence deflation.

This is my biggest disagreement w/gold bugs who keep calling for hyperinflation. They say money creation is only possible from govt actors. NOT TRUE. The pvt sector was minting money at the ratios of over 90:1 (Lehman and Bear Sterns).

Who knows how much imaginary money and leverage there still out of there?

Why are the banks now leveraged 20:1? Why even 10:1?


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