[video=youtube;thx47NcPRPM]http://www.youtube.com/watch?v=thx47NcPRPM[/video] Do not forget that around 50% of the reserve assets held by the Federal Reserve Bank are U.S. Treasury debt. Remember how the deflating of the housing bubble caused the collapse of several banks? This could be far worse. The dollar potentially could quickly lose a large portion of its value almost overnight. Do not forget that the Federal Reserve Bank can only hold down interest rates by churning out even more dollars. By buying up all this Treasury debt, the Federal Reserve bank is creating a situation that could eventually spiral out of control.
What is going to happen when interest rates go up, as they eventually will have to? An interest rate of 7% would not really be that surprising if we look at the historical record. Is the government going to be able to handle that? Will continuing to service the debt become more difficult? Will there be a huge transfer of taxpayer money to private investors? Seems like it will be contributing a lot to inequality...
"If the debt limit was frozen, Congress would have to quit spending, and then government would get smaller... The debt limit is very important, we shouldn't raise it, we should put pressure on them... But you know , if you took away the privilege of the Federal Reserve to buy debt, this thing would all come to an end. Because if you couldn't print the money to pay for the Treasury bills, interest rates would go up, and Congress then would be forced - economic reality - 'well the interest rates are going up because we're sucking up all the money'." -- Ron Paul What he means is that the central bank is buying up the government debt, using the government debt as collateral to back the printing of more money. Basically, the Treasury is just printing more money for the Federal Reserve Bank, then the Federal Reserve lends the money back to the Treasury, which uses it to fund the government's deficit spending. But the treasury then owes the Federal Reserve money, with some interest added on top. For those of you who are wondering, theoretically if or when the Treasury ever pays off all its debt, the Treasury bonds will be returned to the Treasury and the Federal Reserve will get the money. Since the money are actually bank notes technically issued by the Federal Reserve, and since the Federal Reserve no longer has the Treasury bonds to back it, they will be obligated to destroy the money. This is of course only theoretically how it is supposed to work, in reality there is quite some space for flexibility. The Federal Reserve essentially sets the market interest rates for the Treasury bonds, since they have so much money at their disposal to pay higher interest rates to borrow money, or alternatively to lend money out below market rates, losing money. If they can just give money out like this, you might be wondering about the necessary reserve assets, the short answer is that it is essentially just money backing money, so if they lose money, it just dilutes the value of all the other money.
The Federal debt could theoretically cause a collapse of the dollar but it is not likely to happen for a number of reasons: First of all a monetary collapse usually means that a currency loses a large percentage of value compared to other currencies in a very precipitous manner, like a 40% collapse in value over a period of days or weeks. A huge volume of $US are held overseas and used in international trade and as a currency reserve. If a $US collapse became imminent traders would move to other currencies and banks and nations would trade their $US reserves for other currencies or a commodity like gold. The reality is that there is not enough of any other currency to act as a replacement for the $US. The Euro is in troubled times, the Chinese Yuan is not convertible, lacking a market based exchange rate. No other currencies are even possible candidates since they do not exist in the quantities needed, not that the Euro or Yuan do either. It is the Congress that passes all spending legislation. It is totally nuts that they consider the spending obligated by legislation they pass to be somehow unconnected to the debt it is incurring. If they were really interested in limiting the debt they need to do it through the spending legislation. They act like imbeciles "We didn't know that all this spending and tax cuts would cause the debt to go up, Wow, what a sudden surprise, we need to do something responsible about it right away, like vote against increasing the debt limit. By the way, all that spending, that wasn't us."
The value of the dollar, or of government debt for that matter, could drop very fast, essentially overnight, if a sufficient number of investors began dumping it. Everyone would want to get out before it was too late. The question then becomes, is the dollar actually overvalued? If people start dumping dollars and government debt, is that a "healthy" thing? The dollar is very intimately tied to government debt. If one collapsed, the other likely would too. The Federal Reserve is trying to prop the United States debt up with more dollars. For the first time in history, the Federal Reserve bank is buying up more government debt than the United States Treasury is issuing. That means there are more private investors selling Treasury bonds than buying them. It seems the government has reached the point where it can no longer borrow money. Any further deficit spending is going to be financed by inflation.
We have been there before and survived. The Fed bought huge amounts of US debt in the 1930s and the 1970s. The Fed is also buying up $50Billion a month of private paper so by your logic the private bond market can no longer borrow money either. The Fed has established a program to put a certain amount of money into the economy each month. It has limited its amount of private purchases to $50Billion a month to not upset the private market so the rest must be government paper. There is no shortage of lenders for US debt at its auctions, which have pushed interest rates quite low. The Fed does not bid in auctions but buys all its debt from the open market. The move by the Fed to sell short term debt and buy long term debt puts more money into the economy now while enabling the Fed to remove it later if there is any signs of inflation. Inflation, in a monetary sense depends on certain conditions, none of which are apparent at this time or foreseeable in the near future. Besides, the Fed is sitting on so many highly liquid assets that are not government debt that if it sold them off it could suck a few $Trillion from the economy overnight, which would put a quick stop to any move by investors to short the $US. This is well known among investors so they tread carefully. The US is not Thailand or Argentina where vast floods of money can overwhelm the national bank's ability to deal with it. The $US will be defended not just by the Fed, but by the EU and Japan and China and Saudi Arabia and many other nations that hold far more $US than all the private investors combined.
The interest will never get that high again in the near future as long as the Fed has something to say. That type of interest rate would bankrupt the US in no time. You think because historically we've been there, we will get there again? Imagine how much more the US would have to tax people in order pay 7% on treasuries. That is over 4 times what they are paying now on 10 years. Think about it.
There is a shift in the world. You assume the US will remain the world currency. That is the advantage we have right now, and the only one. There is a race to the bottom right now to not get too highly valued versus the dollar. There is no exit plan for the fed. Partial at best. They can't unload trillions of dollars worth of treasuries on the market. That would tank the price of treasuries and increase the interest rate that would bankrupt the US in a heartbeat. They can only keep buying treasuries on their digital, unaudited balance sheet that can essentially grow to infinity. The problem comes, when the US dollar is no longer the world currency reserve. That isn't all that far behind I fear.
Anders wrote: Everyone would want to get out before it was too late. Get out and go where?... ... unrealist wrote:... The reality is that there is not enough of any other currency to act as a replacement for the $US. The Euro is in troubled times, the Chinese Yuan is not convertible, lacking a market based exchange rate. No other currencies are even possible candidates since they do not exist in the quantities needed, not that the Euro or Yuan do either.
The $US will remain the world currency for now because there is nothing to take its place, nothing until Saudi Arabia and the rest of OPEC begin accepting other currencies for oil, which they have not since OPEC was founded shortly after the US went off the gold standard. It was a shrewd move on the part of OPEC since the members already had vast amounts of $US in their treasuries and wanted to ensure that they maintained their relative value. There was no better way to do that than to demand $US for oil. It instantly made other nations hungry for $US and gave OPEC and the US a huge advantage in trade. For the rest of the world, especially the EU and Japan, this was not such a good deal. They needed to sell goods in the US or OPEC to gain the $US they needed to pay for the oil that was vital to their economies and since OPEC economic demand was tiny the only real trading partner was the US. In the late 1970s the US plunged into a combination of economic recession and monetary inflation due to fiscal and monetary policies. This placed US trading partners in dire straits. The price of oil was increasing from inflation while demand in the US declined. They sold their goods to the US at a loss to gain enough $US to pay OPEC. This was when the idea of a EU wide currency began to be taken seriously. A EU wide currency would accomplish a number of goals, it would reduce trade friction in the EU, outside trading partners would accumulate Euros and use them as part of their reserve, and eventually the Euro would be accepted by OPEC, which would free the EU and much of the rest of the world from the monetary fallout of bad US policy. All but the latter was accomplished. Some mistakes were made along the way and they have prevented the Euro from gaining its ultimate goal. The EU failed to establish a banking union and did not establish firm rules on EU banking or the fiscal policy of its latter members in its rush to gain size. Only now are these things being partially corrected but it has put the Euro back a decade or more. You are being far to alarmist about the Fed and its options. The Fed can remove $Trillions from the economy in short order without selling its government debt holdings. It can sell off the $Trillion or so of private assets it holds, it can increase the reserve requirement, it can push the overnight interest rate up, it can intervene in the currency markets. The Fed has a lot of tools to deal with inflation before selling off government debt holdings. This is not 1929, or 1979. That said, one of the political parties in the US does not seem very interested in compromising to accomplish any sort of long term plan that is fiscally responsible. Intransigence is their watchword and as long as that goes on the US will indeed keep sinking into deep do do. They may or may not have the right position but that becomes increasingly less relevant the longer that no progress on these problems is gained. The US was founded on compromise, to claim that being uncompromising is an American virtue is a baldfaced lie.
The Fed eventually will not have a choice. It costs money to hold interest rates down. And the more inflation there is, the more it costs to hold interest rates down. I suspect the Fed is doing it on purpose, so the government can keep spending. But there is a real danger that this thing could spiral out of control. Every time the Fed lends out more money below market rates, it dilutes the value of the dollar. It is a little complicated to explain, but just think of it this way: You cannot get something for nothing. This is what I am trying to warn you about.
One of the big promising attractions of the euro was its stability and low inflation rate. But with all the bailouts we have been seeing, one has to question whether these policies are actually undermining confidence in the currency.
It is not confidence in the currency that is at stake but confidence in national governments within the EU as a whole. The bailouts have been nothing but the serial transfer of private banking losses onto the people's backs, with Cyprus just being the latest and most egregious. If Spain and Ireland and Cyprus had let the banks fail instead of borrowing $100s of Billions to bail them out they would not have become victims of harsh austerity. It is very questionable about whose interest the politicians are looking out for when they bankrupt their nation and its people to cover bankers reckless behaviour. The decision by Ireland's Prime Minister to make good on the debts of Irish banks was the pinnacle of reckless political misbehaviour. Spain's massive borrowing to shore up its failing banks was not far behind. These nations did not have any fiscal problems before deciding on massive borrowing to bail out their banking sectors, decisions that were foisted upon them by the IMF, the EU central bank and others as absolutely critical to prevent economic catastrophe. It did that, but it put the entire burden on the public. It is becoming increasingly clear to many people that the primary beneficiaries of these bailouts are the same people who caused the financial crises in the first place. The bailouts did not require them to take losses, in fact they are designed for them to reap huge profits. The bailout of Cyprus will be used to repay bonds at 100% despite the reality that Cypriot bonds have been trading at 70% of face value. If the bailout included repaying the bonds at market value it would be 30% less, enough to completely avoid the confiscation of deposits from Cypriot banks. The biggest beneficiaries of the bailout will be hedge funds which have been buying up Cypriot bonds at around 70% of face value and will now make a 30% profit. It was even worse for Greece. Greek bonds were selling for around 28% of face value but the money it got in the bailout was not allowed to be used to buy up bonds on the open market at the market rate and retire them. Greece was required to use the money to pay off the bonds that were due at face value. By that point the only ones still holding Greek bonds were a few big banks in Germany and France who were unwilling to realize the loss and write them down because that would have required them to raise their reserves a few percent, and the hedge funds and investment banks that bought it up at a huge discount on the open market. I guess that the EU and IMF decided that destroying the Greek economy and impoverishing the people for a generation while giving the investment banks and hedge funds a huge windfall was better than causing a few of their banker friends some temporary discomfort. It is quite insane what has been going on in the EU over the past few years and none of the bailouts were actually required to prevent a collapse of the Euro, none of them. In fact, it has been an unfounded panic that local bank failures will lead to a Euro collapse that has put the Euro zone in such dire straits, and will continue to do so until EU makes it illegal to transfer private debt onto the public purse.
While I agree with your post, I must point out one thing. The euro is being backed in large part with government debt from each member country. Perhaps that is one of the major reasons those in power do not want to see any sovereign defaults. The structure of the euro zone is a little more segmented than the dollar in the United States. In the USA, the Federal Reserve system can lose debt assets backing the dollar, and the resulting inflation automatically adjusts to dollar price of the remaining assets so that dollars in circulation always match the dollar price of the reserve assets held by the Federal Reserve system. In the Euro Zone, it is a bit more complicated. If the regional bank of one country loses assets (such as a default on government debt), the resulting inflation is not all concentrated in that one country, but rather affects the whole euro zone. This is not only bad for all the other countries, but it also leaves the local regional bank in the defaulting country with a lack of reserve assets to cover the euros they have issued. While this can be easily remedied by interbank transfers, the unfairness of it is blatently obvious and causes political resentment. Each regional bank is responsible for backing the euros they have issued. It is too complicated to explain here, but theoretically the big private banks can go to the regional euro zone banks and redeem the euros for debt assets, which is why each regional bank has to balance its reserve assets to issued euros. The euro zone could never allow any regional bank to default. Well, actually it could theoretically, but that would essentially be an exit from the euro zone for the affected country.
But that does not explain why the EU decided that the people, through their governments, are the ones who must pay for the private banks irresponsible behaviour, especially when the banks behaviour was encouraged by EU rules. It would have been far less painful if the EU Central Bank had acted like the central bank it is supposed to be and provide support directly to the banks than what it did do, which was adopt IMF like behaviour, which nationalized private debts to protect lenders and bondholders without regard to the economic damage that has been foisted onto entire nations of innocent people for a generation or more. There is a lot of unfairness in these bailouts, which protect the banks and depositors and investors in the north whose lending spree to the southern nations upon their ascension to the Euro was what created the economic bubbles in those nations in the first place. That the banks and investors who fuelled these bubbles should not have to suffer any consequences from their own reckless actions is what is unfair. That the regional banks in the north who directed so much of their lending to the south should not allow the EU Central Bank to come to the rescue of the southern banks that they put into such an untenable position when they pulled the rug out from under them is in no way fair. These are hard lessons and it appears that the EU has yet to learn anything from them. Meanwhile the hedge funds and other arbitragers are feasting on the huge transfers of entire nations of wealth to make good on private debt gone bad, debt that they bought up for pennies on the dollar while the EU was prevaricating, which will now be repaid at full face value by innocent people struggling to get by in their devastated economies. The only nation that got it right is Iceland. It joined the EU banking union and adopted EU banking rules to the letter. When the Icelandic banks failed so spectacularly Icelanders simply refused the liability, twice by referendum. Their view was that it was a private business matter that the government could not be held liable for since the government had followed all the rules. The UK and Ireland, which had rashly made all depositors in Icelandic banks whole on their own initiative and at their own expense attempted all sorts of highly questionable actions to force Iceland to nationalize the debt so they could recoup, the UK going so far as to declare Iceland a terrorist supporting state so it could seize its assets in the UK. Meanwhile the case was winding its way through a court set up especially to deal with matters between Iceland and the EU. The court has recently ruled that because Iceland followed its treaty obligations concerning banking to the letter it could not be held liable for the debts of its private banks. There is no appeal to this ruling. A few years ago when the crises in Greece was unfolding the first thing that crossed my mind was that this will be like the IMF in Argentina. I was wrong, it was worse.
And what would happen if they tried to do this? You do realize that the half of its assets which are not U.S. government debt is almost all mortgages? Believe me, if the Fed ever tried to do this, economists would be screaming about the sky falling. Despite the stupidity of these economists, I happen to think allowing home prices to drop would be a great thing. Except for the fact that it would leave the dollar almost entirely backed by U.S. debt, even more so than it is now. If you cannot see the problem with this, you have your head stuck in the sand. Likely it would greatly devalue the dollar, because then essentially the dollar would not really be backed by anything, except government obligations in the future to tax. This might reduce the supply of "money", but the inherent value of the dollar would remain unchanged. This is a complex issue that I am not going to get into, but I happen to believe that the money supply does not fundamentally cause inflation in the long term. Most economists would probably disagree with me, but it is not merely how much money there is, but what is backing it. One point I do want to make clear however is that I believe bad loans caused the money supply to expand, and that this did lead to inflation as the housing bubble was growing, but only because investors did not realize that this money supply was not being backed with real wealth. It takes money to do this. These "tools" cause inflation.
I have to disagree with you here. You are talking in abstract concepts. Is it even possible to quantify this supposed blame you are putting on the northern banks? I wish you people would put more thought into the mechanics of what causes economic problems other than just try to blame the banks with vague accusations. I am not saying that an oppressive and dysfuctional economic system does not operate through the banks, but you need more concrete criticism if you expect anyone to be punished for the blame. Just my personal opinion, but it has to do with the inherent nature of property rights. And the Greek government has plenty of blame as well for taking on all that debt.
There is little private demand for mortgages these days, the risk of them is still uncertain. (Fannie and Freddy have 86% of the market.) As the economy picks up and the risk of mortgage defaults declines, private demand for mortgages will pick up, putting pressure on lenders for more lending capital which will put pressure on interest rates. The Fed can sell its mortgage holdings into the market to meet the increased demand and reduce pressure on interest rates. Besides, it is only a $Trillion of mortgage derivatives dropping into a derivatives market that is $600Trillion so it may have no effect at all. Money moved away from being backed by anything a long time ago. There is a huge amount of money sloshing around the planet, far more than can be deployed in useful economic activities. As a result a large portion of the planet's money has become permanently employed in speculative gambling in certain markets, like equities and commodities. Economists call this "investment". Occasionally some of this money will flow into some other sector of the economy and create a bubble, which will burst when it moves out again. This is what happened with the US housing market, any other explanation is pure bunk. The Fed does not need a penny to raise interest rates. All it has to do is raise the reserve requirement for its member banks and the overnight interest rate, and all other interest rates will rise as the banks move to increase their reserves. This will actually remove money from the economy, which is far more likely to create deflation than inflation.
Yes, it will remove money from the economy. But by "money", we have to define it as bank debt, not federal reserve notes. I very much question how much this would stop inflation. Like I said, it is not only the ammount of money in circulation, but what is backing it. The value of money is generally dependant on the value of federal reserve notes, because obviously bank money (from fractional reserve banking) cannot be created unless there is some mortgage or personal obligation backing it. Do you see the fallacy of your thinking that just removing "money" from the economy would stop inflation? Similarly, even if the Federal Reserve Bank did not issue any more notes, if they mismanaged their reserve assets it would still cause inflation. Dollars in circulation would not change, but the assets backing it would. But of course, at the same time, it should be mentioned that if the Federal Reserve tried to greatly expand the money supply (by going on an asset buying spree), it would cause inflation because it would strain the market supply of those assets, and when the demand exceeds supply, prices go up. The fact that the federal reserve notes are being theoretically backed by those assets would not be enough, because it is a rather complicated issue for a big institutional bank to try to redeem its federal reserve notes for actual mortgage assets. If the market, for some reason, wants to actually hold those assets privately, and the Federal Reserve is not willing to sell (redeem) them back, the market immediately becomes reluctant to sell any more assets for federal reserve notes, and then it causes inflation. And let's not forget that half of the federal reserve assets would be very difficult to sell (all those U.S. Treasury bonds). Not enough people would want to buy them at the current rate. This is really the heart of the issue.
You seem convinced that Fed assets are what backs the $US and that Federal Reserve Notes are the money supply. The money supply, as measured by M2 is about $10Trillion. There is about $1.13Trillion in Federal Reserve notes in circulation. Fed assets on its balance sheet are currently around $3Trillion, over $1.2Trillion in mortgages accumulated in the last three years and about $1.8Trillion in US Treasuries. Before the 1980s the Feds held less than $100Billion in assets and before the 1950s usually had zero assets on its balance sheet. The Fed is not obliged to hold or sell its assets by anything or anyone. Its buys and sells assets on the open market and can pay or take any price the market decides without any consequence to itself. There is a saying among traders "don't buck the Fed" because the Fed is the ultimate market manipulator, it can flood the market with assets to push prices down or with money to push them up. It can remove massive amounts of money from the economy overnight by raising the reserve ratio which would immediately push up interest rates and reduce lending. It can also force banks to buy back assets they traded at the discount window for cash, which peaked at $3.3Trillion in 2009, much of which has since been redeemed but not all, and a lot of it is bad paper that the banks would be forced to write off if they bought back, which would require even higher reserves and reduce lending ability. While the Fed has embarked on an inflation of the money supply, monetary inflation, the increased supply of money has not resulted in the wide scale rise in prices and wages that characterize a typical period of economic inflation. Until the economy recovers to stable growth inflation remains a less likely occurrence than the economy slumping back into recession. You are barking up the wrong tree.
There is a reason why inflation hasn't been and is far from an issue right now. Although the Fed is essentially printing money, it's not going into the economy. It's merely going to banks to provide them liquidity for the trillions of dollars of bad mortgages and is going to buying treasuries to keep interest rates low. This is not going to stop anytime soon. Deflation right now is a major risk. This will work until it doesn't. More QE is on the way, guaranteed. You can say the fed can push up interest rates which would decrease lending, yes this is true. But it can't happen, not in this economy. This would cause major deflation in this economy. This economy is based on consumer spending, which is paltry. It's based on massive lending and debt. Any decrease in that will kill this economy in a heartbeat and Ben won't do that. Any significant increase in treasury yields bankrupts the US. It's more QE, not less on the way. Eventually the economy will require direct infusion by the Fed. This is the trigger that will lead to the USD blow up. This isn't isolated to the US. Japan is printing like crazy. ECB is next. Race to the bottom. Again, it will work until it doesn't.
The Fed assets are what backs the $US, but of course the money supply is much greater than this. The larger money supply is rather irrelevant. If the value of the $US changes, it will automatically cause the larger money supply to adjust. A home that was with 100,000 dollars will now be worth 120,000, suddenly there will be "more" equity, "more" loans, and "more" money in bank accounts. Similarly, we can say the reverse, that a change in the overall money supply will not affect the value of the dollar. This is where many economists make a big fundamental error, because they misunderstand how things work. The economy could be flooded with fractional reserve money, but as long as there is mortgage equity (voluntarily) backing that money in proportion, there will essentially be no inflation. Remember, as more money is "created" through fractional reserve banking, there becomes more private debt. This is specifically what counterracts the money inflation, if you want to view it that way. I disagree with your perspective. All that money going to cover bad mortgages may not be "creating inflation", but it is reinforcing inflation, making it permanent. The housing bubble, and all that bad debt, made the economy experience inflation. Once everyone realized it was bad debt, all that inflation would have gone away. But the Federal Reserve intentionally wanted to prevent this, they wanted to make all the "unsubstantiated" inflation that had already happened real. When a bubble pops and incomes go down, prices are supposed to fall also. But thanks to the Feds bad policies, prices have not gone down in proportion to the lower wage levels. (there are of course other factors driving lower wages, but I am trying to make a point here) Deflation is GOOD !!! When incomes go down, prices need to come down too so people can afford things. It's probably no surprise that with the dollar being backed by so much mortgage equity, the price of housing has remained unaffordable to Americans after the recession. If not for the Fed, the price of housing would have gone down in proportion to the lower incomes. (again, more complicated than this, but trying to make a point) Obviously those board members running the reserve do not share this opinion. I must also add that the value of the dollar is also backed by taxation. In this sense, the value of each dollar will be dependant upon the total proportion of wealth being taxed divided by the number of dollars in circulation.
Believe me, deflation is not good. It sounds good, but that is exactly what leads to people losing their jobs left and right. It leads to stock market crashes, it leads to people having no money for food. But, it won't happen. Ben won't let it. If there is anything Ben can do, it's preventing deflation. Deflation is a spiral that once unleashed is very hard to contain. There will not be inflation until wage increases are on the horizon. This is far from happening at this point. The only reason corporations are even coming close to estimates right now is because of cost containment, not because of increased revenues. This is the sign the consumer is weak. Believe it or not, the consumer on a whole has learned a lesson. Debt is not good for families. Apparently it's only good for governments. You won't see the over leveraged consumer like you did in the mid 2000s for a very long time. The problem is the government needs this to happen. It's not going to happen. We have the lowest rate possible for people to stash money in, and yet our spending is way down. If you can't induce people to spend in this environment, it's not going to get better. Inflation will come, but not until the Fed releases their fake cash directly into the economy. It's only a matter of time, could be up to 5 years yet.
No one in the currency exchanges, where the value of the $US is determined thinks that, they value the $US on a number of factors, none of which have anything to do with Fed assets. Actually, there is huge inflation but it is confined to the speculative markets, which have been sucking up money faster than the Fed can conjure it up, which leaves little for the rest of the economy. The housing run up created inflation in the housing market, some of which trickled into the economy but not to much effect since wages were unaffected. The housing bubble, while calamitous when it burst because housing comprised some 40% of all economic activity, was not caused by monetary policy as much as by market hysteria. Deflation is too few dollars chasing too many goods.The US has a lot of experience with deflation, which was a regular occurrence in the 1900s so there is a great deal of understanding about what exactly happens as an economy deflates. The first thing that happens is that prices begin to decline because merchants begin to compete on a price basis for dollars to pay their obligations. (This is far different from price declines due to productivity increases, a critical difference that many economists ignore.) As prices continue their decline merchants find themselves paying more for goods than they can sell them for and begin to abrogate and renege on contracts with suppliers, and default on payments to them. They also cut wages to employees and reduce staff. Some begin to default on loans. Producers, close their doors as declining prices make it impossible for them to continue. Massive layoffs follow. The banks become concerned as borrower defaults increase, call in whatever debt they can and stop all lending in order to accumulate reserves to pay off depositors who are withdrawing their savings as their businesses lose money and their jobs disappear, as more businesses close and more homeowners default and the viability of the banks becomes increasingly questionable. The halt in lending and run on the banks leads to a serial collapse of the entire economy as sector after sector succumbs to declining demand. General deflation is not to be wished for in an economy that is dependent on economic growth to repay debt for its wherewithal because deflation generates debt default across the entire economy. The housing bubble burst but the impact was blunted because the rest of the economy was able to carry on because of massive government intervention. If you believe that we would all be better off if the economy was just allowed to collapse in 2009, you have no understanding of how economies actually function. They do not function on money, they function on the promise of money. There is a difference and it is profound. That is so wrong that it does not deserve comment.
