The Great Depression Online

Great Depression Online Archive Issue:

Today's Drunkenly Distorted Economy

Day 2 of 7 - Seven Day Course

Inside Day 2 You Will Discover…

*** Today’s Drunkenly Distorted Economy
*** Why it Could Happen Again
*** How Global “Liquidity” Has Been Transformed into Inflated Asset Prices
*** Why the “Wealth Effect” Increases Debt
*** And More!

Today's Drunkenly Distorted Economy

In America, today, we import more goods and products than we export.  This has been going on since the 1970's, but the magnitude of the imbalance has reached historic proportions.

In fact, the U.S. trade deficit rose 10% for the month of March 2007 to nearly $64 billion -- $64,000,000,000.  In other words, Americans spent $2 billion more per day than they made on a global basis. 

The difference was made up with debt: corporate debt, government debt, and private debt.

It does not take a genius to understand that when you spend more than you make you eventually go broke. 

But with rapid globalization a curious affair has developed in world markets led by a curious word -- "liquidity".  In short, foreign central banks take the $2 billion per day that we send them, convert it to their local currency, and then purchase U.S. Treasury Bonds.

This suppresses interest rates and props up the value of the dollar, perpetuating an ever expanding bubble of debt.  All this activity produces more and more "liquidity" as massive amounts of credit based money changes hands.

Historically, "liquidity" referred to the ability to liquidate assets, or how quickly one could sell an asset to raise cash.  To be clear, "liquidity", in today's sense, is not real wealth; it's largely based on debt. 

And it has shown up in inflated asset prices including real estate, stocks, bonds, and in the dollar itself.

Why is this so dangerous?

Inflation, Credit, Speculation, and More Debt

Inflated asset prices support the extension of more credit, speculation, and the accumulation of more debt -- and production of more "liquidity". 

This has brought another curious term to existence -- the "wealth effect" -- where people refinance their home loans, cash out part of the inflated asset price, and go on a gluttonous spending spree.

Yet the money cashed out is not free money, as many perceive, it is added to the loan balance as debt.  Oddly, the "wealth effect" does not produce real wealth; it increases debt.

When credit is expanding, and asset prices are going up, those participating feel much richer.  And much smarter too.

Throughout history central banking has brought with it rapidly increasing money supplies, encouraged swelling levels of debt, and a devaluing currency.  However, when a currency is backed by gold a limit is ultimately reached where citizens become privy to the money supply expansion and begin redeeming their paper money for gold.

At that point credit no longer expands; it contracts.  Asset prices no longer inflate; they deflate.  The financial economy no longer flows with "liquidity"; it stagnates.  The "wealth effect" becomes supplanted by bankruptcy.  And people feel less rich -- and less smart.

In such instances, a recession or depression occurs.  And while these scenarios would be financially painful, and would result in a lower standard of living for many, after some time economic growth would return.

But this time the Depression will be preceded by an all out financial crisis that turns currencies -- especially the dollar -- upside down. 

The ensuing calamity will be much worse...much more painful...and will result in much more social upheaval and chaos.


M.N. Gordon
Great Depression Online

P.S.  Find out why this time the Depression will be preceded by an all out financial crisis that turns currencies -- especially the dollar -- upside down in tomorrow’s edition – Day 3 of 7 – of the Great Depression Online.


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