Deflationary Debt Crisis

[AllentownJake]

3 ways to respond

1) Do nothing and let the debt work it's way from the system legally using bankruptcy.

2) Bail out the debtors so the debt disappears.

3) Bail out the creditors so they provide more lending, to over leveraged debtors.


Which do you think makes the least logical sense and will lead to another deflationary debt crisis?

[dkf]

1. How's about providing emergency funds so the FDIC doesn't go bankrupt?

Sometimes things are a little more self serving that we think.

[AllentownJake]

2. We gave them 500 billion this year as a backstop. nt.

[dkf]

4. If citi goes under how much will we need?

[AllentownJake]

5. Do they even have a large base of traditional bank deposits anymore?

I'd have to look at their financial statement.

Most of Citi's operations are outside the realm of traditional banking.

[dkf]

6. Weird I thought they kept the banking parts and dumped the others like smith Barney and travelers.

[AllentownJake]

7. Credit Cards nt

[Craftsman]

3. Let's party like it's 1929.

Serfs up

[Ozymanithrax]

8. (1) It only works through the system if easy debt acquisition is stopped.

So that is a no.

(2) Debt doesn't disappear. It is taken on by those who bail them out. So that doesn't' fix anything.

(3) This really combines number 1 and number 2 and turns everything to crap. It doesn't fix anything. The debt is just assumed by someone else and continues to weigh down the economy. More lending just acerbates the problem.

I don't think there is a palatable solution to the problem. There certainly is no easy solution.

[AllentownJake]

9. Well of course there is no palatable solution

1 and 2 end the old system. 3 extends it till the next crisis is inevitably larger and more destructive than the first.

BTW we've been doing this since the 1980s.

[Ozymanithrax]

12. Actually, easy credit and extending Credit cards is a central feature of Consumerism...

Consumerism began in the late 30's under FDR, but really got going in the 70's. It became the central feature of the American economy under Reagan and is necessary in the reapportionment of wealth from the middle class and poor to the investor class.

[AllentownJake]

13. The system was somewhat sustainable

When people making things were paid a decent wage so they could buy things off of people that make them.

The underlying problem with this entire debt bomb situation is energy prices. No $4.50 a gallon gas, no explosion.

[Ozymanithrax]

15. The investor class doesn't give a damn about sustainability.

The system always carries the flaw and what is happening now was inevitable

Outlawing credit cards and requiring people to live on what they make is the only sustainable solution. But it isn't palatable to most Americans, and would be difficult. Credit has become the foundation of our culture.

Try to make a reservation for a hotel or an airplane without a credit card. There are places that you just can not do it.

Credit allows every person to create as much money as a bank or other lending institution thinks they are worth. This money is then used to purchase goods, most of which we don't need. Those goods are designed to be obsolete within a short time and require replacement. Advertising creates a demand by convincing people that if they just drink the right beer or own the right car they will be just like the rich, and that makes them rich. If lending institutions get low on liquidity, they extend more credit to people who buy things they can not afford. Crashes like this one are part of the system.

I live from month to month. My credit cards are paid off. I would get rid of them if I could, but I do too many things that require a credit card just to get into the door.

The system will crash.

People will work their way up a bit form the crash.

Then they will get more credit and do it all over again.

Because the investor class isn't concerned about crashes. Those crashes are part of the system.

[AllentownJake]

16. Each time it crashes

It becomes more and more difficult to put back together.

[Ozymanithrax]

17. Because crashes are inherent to the system, they only way to fix it is..

to get a new system.

The investor class will not go broke because of this crash. They will feel no real misery.

It is the people in the middle and at the bottom of the pyramid who get crushed. Because we live in a system where credit is required we have no choice but to rebuild. And for every old timer like me who gives the system the bird, there are 3 or 4 new members getting their first credit cards, watching commercials tell them what they want.

On an individual level, we are hosed, but across the U.S. and everywhere we have exported the system, it works like gang busters. Look at China who just announced that they need to narrow the gap between the rich and poor. The gap will not narrow, they will just issue credit.

Last week, I received two invitations to accept pre approved credit cards. I shredded those suckers. But most of my neighbors did not and are incapable of seeing consumerism for what it is.

[AllentownJake]

18. We've reduced wages low enough

to sell to China :rofl:

Not laughing at you, basically China and America eventually switch places.

[Ozymanithrax]

19. India an China both have a fast growing middle class...

that is hungry for credit.

I don't hink it is anything to laugh at. What we are exporting is the Credit system. We are inviting their growing wealthy class into our own investor class.

[AllentownJake]

20. They've been members for 10 years

This is nothing new, now is just the point where they become made men.

[Igel]

10. Heard the flip side, "inflationary crisis," last summer.

The guy was pointing out the massive influx of credit by the Fed and Treasury to all sorts of banks. Essentially nearly unlimited free liquidity--how could it not produce runaway inflation?

I told him.

1. Reduced multiplier. If the multiplier is lower than expected the liquidity wouldn't produce the massive inflation.

2. Less lending. Lending had largely dried up as banks ditzed with building up their reserves and not overextending themselves and a lot of collateral had been devalued. So the additional liquidity probably was largely backfilling the whole in the money supply that had been created.

My conclusion was that it was impossible to know if the increased liquidity would balance out the loss of liquidity, if it would tip the balance to greater inflation or if there'd still be large-scale deflation. Moreover, it also depended on how quickly banks start lending and how quickly assets reappreciate combined with how slowly the Fed/Treasury sucks that liquidity back out of the system. Making it harder yet is that a lot of the US money supply is outside the US, and how other actors deal with US currency might not be a trivial factor in this.

[AllentownJake]

11. Both are possible silmutaneously with this situation

Supply and Demand dictates that unemployment will lower wages in the areas that unemployment effects.

Banks produce nothing. They are an intermediary of assets and transaction exchanges, nothing more, nothing less. Giving them money encourages them to use it somehow. If they can't lend it because the borrowers are over leveraged it has to go somewhere and banks hate holding cash. Banks make no money holding on to cash. The key for a bank is to take the cash they are given, pay someone a rate of return lower than what they take in.

Commodities, Stocks, CDS, Currency Speculation other things.

Which is where we are at now. Crazy speculative market and lowering wages.

Gas prices should not be where they are based on consumption, unless $4.00 a gallon was a real price and not based on some speculative game.

[Kurt_and_Hunter]

14. 4) Inflation

It is the right answer.

A systemic version of 2 that is also vitally important to overall recovery, real wage growth and regaining monetary leverage to deal with the next collapse.