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Friday, January 28, 2011

Debt levels are holding back recovery....Thanks to Dr. Rothman of sending this along.


http://www.frbsf.org/publications/economics/letter/2011/el2011-02.html

1 comment:

Jeffrey said...

"While housing wealth and stock market gains masked the increase in debt from 2001 to 2006, the subsequent collapse of asset prices led to a tremendous increase in the ratio of total debt to total assets in the U.S. household sector"

The housing wealth and stock market gains were built from the increase in debt - rising stock market and GDP numbers don't mean anything if its a result of debt related inflation. That means we "created wealth" not by producing anything, but by promising to produce things.

The results of Fed actions, stimulus, and bailouts was that enough money was injected to keep the already artificially high numbers from falling any farther than they did. The market was correcting its mistake and eliminating the counterfeit "debt money" in the economy, and the government stopped it. Because we have not eliminated all of the fake money and institutions who benefited from it we now have to pay for it all slowly over the years to come.

If it was not the Federal Reserve's job to control the interest rate none of this could have happened in the first place. The actions of Fannie and Freddie would have quickly caused interest rates to sky rocket, preventing any bubble before it occurred.

BTW an endless deflation death spiral is impossible because of that inherent desire and need to consume that we all have. An endless inflation death spiral on the other hand is a real possibility - if people begin to decide that a currency is no longer worth anything there isn't much that can be done to stop that.