OK, let’s substitute housing. Let’s say that home prices go down. Did any money disappear? NO. Absolutely not.
It is true that it’s harder for banks to create new money via HELOCs because now the collateral (homes) are lower in value. But a reduced ability to create new money in the future is NOT THE SAME as a decrease in the supply of existing money. I covered this in detail in the article I linked to in my prior comment.
The rest of your post consists of multiple assertions that I’m not sure what to make of — ie. are you suggesting that I have argued that the bubble was not unsustainable, or that I think it’s a good idea to throw money at it to keep prices propped up? I certainly hope you aren’t under the impression that I believe such things.
Cyphire posted that a decrease in asset values decreases the money supply. I posted in reply to point out that this was not the case. I never said that the bubble was sustainable or that the government should throw money at it (not in this thread, or ever!)
I also don’t understand the assertion that the amount of money in the economy pales in comparison to the bubble. The fact is that the money supply has increased quite dramatically since the bubble ended. People aren’t spending the money as quickly because of the weak economy, but there is more money out there now than there ever was during the bubble, by a huge margin. Here is a chart of M2, a widely used monetary aggregate, to illustrate this:
As I’ve argued many times, and at great length (notably in the two-part series whose second part I linked to above), the Fed is fully committed to increasing the money supply and is entirely capable of doing so. Given that the money supply grew substantially in the face of generational asset price declines, I’m not even sure why this is a matter of debate any more.
