What nobody is talking about is the DEFLATIONARY side of credit…it’s called debt.
Credit is used to bring purchases forward, removing the purchases from the future. As an example, if we all had to save to buy a house, we would be too old to enjoy it, so mortgages were created to enable us to buy first and pay later. The purchase that would have occurred many years later can occur today, instead.
Initially, credit looks like a good thing as purchases and transactions accelerate. This makes the supply-siders want to expand credit, as they are usually the winners (lenders and businesses win during a credit expansion). Prices go up, and more credit is needed to buy the same item (inflation).
But credit has an equal and opposing side, too — deflationary debt. For each dollar that is spent today, a dollar (PLUS INTEREST) is taken away from future spending as that debt needs to be serviced. The more you expand credit, the more indebted people become, and it can grow for a long time until the debt can no longer be serviced, even temporarily, as the payments just become to enormous for the debtor to handle with his/her earned income (and he/she is no longer able to qualify for more debt because of this, eliminating the option of using debt to pay off debt).
Then comes the downside…as we experience debt destruction in the form of defaults and bankruptcies — and lost purchasing power. Lenders, not knowing where the damage is or where it will end, will slow lending and hoard more capital to protect against additional losses from the defaults.
At this point, you can pump all the money you want at the deflationary effects, but IMHO, the deflation must match the inflation that caused it…unless you literally print money (no debt offset) and give it to THE DEBTOR to service his/her debts.
What the Fed and Treasury are trying to do now is print money to replace the repudiated debt. $700,000,000,000 is a drop in the bucket. The credit bubble really began to take off in the early 80s, and the inverse may well take us back to those levels.
They are trying to save the banks when they should really use that money to backstop the FDIC, SIPC and PBGC as well as provide zero-percent loans to insurance companies so they can pay their regular property and casualty claims. It is this money (in “safe” accounts) that will provide the floor for the downturn.
Additionally, they should enact a work program because the deflationary side of credit really is destructive. We have a lot of work to do in this country. The credit/housing bubble has distracted us from the many productive things we could have spent our money on over all these years — infrastructure and R&D in energy, transportation and health care technologies.
We will not work our way out of the depression/recession until we take the focus OFF of housing/credit and shift our resources to the REAL economy. The idiots in D.C. do not get this.
