So, how would it happen? Well, deflation being the current cause celebre, central bankers are busy stuffing money anywhere they can except directly into the hands of the public at large, because, well, that would be too obvious to the dollar hawks. So, they are handing it off to banks with next to no oversight, and, if a recent equivocation by a functionary of the central bank is to believed, they aren't even writing down who they gave it to, which will provide for some interesting dinner conversations when it all comes out.
However, the money, believe it or not, isn't being lent. This is quite sensibly because the rest of us are scared spitless about the idea of taking on more debt. It is an interesting factor of a free economy, that when nobody wants a thing, you can't sell it at any price. So, despite that the 'price' of money, the effective interest rate, has been below zero for a very long time, due to the fed interbank rate being below the nominal rate of inflation, the market is not moving; few new loans are being made.
People like to blame the banks for clamming up, requiring your whole life history, with witnesses, in triplicate, before issuing a loan, but that is only part of it. There's a lot more to it. For starters, there's the loans that the government has 'adjusted', meaning the home owners have essentially declared chapter eleven, but only on their home, and received a court-ordered payment schedule. This makes the loan into a no-recourse loan, meaning the homeowner can't easily get out of it. Of course, the amount they have to pay is set right at the level that makes them squeal like a pig, so they have no more income to get new loans. As a matter of fact, they're so scared, they're re-using toilet paper and so on at this point.
And that's why the loans should have been left to go into default. I know it is harsh, but had that been allowed, the homeowner would have sought and acquired cheaper digs, due to the fact that investors are snapping up homes at serious discounts and renting them out, likely to someone just evicted from their house. This means the former homeowner would have negotiable income once again, instead of being chained to the grist mill, as it were. He would be able to take on more credit. He would be able to eat out. He would be able to buy a new flash-bang computer instead of the netbook he's struggling with, cursing the day Obama came to help him.
Anyway, what this means is that, largely, the system has been locked into a kind of stasis, with much of the mal-investments and general cruft locked in place, with Wall Street exactly as parasitic as ever, except now we're pitching gobs of cash at the 'last bullwark of capitalism' and that cash isn't being lent. It's going to bank coffers, to executive payouts, to jets, so on.
The money in the bank coffers is what concerns us. At the first spark of real recovery, banks will start lending that at silly multiples again. When that happens, the fact that the fire was never put out will be obviously to all, as the conflagration strikes up again.
And, an increasing market will not allow for the derivatives market to finally implode like it should meaning the sponge that has been sopping inflation as fast as it can be pumped will go away. The fed always takes a while to react, but the sudden stoppage of hemorrhaging losses in the financial markets coupled with any real recovery in the consumer sector will drive the biggest bout of inflation you have ever seen.
As usual, these posts are just opinion; the bureau and all its writers, friends, family and pets do not make any recommendations as to how to spend your own money and if you lose all your money, don't complain to us; you should have done your own research. This information is given for free, and you should consider the price in your decision making process.
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