Originally Posted by
scambo1
I am about the most debt averse person you can meet. The concept of spending more than you make is really, really foreign to the way I am wired. However, wrt the gubmint, they print the money and the fed controls the supply/value.
The bailouts of the past few years have shown us a window into how the gubmint thinks/reacts. I cannot say this with 100% certainty, but if past practice can be used to predict future results, the gubmint will spend until the cliff is 100% irrecoverable...Think ruble, 2001.
The concept I have a difficult time wrapping my head around is the effect of leverage, especially on the scale some of our bankers use it.
Dick Cheney famously said "deficits don't matter." Could he be right?
Lets say a guy takes 1 million from his savings and retirement and invests it in a business. He still shows $1 million, the business shows a million and with interest rates where they are at, might as well borrow a million (and the bank's deposits are just another guy's savings) ... so now my business has $2 million and I've got my million on paper too, for a total show of $3 million in assets. Magic, as long as you can make the payments. Now, we buy a couple million in houses from Courthouse foreclosure sales for around 50 cents on the dollar. If we can appraise them right 3 million becomes 6, and we can borrow against that equity. So, in this example the money supply has not increased, but by investing, there is a lot of cash floating around this little business.
That's leverage of 1 to 1, then 2 to one and finally 3 to 1. The average for banks is 9 to 1 and I think the investment banks got up to 34 to 1 in 2008.
When the liquidity ponzi schemes came cashing down, nearly all investors lost a lot of money. Where did that money go? It was in the money supply, but now it is gone. My business partner lost somewhere around 1.6 million total in 2008 and since his investments went to zero (Fannie, Freddie, GM Preferred stock, etc ...) he did not recover with the market. That cash is out of circulation.
My question is, do losses like his offset the increase in the money supply created by deficit spending?
Another question, what about when all this money is created ... can't we create much more money through leverage than the government ever dreamed of creating?
And, when our economy grows, don't we need more money? If you have a monopoly game with 1,000,000,000 players ... you are going to need more money than the game comes with .....