Comment: Deleveraging is the primary

Deleveraging is the primary mechanism to reducing the number of dollars in circulation. You take an asset, say a home mortgage, bundle it with other mortgages according to risk pools, give it a credit rating, and then the banks hold it as an asset on their books, which they then leverage out at 30-40 to 1. So, your $200000 home mortgage becomes 6-8 million in virtual FRN's. These are then bought by pension funds, governmental entities and etc, primarily as hedges but for other reasons too.

The problem is when the underlying asset is in default as with foreclosure, as it has the effect of wiping out not just that $200000 home loan, but also the 6-8 million of virtual FRN's that were conjured magickly out of thin air.

Multiply this by millions of other mortgages, and you have a gigantic cluster or bubble as you may call it. It's great when asset prices continue to go up, but when they go down, it's a big mess. Subprime was just the tip of the iceberg. The Titanic will be in 2010 and 2011 when CRE, Alt-A, and ARM resets occur. There are about 3-4 trillion of toxic assets there, upon which there will be thus approximately $150 trillion in toxic derivatives based on those underlying toxic assets.

So, I think we are in for another round of deflation before we go Weimar.