Bank of "We have no paddle" has $1 billion dollars. Thinking its a good idea to be levered 20:1 (this is a conservative estimate in regards to what was happening in 2007, See Bear Stearns), they use that $1B as collateral to invest the equivalent of $20 Billion (Derivatives, Shorts, Currency Exchanges, Futures, housing, etc...). Thus, there is now $20 Billion in this economy instead of only $1B.
In a simplified version, depositors come for their $1B dollars and the banks need to pull back more capital, OUT of the economy. When this happened in 2007, Banks immediately needed cash flow and needed to de-lever. This removes money from the economy at a rapid pace (Thus Bernanke's faulty assumption he needed to create capital).
Well nothing has been fixed since then; banks are still over-levered, and when they can't invest or lend, Monetary supply will drain from the economy faster than Bernanke can run the printing presses and click the "Transfer" button.
You see, the lack of available credit that will hit the system (like 2007)is the same as saying there is not enough money. This will force prices to decrease as demand will plummet (trickling from the large to the small, i.e. banks and corporations to the little guy)
Margin compression occurrs when companies have to continuously reduce profit in order to maintain demand, and soon there is no more profit to reduce.
Lots of stuff there, maybe all over the place since I'm posting quickly from work, but Long Story, Short:
More of our money supply is credit based than actual $ based. Avalable credit will decrease faster than $s can be printed once banks need to De-Lever. Google leverage for a more in depth understanding, its a fun, scary concept.
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