| | <10 stages to Doomsday>
Does anyone think any of below very familiar to us, today?
Let's pray
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Irving Fisher, the debt-deflation theory of Great Depression
1. Mild Gloom and Shock to Confidence, Debt liquidation
2. Money Interest on Safe Loan falls
3. Distress Selling; Fall in security price and commodity price
4. Real interest rate increase; real debt increase
5. Contraction of deposit currency
6. Reduction in net worth
7. Decrease in profits; increase in losses; reduction in volume of stock trading
8. Decrease in construction, reduction in output, reduction in trade, unemployment
9. Hoarding
10. Runs of banks; Banks curtailing loans and selling investments; Bank failures
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"The over-indebtedness hitherto presupposed must have had its starters. It may be started by many causes, of which the most common appears to be new opportunities to invest at a big prospective profit, as compared with ordinary profits and interest, such as through new inventions, new industries, development of new resources, opening of new lands or new markets.
Easy money is the great cause of over-borrowing. When an investor thinks he can make over 100 per cent per annum by borrowing at 6 per cent, he will be tempted to borrow, and to invest or speculate with borrowed money. This was a prime cause leading to the over-indebtedness of 1929. Inventions and technological improvements created wonderful investment opportunities, and so caused big debts."
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So what is the solution?
"It is always economically possible to stop or prevent such a depression simply by reflating the price level up to the average level at which outstanding debts were contracted by existing debtors and assumed by existing creditors, and then maintaining that level unchanged."
This is why the Fed is expanding its balance sheet substantially.
But unfortunately, reflating is not a task as easy as Fisher believes.
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| | Posted 5/6/2009 1:05 PM - 15 Views - 2 eProps - 1 Comment
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