Reply #40: A snippet from The Daily Reckoning

[54anickel]

http://www.dailyreckoning.com/sub/signuphub.cfm?List=DailyReckon&sourceid=321Gold

There must be some surprise coming. Americans now believe that the trillions in debts they owe to foreigners (and to themselves) will be calmly marked down by inflation and dollar devaluation. "It's our dollar," they tell the foreigners, "but it's your problem." But lenders do not sit still while their assets are marked down. They bolt for the exits. A panic out of the dollar would surprise nearly everyone - triggering immediate and unpleasant consequences for the whole world economy.

But people need dollars - almost desperately. That is why credit binges do not typically end in inflation. Debt loads are not usually lightened so easily. People need dollars to pay the interest on loans...and to pay back the principle. What usually happens at the end of a credit boom is that money becomes harder and harder to get. Debtors are stretched; they can no longer increase spending. Businesses have surplus capacity already; they cannot profitably add factories and workers. Capital spending slows down. Consumer spending slows too. Money becomes scarce.

So, here, we find another surprise...instead of seeing their debts eased by inflation and a dollar decline, Americans are likely to find the burden heavier than before. While the dollar might be worth less overseas... at home, it could be more precious than ever. Many may find it hard to pay their bills. Many credits - backed by people who are no longer good for the money - will become worthless. Others, such as U.S. Treasuries, will be sought after.

We have lived through the greatest credit expansion in history. On the other side of it lies a great credit contraction, about which nearly everything is unknown. When will it arrive? What form will it take? Who will be its victims? Its heroes? We don't know, but we vaguely expect it to be similar in many ways to what Japan has gone through for the last 15 years. Stocks and real estate have been pushed up not by honest toil and disciplined saving, but by reckless leverage. We read yesterday, that J.P. Morgan had set a new record for lending money - arranging more than $2 trillion worth of loans last year...or more than 50% greater than the year before. The loans, we learned from press reports, were bought by mutual funds! Oh, what have we come to, we thought to ourselves; more and more money is lent to less and less creditworthy borrowers by more and more lenders who have less and less to lose if they go bad. Our guess is that they will go bad; in fact, we'd bet on it.