Mauldin on Money

For a number of years now I’ve been getting John Mauldin’s weekly investment column, and I thought this week’s entry, The Trend May Not Be Your Friend,  was especially good at describing our current situation.  It’s the first half of a summary of a talk he gave recently, so I look forward to the conclusion next week.  But in this first part, I thought this section on ‘money’ was quite correct:

It’s a bit misleading to talk about money supply, because what money really is is roughly $2 trillion of cash and then $50 trillion in credit. Because what do the banks do? They take deposits in and then they borrow money to leverage them up. I take my credit card and I spend with it. I borrow against a house. I have an asset that rises, and I borrow against it.

We have two trillion dollars of actual cash propping up $50 trillion in credit. If we all decided to settle and pay off everything, we couldn’t do it because there is not enough cash. There would be massive asset deflation. We, as a nation, are levered 25 to 1, or we were. Now, that $50 trillion is in a real sense the money supply because that is what we are all pretending is real money. I lend you money and you pretend you are going to pay me back. Then you pretend he [pointing at another attendee] is not going to call your debt for cash, and we are all going to keep the system going. Because if we all try to pay each other back at once, we are all collectively — and this is a technical economic term — screwed.

So we keep the system going. Now, where are we today? We are at the Great Deleveraging. We are seeing massive losses and destruction of assets, on a scale that is unprecedented. There was massive destruction of assets during the Great Depression, which caused a lot of problems, and we are seeing the same thing today. We are watching trillions simply being poofed (another technical economics term – which will drive my poor Chinese translator crazy!). We are watching people pay down their credit lines, which is one way of saying the supply of money and credit is shrinking.

He goes on to talk about the central bankers ‘genetic tendency’ to fight deflation with all guns blazing.  Which force will win?  And what does it mean for all of us?  Read the column to find out more!

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