Originally posted by vcwxvwligen
The Great Depression happened because the banks simply stopped giving out loans. It was domestic terrorism before they even gave it a name.
Why did they stop? Because many people had already used up their credit. A credit boom is followed by a consumption failure in the market.
Every time you see a boom that is done on credit, you are going to see the consumption rate, at some point, dramatically fall. It's a matter of
If I make 100 dollars a month, and I want an item for 500 dollars, I could save for X amount of months, after expenses, and that would lead to a
normal consumption rate. Say I have a credit limit of 500 dollars though, and use that credit to buy that 500 dollar item at a 10% interest rate a
month. Now let us assume the minimum payment is 1%. Now let us assume that my expenses a month are 55 dollars.
X being the total, 45 being my maximum payment, and .1X being the total multiplied by 10%, representing the interest on my total. Y being the new
total which next month payment is based on.
According to my math, On the third year and 11th month, I would fail to make the minimum 1% payment of the total.
So it would take me nearly 4 years to default on my credit. Nearly 4 years if I spent all my expendable income on paying my credit bill. Had I simply
saved my money, on the 12th month, I would have been able to purchase that 500 dollar item, with 40 dollars to spare.
By using the credit, I killed my long term ability to purchase, and my credit score. I would crash into debt and lose almost everything.
Point being, credit kills long term market, and if out of control, can crash the market completely. Out of control credit doesn't just lead to a load
of bankruptcies and people ending up out of all their possessions, but it kills consumption, thus kills imports, kills investing, etc. etc.
Lax credit is probably the single most damaging thing to a country and its economy.
In a perfect system that may happen, but what happens in the real world is that when a person's credit line is exhausted, his property is
repossessed. A more terrifying scenario would simply be to horde the gold.
As I had shown above, it would take nearly 4 years before my went bankrupt and lost my stuff. Obviously if you blow through a credit line that was
obnoxiously beyond what your ability to pay it back was, then yes, you will lose your stuff pretty quickly.
That often isn't the case though. As you saw above. Had my purchase been 400 instead of 500, I never would have went bankrupt. I would have slowly
but surely paid off my debt. If my purchase was 450, I would have sat at 450 debt forever, A.K.A. the credit company hopes I make a purchase of 450.
450 is the best purchase I could make for the credit company. They pretty much just enslaved you. 400, you are very profitable. 500 and you go
A credit crisis caused by banks handling questionable "assets" as collateral.
No, the credit crisis I refer to is that of banks giving out slightly more credit than they should. The credit crisis you refer to is a specific
aspect that I'm not referring to. You are referring to the mark to marketing aspect. I'm referring to the purchasing power aspect. The mark to
marketing bit is what turn a strong asset into a questionable one almost overnight. A game of hot potato is what it was. It was assumed that these
people wouldn't default and that even if they did, there would always be a market for the asset (property/housing market). But like all credit
induced bubbles, the market quickly plummeted, so now when the defaults occurred there was no market for the asset, and mark to market acted
accordingly. The value of the assets plummeted, and certain companies were left holding the hot potato.
Under a backed currency, people simply steal the reserves. Everyone playing fair would be able to claim his reserves and re-deposit them, whereby a
new money system can then be instituted.
And if you have hoarders? In an idealistic system, the rich will continue to literally spend all their money via resources and investments, etc. Often
times, in troubled markets especially, that may not be the case. They will save, waiting for the troubled times to pass, and more safe promising
investments to hit the market. During that time, back runs may start to occur, spending will dramatically decrease, and hoarding will occur. Monkey
see, monkey do. Little people will follow suit.
You bring currency circulation to a virtual stand still.
Or the government goes bankrupt since they have no resources on hand. If everyone trades in their cash for the governments gold, the government has no
gold, thus its money is worthless, how is government going to pay its bills?
Of course the money exists. If the money doesn't exist then you can't collect any interest.
No, the money DOESN'T exist, and that is exactly my point. They can't possible collect the interest if you can't pay it because it doesn't exist.
That means you are virtually bound to bankruptcy if you agree to that interest rate.
If the money doesn't exist, they just take the stuff you own. Interest goes under the assumption that there is this limitless flow of money out
there, and the only restriction is your ability to get your hands on it. That is not the case, especially with a backed currency. The limit isn't
only "can you get the money" but "does that money exist?"
I just decided to get to the rest of the post later. It has been a long day, I'm tired, so I'm just going to come back later when I'm not 3/4th