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Old 09-23-2011, 10:32 AM
thomachan72 thomachan72 is offline
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Quote:
Originally Posted by rkg000 View Post
In the article, an interesting point was that the borrowers were paying their debts instead of spending.

That got me thinking as to where the money originated and where is it going. For example a house worth $100 in 2003 is worth $1000 in 2006. So a bank would have to lend $1000 for someone to buy that house and then investors or government would have to lend that $1000 to bank to make the loan. If the price increase was on par with rise in inflation then the gains for the creditors are just the interest on money. But since the House price fell back to $200, the creditors or money creators are enjoying an extra $800 for which home owner is on hook. Who exactly is enjoying the extra $800 and the interest on it while the inflation adjusted increase was just $100 from 2003 - 2006.
Its very complicated. This extra $800 is channeled back into the system. That is why we have several more high paying jobs than what would have been available if the growth of price was just from 100 to 200. Now when it fell back from 1000 to 200, the jobs and other facilities that the "extra 800" supported is also falling apart.
Now here is the interesting role of "offshoring/outsourcing" plays. Instead of a reduced consumption due to increased cost of production what we say "thanks to NAFTA/other trade agreements" was that consumption was maintained by production offshoring. What now? Now we have a dangerous situation in countries like India/China due to the temporary boom; Every indian and chinese will soon own a car. Imagine that situation The US/Europe simply shifted the "consuming responsibility" to India/China which were traditionally very low consumers. Unfortunately there is no going back without a painful setback in these economies on the long run.
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