awgee_IHB
New member
<em>"We've explained the difference between a recession and a depression before. But we'll do it again. A recession is a pause in an otherwise healthy, growing economy. A depression is when the economy drops dead. And when it drops dead, the assets that people owned - stocks, bonds, houses, derivatives, debt - are called into question. What are they worth, now that the economy that created them no longer exists? That's the big question. The U.S. economy has been expanding for the last 60 years - largely by increasing consumer spending and debt. Now, neither consumer spending nor debt is increasing. In the last 6 months, consumers have suddenly reversed their free-spending ways. Borrowers and lenders have repented too. But if it is no longer an economy that grows by increasing consumption and debt... how does it grow at all? And what about all those businesses that are set up to provide products and services to the consumer economy? And what about all the debts and obligations that the consumer economy produced; what are they worth?
That's what everyone wants to know. So the markets have entered into a period of vigorous price discovery. Some things are still valuable, of course. A house, for example. But many things aren't as valuable as they used to be. The house won't be worth as much if people can't borrow to buy it... or if potential buyers can't get a job. And the mortgage debt that the house carried... which was recycled into a leveraged debt instrument... is bound to be worth a lot less than people once thought.
But it takes time to sort out the good assets from the bad ones. How much does the business owe? To whom? Who owes it money? Will the debtor be able to pay? And what about those strange piece of paper - CDOs, MBOs, SIVs - in the company vault? What are they worth?
For a while, people are so afraid of making the wrong move that markets freeze up. No one wants to lend when he doesn't know if he's going to get his money back. That's called a 'credit crunch.' And no one wants to buy when he has no idea what things are worth. That's when markets go "no bid."
But eventually - unless the feds stop the process - things sort themselves out. Businesses go broke. Homeowners are defenestrated. Automobiles go back to the dealers' lots. Prices sink to a level where people are able to buy. And the whole process starts over again.
This can take a long, long time... especially when government is trying to stop it."
</em>
- Bill Bonner
That's what everyone wants to know. So the markets have entered into a period of vigorous price discovery. Some things are still valuable, of course. A house, for example. But many things aren't as valuable as they used to be. The house won't be worth as much if people can't borrow to buy it... or if potential buyers can't get a job. And the mortgage debt that the house carried... which was recycled into a leveraged debt instrument... is bound to be worth a lot less than people once thought.
But it takes time to sort out the good assets from the bad ones. How much does the business owe? To whom? Who owes it money? Will the debtor be able to pay? And what about those strange piece of paper - CDOs, MBOs, SIVs - in the company vault? What are they worth?
For a while, people are so afraid of making the wrong move that markets freeze up. No one wants to lend when he doesn't know if he's going to get his money back. That's called a 'credit crunch.' And no one wants to buy when he has no idea what things are worth. That's when markets go "no bid."
But eventually - unless the feds stop the process - things sort themselves out. Businesses go broke. Homeowners are defenestrated. Automobiles go back to the dealers' lots. Prices sink to a level where people are able to buy. And the whole process starts over again.
This can take a long, long time... especially when government is trying to stop it."
</em>
- Bill Bonner
