Brazil Is the New America: How Brazil Offers Upward Mobility in a Collapsing World Read Online Free PDF Page B

thus create an artificial boom and the appearance of prosperity. But such a boom is bound to collapse soon or late and to bring about a depression. 9
    In other words, taking debt expansion to the limit always ends badly.
Worse than the Great Depression
    The vulnerability of the system arises from the ephemeral nature of fiat money. It can be destroyed almost as readily as it can be created out of thin air. Think of a house of cards. The sustainability of the artificial credit boom is jeopardized when the economy’s weakest links encounter unfavorable winds. This was illustrated in the United States by the crisis in 2008 arising from the collapse of Lehman Brothers, and the gaudy end of the subprime mortgage boom. It remained on display with the continuing collapse in residential property values, as evidenced by record foreclosures. A June 14, 2011, report on CNBC stated that:
    The housing crisis that began in 2006 and has recently entered a double dip is now worse than the Great Depression. . . .
    Prices have fallen some 33 percent since the market began its collapse, greater than the 31 percent fall that began in the late 1920s and culminated in the early 1930s, according to Case-Shiller data. . . .
    Then there is the issue of underwater homeowners—those who owe more than their house is worth—representing another 23 percent of homeowners who cannot leave or are in danger of mortgage default.
    Indeed, the foreclosure problem is unlikely to get any better with 4.5 million households either three payments late or in foreclosure proceedings. The historical average is 1 million, according to Dales’ research. 10
    If anything, the housing crisis deepened as 2011 drew to a close. Average new home prices fell in each of the last five months of the year (through November) at an annual rate of −25 percent. Meanwhile median prices deflated at a −24 percent annual rate. With 6 million homeowners either late on the payments or already in foreclosure, deflationary pressures continue to build.
    A little appreciated facet of the foreclosure debacle is the fact that each property that is sold in foreclosure extinguishes debt and thus reduces the money supply. This deflationary impact is amplified by the fact that many foreclosed properties are sold for cash. The fact that buyers tend not to rely upon credit financing means that there is no counterbalancing growth in the money supply to offset the debt that is extinguished by the defaults.
    Every artificial credit expansion is limited at points where weak players threaten to implode the tottering edifice of debt, touching off an avalanche of deflation. The imperative that drove the bailouts of Wall Street banks in 2008 and drove the European bailouts of Greece, Ireland, and Portugal more recently is the same. The authorities cannot permit the weak players to default without imperiling the whole system. As a result, you have a daisy chain of insolvent banks supporting insolvent governments and insolvent governments supporting insolvent banks.
    The logic of fractional reserve banking (where trillions in debt are leveraged out of a thin sliver of bank capital) means that the whole banking system itself soon becomes insolvent when even a small fraction of existing debt goes sour. Without bailouts to re-fund the debt, the collapsing value of U.S. home mortgages or Greek government debt would soon undercut the claims of “innocent” counterparties in the banking system.
    This creates both a fiscal and a monetary problem. The point where the two intersect is with deficit spending where governments issue IOUs as collateral for the creation of money out of thin air. In the early stages of a credit boom, the magic of deficits consists of the fact that the credit of the central government is generally unquestioned. This enables the government to escalate debt to a higher level (kick the can down the road or climb to a higher diving board) by taking on bad credits and