As Risky Debts Plunge in Value

A fellow named Roger asked me a question, so here is my answer. Anybody who finds an error, please let me know. This is my understanding and I learn a lot from Steve and business over many years.
It works nicely until the servicing (interest) of the debt, exceeds the ability to repay it. Taking your example, suppose the Bank (Bank of America, say) has 1 billion in deposits, hyptothetically. Suppose they only do car loans. they lend 40,000 to 450,000 people. That's 10 billion in loans created from 1 billion. The bank takes the initial deposits and buys treasury bills and has debt on their balance sheet for the other 90 billion to a federal reserve bank who lends at the discount rate to the bank who charges, say an extra 2% (profit) in the note. Bank of America puts in the accounts receivable 90 billion.

90 billion was created out of thin air, because its all debt based. No money really changes hands. The federal reserve bank has 90 billion on their balance sheet which are now offered in the form of Treasury bonds to investors, be it other country’s, hedge funds, wealthy investors, insurance companies, etc… In turn, those bondholders all expect a return in the form of interest, presently 3.25%.

The stock market drops 30%, inflation continues higher, people lose jobs, real wages drop as jobs don’t keep up. So, I can no longer pay for my car, because I would rather eat and pay my mortgage, etc. The problem is not just me. The situation caused failure on 60% of that paper (loans). The bank kicks the can down the road, borrows from peter to pay paul, but eventually the bank auditors come around and say, you’ve got a big problem (as if the bank didn’t know it already). There is no way you can continue, Bank of America. These loans are all way in arrears and your reserves aren’t enough. Much like a margin call, they can’t pay, the bank is forced to close its doors. It doesn’t end there. Unfortunately, 70% of the nations banks in our hypothetical scenario become insolvent. The Federal reserve bank owes bond holders on trillions of loans. The only way they can pay is to keep interest rates low, so that people borrow more money and keep on servicing all of that bond debt. However, inflation is exceptionally high, people can’t eat so the fed really needs to raise the interest rates (reduce demand for car’s lets say) so that the price of “cars” will come down. But, if they do that it will cause that desired effect, but as demand drops, the car dealers slow down, so the car dealers can’ buy yachts and helicopters and nicer cars than they sell theselves (lol). Each of those products lays off all their workers and its a cycle.

Like I suggested, its great and works like a charm if the economy continues to grow. The problem is that eventually, like a bubble that keeps getting blown larger, it bursts at some point. Are we there yet? I believe we are, but many smarter people than myself thought we were in 2008. We narrowly escaped collapse of the economy and kicked the can down the road further. I hope my book her has helped. I actually enjoyed writing it. Keeps my mind sharp.

I have a position in bns! Uh Oh!!!!!!!

how does lower interest rates get rid of old inventory?

We’re 100% long these markets. Love the doom. We will be buying more doom.

The big banks are hurting??? Who cares. Good!!! Maybe they will go under. Take a bunch of corporations down too. What a curse they have been to our world.

👍💐

Ha!

Those who got in a low rate fixed mortgage have a real bargain. Inflation is approaching double digits. A home loan in low single digits allows extra money to be put to work elsewhere. Many mortgage companies are really pushing home equity loans right now so they can roll the debt into a higher rate loan. Don't fall for that one. They try to roll a home equity loan into a home loan, so you pay the home equity loan at a higher interest rate while the home loan goes unpaid while accumulating interest. It is an accounting trick the mortgage companies really like to do. Yes, pay off you 19% credit card with a home equity loan at 10%, but while that is being paid, the home loan has nothing going toward the principal and accumulating interest onto the principal.
It might be OK if you can get a home equity loan and continue to pay down the home loan balance, but stopping home payments for several years for the payback of a home equity loan at high interest makes no sense. Look into the details of this for any home equity loan. They try to catch the homeowners unaware. Be sure to ask your mortgage company about the principal payments on the home loan while the home equity loan is being paid. They won't volunteer this info, but disclose it in the fine print of the contract.

Ashmore group is gonna cause the crash!

Time to tighten bankruptcy rules. I see people get their debt wiped clean then go out and try to buy $50k cars. They didn’t learn their lesson.

Do you have any information on a potential pullback in the recent rental sudden increases in the face of a obvious recession. It appears to me that landlords ill advisedly jumped the gun and may be left holding the resulting vacancies when are no longer able to support increased rental obligations!

Just reported about a dozen SCAMMERS in your comment section.

Job ads has never been an accurate measure of worker demand. Many, possibly a majority of companies run perpetual ads for positions to a) see if a star comes across their path, b) to to just monitor the market. As a rule of thumb, I would take the number of job ads and devide by 2.

Isn't that what happened in 2008?

School they HIGHT they ALL … BLINDED by GREED they ALL … STUPID BECOME they ALL …
you ALL ……… ALL at ONCE ……… say THANKs TO joe bidden … xie jin pig AND george soros …

Once "this sucker goes down", they'll bailout their precious 'system' again, while the rest of us burn once more.

FED SHOULD INTRODUCE SUB- FED OFFICES IN EACH AND EVERY STATE SO THAT THE SPILL OVER CAN BE MINIMISED BECAUSE THE ENTIRE NATION SHOULDN'T PAY THE PRICE ON BEHALF OF BANKRUPT STATES.

Many people are being scam of their crypto,I'm a victim,after meeting Mr Henderson, I invested, guys I now make 593$ every week,,

Banks never lose. Just read rule no. 11 from the Monopoly board game.