Chain Reaction II
A possible chain reaction
1. Treasury prints more money & Fed lowers interest rates
2. Money supply becomes inflated and excess money chases yield causing asset price inflation
3. Real estate loans become easy to securitize through FNMA and FRE with very low credit spreads. The loans have a multiplier effect on the economy
4. Banks lend or "print" more money by taking a deposit, leveraging it by making a real estate loan, then sell the loan, take the profit upfront and recycle the profit to making more loans.
5. Chasing yield through low credit spreads causes investment misallocation
6. Misallocation distorts and shifts the economy from long term sustaining economic activity to short term money shuffling activities, effectively crippling the economic base.
7. Productivity seems spectacular, but growth relies on excess liquidity.
8. An unrealistic bond market keeps high end rates artifically low, resulting in The Fed raising rates on the short end, forcing banks to pay more on deposits.
9. Losing deposits means leverage goes up, the banks sell some loans or call some back to create liquidity while FNMA & FRE tighten their portfolios making it harder to securitize loans.
10. Credit spreads are no longer low, cutting liquidity and productivity gains as asset price levels reach an unsupportable level
11. With rising short end rates, the banking industry faces yield curve inversion, just as the inflated assets begin to deflate to their natural or neutral value
12. The multiplier effect reverses on the banks and economy, interest rates soar, liquidity and housing sector dries up, loans default, banks fail, economy busts
1. Treasury prints more money & Fed lowers interest rates
2. Money supply becomes inflated and excess money chases yield causing asset price inflation
3. Real estate loans become easy to securitize through FNMA and FRE with very low credit spreads. The loans have a multiplier effect on the economy
4. Banks lend or "print" more money by taking a deposit, leveraging it by making a real estate loan, then sell the loan, take the profit upfront and recycle the profit to making more loans.
5. Chasing yield through low credit spreads causes investment misallocation
6. Misallocation distorts and shifts the economy from long term sustaining economic activity to short term money shuffling activities, effectively crippling the economic base.
7. Productivity seems spectacular, but growth relies on excess liquidity.
8. An unrealistic bond market keeps high end rates artifically low, resulting in The Fed raising rates on the short end, forcing banks to pay more on deposits.
9. Losing deposits means leverage goes up, the banks sell some loans or call some back to create liquidity while FNMA & FRE tighten their portfolios making it harder to securitize loans.
10. Credit spreads are no longer low, cutting liquidity and productivity gains as asset price levels reach an unsupportable level
11. With rising short end rates, the banking industry faces yield curve inversion, just as the inflated assets begin to deflate to their natural or neutral value
12. The multiplier effect reverses on the banks and economy, interest rates soar, liquidity and housing sector dries up, loans default, banks fail, economy busts
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