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When a person puts their money in the bank, they are in fact lending the bank money. The bank takes the money and lends it to a borrower, who then spends it. There is no guarantee that a loan will be paid back. The reality is that the money was spent at the time it was "deposited".
Since 1982, there has been a tremendous expansion of credit. This calls for a severe contraction. Expansion cannot go on forever. Trees do not grow to the sky. The recent plunge in the U.S. stock markets has been blamed on the trouble in Russia and Asia. But, in fact, the market’s fall occurs not because of what is happening now, but because of what happened in the past. People are not losing their money now, they are just coming to the realization that they lost it a long time ago. When the U.S. lent money to Russia, they were essentially giving the money away. They are just now realizing that they will not get their money back.
The response to the recent troubles in the U.S. markets has been to issue more credit. But the solution to an over-expansion of credit is not to expand it more! The market has been inflated since 1982 through many investments that should not have been made. The over-investment has reached the outer limit. The solution is not to make more bad investments. The solution is to let non-profitable companies go bankrupt and transfer the collateral to stronger hands.
