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None of the malinvestments have been allowed to be liquidated.Housing prices have been propped up, banks and auto companies have been bailed out, regulations have been increased, debt covenants have been violated, unemployment insurance has been extended.In addition, there's the cap-and-trade bill, the healthcare bill, and a "czar" around every corner.
Common sense tells us that if phenomenon A causes problem B, then B cannot be rectified unless A is first removed.So if one defines deflation as a reduction in the M2 money supply, then we are indeed experiencing deflation.On the surface, consumers are finally getting religion, curbing their spending habits and paying down debt.Consider a system with 0 in loans due in a year at a 10 percent interest rate.The total amount of money in the system is only 0 but the amount due at the end of the year is 0. It has to be lent into existence at some point prior to when the 0 is due."It goes without saying that deflation would have been very painful for any debtor.