Debt & Debtor

I've been reading a lot of stock market news along with doom and gloom stories about the economy. I think the gist is that long-term loans became so cheap, people were enticed to buy things with borrowed money. With all this money (rather, credit) circulating, houses became a lot more expensive--not because they were actually increasing in value, but because people had more and more credit to spend. So people borrowed even more money to buy these homes. Long story short, more money has been loaned out than actually exists, and that's causing problems; you can't pay back loans with non-existent money: Nicholas Andre: (looking at peices of paper in a suticase) Where's all the money? Lloyd Christmas: That's as good as money sir, those are IOUs. Go ahead and add it up every cents accounted for. Look, see this that's a car, 275 thou--might want to hang on to that one. Being able to compare US consumers with Lloyd Christmas from Dumb & Dumber makes me nervous. So here's the rundown as I've gathered:

• People borrow more money than they're able to pay back.
• Banks lose money on the loans given to these people.
• Banks can't give out more loans since they don't have as much money to loan out.
• People can't get the loans they need to buy things, so they have to stop spending.
• Companies profiting from people buying their stuff lose sales.
• Investors used to steady, rising company profits get upset and cash out their investments.
• Stock prices fall, companies lose capital they need to do business, people lose jobs, the economy goes south.

Hey, doesn't this sound familiar? Anyways, the difference between now and 1929 is that we have federal groups that are supposed pull strings to try to keep the economy going. Good luck with that. To be fair, the latest move by the Fed--lowering the interest rate for loans they give to banks--did help the market rebound today, but that just adds more borrowed money into the mix.

Eventually the US is going to have to generate money, maybe some lucrative new energy source, perhaps? Until then, I'm not sure what to do. If this scenario causes the value of the dollar to increase (as a result of credit being harder to obtain and prices decreasing), I'll want to hold onto cash. On the other hand, if the US economy tanks and the dollar loses its value, then my cash will be worthess, so maybe I'll want to buy gold or something to protect my dollars.