PROBABLE CONSEQUENCES OF DEFAULT

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If any banks should go broke in the process, this will bring on a further tightening of credit and a further reduction of liquidity. In this kind of an atmosphere, business will not expand. Everything will be pointing to a contraction. This knowledge is widespread enough now to bring on an inevitable contraction in the marketplace and through the general public. People facing this will buy less. Unemployment will increase.

It's a mystery to me how so many of these writers can holler, "More inflation." Where does the inflation come from? Where is there a plentiful money supply? We have just said that over $300 billion in the liquidity barrel is leaking out and will eventually come right out of the barrel. Let the Fed try to put in funds at the rate they are disappearing or being destroyed. And we have only started so far. No way in God's world can the Federal Reserve of the United States handle this global problem. Even if some extra money is created by the Fed, it will be as a drop in the bucket compared with the general climate of contraction and the huge loan losses suffered and finally admitted.

We may not have dramatic bank failures only a chorus of gaspings as some of them go under almost unnoticed.

The interest payments which the banks have counted on must be stricken from the books. The earnings statements that accountants look at when they advise on the reasonable price of a stock will be drastically knocked back because of the loss of this interest. Also, loans will necessarily have to be written down by degrees. We are not going to bury this corpse in one piece. We'll hack him up and do it gradually. But the smell will be around, and the days of plentiful money—the era of inflation-will have been banished for a long, long time to come. What we are facing, therefore, is a deflation starting out mildly at first and growing more severe as time passes. And the results of that will be classic.

[1] Cash will be king, and the same amount of dollars in cash will buy more next year than this year, and still more the following year. This will be a reversal of a 30or 40-year trend, when the idea was always to owe a lot of money so you could pay it back with cheap dollars. Now if you owe a lot of money, you'll pay it back with more expensive dollars, or it will be foreclosed, and you will lose the article you have bought.

The population is not ready for this.

Deflation cannot be stopped by a simple move of printing more money by the Fed. Creating more figures in books does not stop a shrinking economy. The idea that printing mountains of money results in an inflationary depression is baloney. There is no such thing as an inflationary depression. A depression means that there is very little money around. So how can you possibly and ridiculously have an inflationary depression, which some newsletter writers mouth around as if it were a real and honest-to-goodness term. They read it somewhere, and they think it sounds good. Plentiful money and tight credit do not coexist.

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