Wednesday, October 22, 2008

The Crisis in Pictures

Casey Research, a financial firm, has prepared a report called "The Crisis in Pictures," about the current financial crisis, which includes the chart below:

Following the collapse of the dot-com bubble and continuing into 2002, the Federal Reserve increased money supply by $1.4 trillion. To quote from the report:

[W]hen confronted with the bursting of the dot-com bubble, Fed Chairman Greenspan without hesitation poured unprecedented amounts of money into the economy, increasing the money supply at roughly four times the rate of GNP growth. . . . [T]he economic dislocations of the dot-com bubble went largely unresolved and, after a very brief hiatus, the credit bubble continued expanding… now with mortgage debt.

In other words, the underlying losses of 2000 were "papered over" by inflating the currency, but because the (debt-funded) money was funneled mostly into real estate, housing was essentially the only commodity that saw a price increase.

The full report is available via e-mail from Casey Research.

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