^NEW 7/14/2007 6:49:58 AM

 

Thecrisis control of the early nineties produced a stock market andtechnology bubble which created a wealth effect in the economy for themiddle class.

The crisis control of the '00-'02 produced a housing bubble which created a wealth effect in the economy for the lower class.

These wealth effects along with cheap imports maintained consumer spending at an acceptable rate.

The postponement of deflationary crises however does not cancel their eventual emergence in the economy.

Thelast attempt at crisis control scraped the bottom of the barrel so tospeak by creating loans for those who either have no experience or havebeen delinquent in repayment of loans. This additional demand inhousing market inflated prices far beyond their natural appreciation.

Thisinflation in housing prices allowed consumers to spend their savingsand to borrow against the unnaturally appreciating value of their homesand spend even more. Yet even with all this excess spending, theeconomy barely muddled through the past few years.

So if the Fedand government are ignorant enough to attempt another round of crisiscontrol in order to stabilize the financial system, these schemes willhave little or no effect on the deflating housing bubble and theresulting cutback in consumer spending.

And as consumer spendingdries up, our service/retail economy will die of thirst and the foreignbagholders will have little incentive to maintain our debt. This willincrease the cost of borrowing which will accelerate the dehydrationprocess.

In order to perform crisis control for the comingeconomic collapse, the Fed/government must create a new asset bubblewhich will make the consumer feel wealthy enough to spend, spend, spend.

Too bad the bottom of the barrel has already been scraped.