What might cause deflation?
Either there is no more money left to lend, or no one wants to borrow it. • 6.1. No more money left to lend. The banks can only lend based on their book value, or amount of equity they have. If a loan goes bad, this reduces the amount of equity and the amount of loans they can make – even if the FED does Repos with them, and reduces the deposit reserves. Even if someone out there wants to borrow money, they are not allowed to lend it because of regulatory limits. This is why the impact of the mortgage market meltdown is important. It is reducing the amount of credit available because of loans that have gone bad. The fact that lending standards have been tightened means that it is difficult to replace those loans. • 6.2. No one wants to borrow it. At some point, no one can or wants to borrow any more money. On the consumer side, debt levels as a percentage of income are quite high. That is why more and more money use has shifted to the hedge funds. New margin rules (lower requirements)
