What the Fed's Exit Strategy Will Mean for the Economy

By Michael Pento
14 July 2009 @ 09:11 am EDT

Economics is not an exact science. It pales in comparison to mathematics because it contains a high component of art in its analysis. With that said, there are several principles that still apply. One such principle is: when the condition of an economy becomes overleveraged, it needs to experience consistently expanding GDP with unabated asset price appreciation and a falling currency, or it will become insolvent.  A fall in economic activity leads to lower asset prices, which force the dumping of those assets held on leverage. Also, an increase in the value of money will increase the value of all debt making it much more difficult to repay. The resulting dumping of assets leads to a deflationary spiral and economic turmoil.

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