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|User Info||Why NOT Shrinking Credit In Recession = U R Screwed; entered at 2012-05-16 20:11:12|
..."Assume ALL homeowners tap into their home equity. The loans shouldn't be inflationary because they are backed by collateral (the houses). Yet we know this would be highly inflationary. So what's going on?|
The inflation is generated at the bank. In order to accomodate all these new loans the banks will have to raise capital (which they rarely do) or simply increase the leverage of their balance sheet. They may go from 20 times debt/equity to 40 times. Voila, there is your inflation."
Rethinking this one more time. I believe that collateral backed loans can indeed be inflationary. The bank creates money out of thin air even on collateralized loans. When the bank makes a new loan it increases its assets (its loan portfolio) then it 'creates' an equal amount of the money by putting it into the borrower's checking account. Checking accounts are part of 'M', so it increasing the money supply.