This week, John Mauldin features the thesis by Pimco's Paul McCulley, on the subject of the deleveraging of the financial system. Here are a few excerpts:
The Paradox of Thrift:
For me, a simple concept brought this realization: the paradox of thrift. For those of you who might not recall, the paradox of thrift posits that if we all individually cut our spending in an attempt to increase individual savings, then our collective savings will paradoxically fall because one person's spending is another's income – the fountain from which savings flow.
On Monetary Easing:
But monetary easing is of limited value in breaking the paradox of deleveraging if levered lenders are collectively destroying their collective net worth. What is needed instead is for somebody to lever up and take on the assets being shed by those deleveraging. It really is that simple.
Read the complete article here - The Paradox of Deleveraging, Paul McCulley
Source: John Mauldin
