Replying to Whats really happening: the global credit crisis

to set things straight, i am about as far as you can get from being a financial buff, but watching the global credit chrisis unfold over the last few weeks has been captivating for me. it's got me thinking about what the financial system is, and when you step back and look at it, it seems wholly absurd.

The global financial infrastructure is an overly complicated exchange of IOUs, the value of each iou is determined most basically by a ratio of the demand for them and the supply of them. although some of the IOUs are backed by goods, services and commodities, most are backed by other IOUs which are backed by other IOUs and so on. think about the 20 in your wallet, it is a note from the government saying they will give you 20 dollars. but the dollar isnt even a real thing its an IOU backed not by anything tangible but by speculation as to the value of the IOUs backing it.

In this system, it is incredibly easy for things to be traded at an inflated value. someone can take boxes of shit, tie a golden riobbon on them and sell them for $100 a pop until someone opens the box and smells the shit. this is what happens when a bubble bursts, and its exactly what happened with the mortgage backed securities that were, until a few months ago traded at face value. when someone tried to collect on the bundle of sub prime mortgages they just bought, they realized that all the people with those mortgages didnt have anything to back their IOUs with.

the next thing i wanna say may be a stretch considering ive only been interested in the economy for three weeks, but it seems kinda obvious to me.
United states bonds and treasury bills are being traded in a bubble. since the louisiana purchase, the United States has been in terrible debt. and since becoming a global superpower, stock in our government has been bought and traded like gold. Now we have 10 trillion dollars in debt and due to 50 years of focusing more on foreign war and less on industry, we have nothing to back our bonds with. The carefree world we live in was purchased on a credit card we dont have the capitol or industry to back what weve borrowed so far, and we just borrowed another trillion.

so in the end i think this chrisis is big, i dont know what will happen buit it will be big. i hope its big enough to teach people to quit trying to live beyond their meens. but its definitely big in the great depression it took 3 or 4 years for the stock market to drop 30 or 40 percent, we did it in a few weeks.