Subscribewho predict that the current boom is unprecedented in history in that it will never turn into a bust.The impression I get from the favourites and the approving comments, is that people think Malor is expressing fairly reasonable, mainstream economic thinking.
Neither of those views is ever correct.
So, in other words, nothing new ever happens.
What happened instead is that the Fed panicked and hit the liquidity button, flooding the system with incredibly cheap money. New money chases inflation, and causes more of it, so it went into housing, and then people started leveraging themselves up into massive debt to buy more of it.If there was a really huge increase in liquidity, beyond the bounds of the normal economic cycle, we would expect to see a correspondingly huge increase in inflation.
That hasn't happened for two primary reasons.Well, I've just gone through the last two pages of your comments searcing for "inflation" and can't find any hard evidence of you've cited of this fantasy. Remember that anyone can take a basket of goods and monitor how the prices change over time, so it doesn't take a government to monitor inflation. If real inflation is very much higher than official figures, this should be very obvious and very easy to prove. Since I can't see such proof, I don't believe you.
A) The government inflation figures are bogus. I've posted at some length about this before; you can look up my past history if you want more info. The recent financial threads have had great contributions on that score from other posters as well. Check Heywood Mogroot's contributions, he had some really good stuff on that score. Government inflation numbers are ridiculous fantasy.
B) China and Japan are 'importing' our inflation by keeping their currencies artificially weak against the dollar to improve their exports. They print their currency to buy ours, which artificially overstimulates their own economies. That's the reason Japan has come out of the doldrums from THEIR real estate bubble; they've been suffering for way more than a decade, and they still would be if their central bank wasn't being reckless. They refuse to let the zombie companies die, so their economy never recovers. And Chine is growing at something like 15%/year, which is wildly destructive... growth that fast results in terrible maladjustments.China's growth rate is 8.5%, which is impressive, but not unprecedented for a "catch-up" economy.
There's an ancillary reason as well: the advent of globalization is the most powerful deflationary force ever. When you can pay Chinese workers a strand of ramen a day, that makes for remarkably cheap goods. If you track the prices of things that have to be produced locally, like housing and health care and education, the prices are going parabolic.
If there was a really huge increase in liquidity, beyond the bounds of the normal economic cycle, we would expect to see correspondingly huge increase in inflation
We have seen just that. However, with interest rates driven to the floor (here) and through the floor (in Japan), the currency didn't inflate, because leverage was so cheap.
Look at stock prices. Look at commodity prices. Look at real estate. Calculate the core consumer inflation rate using the 1990 or 1995 baskets, not the carefully changed baskets used every year, and the inflation is as clear as day. Better yet, use CPI, which reflects those strange people who actually eat food and use energy, and it's even worse.A 1990 basket isn't going to give valid results today. If it doesn't have modern products like cellphones, it's not going to include the relevant price falls.
Compound that with the horribly skewed income inflation -- if you're a C*O, your income has inflated right along with prices (the rest of us? Fucked.)
We've been living in an inflationary economy -- somewhere between 3 and 7%, for the last eight years. The Feds have tried to hide it, but the data is there. Calculate M3, and it's shows clear as day.
However, this one's been different. Before, inflation would be met with high interest rates, which would drive people to savings. This time, we've done the exact opposite, and not only are people *not* saving, they've spent down their savings. That drove the inflated economy further -- instead of saving, people kept spending.
There's tons of info in the thread associated with this comment.All I can see in that thread are subjective assertions by you, shot down by other commenters. I'm not seeing any hard evidence.
Keywords to do your own searching on: hedonic adjustments, owner's equivalent rent. If you do your homework, you will find that the government inflation numbers are so divorced from the reality on the ground as to be useless.
The Fed stopped reporting M3 in 2005. That was not for your benefit.
If there was a really huge increase in liquidity, beyond the bounds of the normal economic cycle, we would expect to see a correspondingly huge increase in inflation.
If the cash goes into specific asset classes, then you don't see the inflation in the general economy until people start selling out of those asset classes. Now, which asset class has rocketed upwards in the last decade or so? Clue: US house prices, UK house prices,
Real wealth is stuff... things that are made, and the means of their production. Food, farms, and farm equipment... access to clean water, lumber, spices, luxuries....real stuff. That's wealth.Actually, solid goods are only about 20% of the wealth of rich nations, according to the World Bank. Education, knowledge, skills, institutions: that's wealth.
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The basis for the good times was the real estate market, leading to risky lending stratagies such as ARMs (adjustable rate mortgages) mf and later even riskier NINJAs (no income no job no assets).
Risky loans were made assuming an appreciation of real estate, the debt could later be repaid with a mortgage on the increased value of the property. This worked most of the time. [Wikipedia: the housing bubble in the
US and -although a bit different-
UK]
The 'severe demand for cash' culminated a few weeks ago on August 15th as the Federal Reserve lent $7 billion, the Bank of Japan lent $10.5 billion and the European Central Bank lent 48 Billion Euros to other banks.
On Thursday August 30th, it is expected that for the first time since federal housing records began 1950, median house prices will have fallen nationally in the United States [see e.g. Forbes].
Preivously on MF: Foreclosure-Radar, the $7 billion put option from hell that expires Sept. 22nd (BTW the Federal Reserve has its next meeting Sept. 18th), A world of Casey Serins, Damnit Jim, I'm a doctor not a stock broker!.
posted by umop-apisdn at 9:02 AM on August 29, 2007