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In Debt We Trust
September 20, 2009 11:30 PM   Subscribe

A government stimulus can overwhelm the impact of a credit crunch, and the innate dynamic of a productive economy can re-assert itself after such a crisis, leading to renewed growth. But this not merely a crisis of liquidity. It is one of excessive private debt, on a scale that is also unprecedented. Economist Steve Keen on the global debt bubble.

Keen has long been concerned about the rise of household debt in the global economy, but he is not alone: although American consumers are now saving as never before, and in a way that worries some economists (see for instance the issue of "debt overhang"), personal debt remains historically high by almost any measure: Collectively, U.S. household debt rose to a high of 133% of after-tax income in 2007, double the percentage of the mid-1980s, according to Federal Reserve data.(LA Times, 9-21-09)
posted by HP LaserJet P10006 (55 comments total) 7 users marked this as a favorite

 
Keen has been predicting a 40% fall in Australian real estate prices for at least 5 years. So far, with no result.
I believe he also did a media stunt where he claimed buying a house was a poor investment, and that he would rent forever and invest the rest in stocks. I suspect last year's shenanigans might have taken the shine off that strategy.
There is no dispute that household debt is too high, especially in Australia. The dividend from increased workforce participation from married women over the last two decades has largely been poured into residential property prices, for no net gain.
But Steve Keen is a grand standing attention seeker.
Unfortunately, some of the theory of the Austrian school economists he favours are very interesting, but he does them no service with his constant doom and gloom predictions.
posted by bystander at 11:42 PM on September 20, 2009 [3 favorites]


The way some people talk about the total amount of debt makes little sense to me. If you save money in a bank, you are loaning that money to the bank itself, so the total amount of debt in the world goes up.
posted by delmoi at 11:43 PM on September 20, 2009


When American Express asked a sampling of 2,032 people late last month what they would do if they found $500, the answers were like a pitcher of ice water in the face of retailers. Survey respondents were offered a list of possible spending choices that included splurging at a restaurant, going on a shopping spree and taking a trip.

But a mere 10% or fewer marked one of those items. Most went down the list and checked off paying regular bills, reducing credit card debt or simply saving the money.

"What we see consumers doing is exhibiting a level of discipline that we didn't know," said Gail Wasserman, a spokeswoman for American Express, which like other card companies has reinforced the reduced- spending trend by issuing fewer cards and slashing credit lines to lower their own risks.
Ugh, the contempt of these wallstreet people for the average Americans. It's like, how dare these people not fork over all their money plus money plus money they don't have to us so we can make ourselves richer! Their goal is to extract as much wealth from ordinary people as possible, ensuring those ordinary people have as little for themselves as possible.
posted by delmoi at 11:48 PM on September 20, 2009 [18 favorites]


I believe he also did a media stunt where he claimed buying a house was a poor investment,

Keen recently lost a bet too:

He made the wager about house prices with another economist, Macquarie Bank's Rory Robertson. The loser has to walk 220 kilometres - from Parliament House in Canberra to the peak of Mt Kosciuszko.

And he has to do it in a shirt with the words: "I was hopelessly wrong on house prices, ask me how."

posted by the duck by the oboe at 12:00 AM on September 21, 2009


40% fall in Australian real estate prices for at least 5 years. So far, with no result.

Australia -- all that land and so few people. You've got like a third a km per person while here in CA we've got about a tenth a hectare per person, tho I guess everything to the NW of Canberra is pretty marginal.

Credit and land boom/busts go together like cookies & milk -- one can never own too much or too good land, or so it seems.

Robert Morris, the richest man in the early US was bankrupted by the Panic of 1796-97. William Penn, owner of the entire state of Pennsylvania, was thrown into the poorhouse a hundred years earlier due to the leverage of land debt and scandalous financial management.

Land economics are endlessly fascinating to me yet you will almost never find an analysis of it in present economic books on capital &c.
posted by Palamedes at 12:02 AM on September 21, 2009


I'm still working out what all this means, and likely will be for years yet, but it looks pretty much like an unmitigated disaster to me.

The entire bailout package has restructured the fundamental economy in a very, very unhealthy way. Just as the interventions after the dotcom bubble crashed set off the debt and real estate bubbles, the massive interventions after those popped appear to be setting off what's probably the final expansion, the Government Finance Bubble.

The US economy appears to now need about 2, perhaps 2.5 trillion in new debt issuance each and every year just to remain functional. The existing debt can't be paid off; the giant accident we just had was the truth of the debt bubble penetrating to the real economy. Everyone realized, "oh shit, an awful lot of this debt is bad", and the system froze up.

So what did we do in response? More of what made us sick... debt issuance. We doubled down on the original bad bets, hoping that boatloads of cash (which is another form of debt) and securities coming from the government would overwhelm the deflationary impulse of all that bad debt. But it's just stoking the fire even higher. They're able to temporarily hide the deflationary undertow with massive inflationary stimulus, but all that stimulus is debt-based, so it carries the seeds of its own destruction.

All the money that's being injected into the economy carries an interest rate, and must be repaid. That's the nature of debt money. Trying to fight deflation with debt issuance hides the fact that the old debt is bad, but it adds to the total amount of bad debt in the system. So it delays the problem, but makes it worse. To avoid losing a foot today, we're promising our leg up to the knee tomorrow. And when they come for the knee, we'll promise the other foot if they'll only wait another day. Eventually, we run out of body parts. We could have gotten away with just losing a foot.

And the method that this debt is being generated is also extremely unhealthy; most of it, north of 80%, is explicitly guaranteed not to go bad by the US government, via its AIG subsidiary, and a very large fraction of the new debt entering the system comes in via Fannie Mae and Freddie Mac, the government-owned mortgage issuers.

The US Federal Government is now probably the most central player in the economy, which, considering their extraordinarily bad financial position, is a profoundly dysfunctional and conflicted place to be. We are addicted to the vast streams of debt it must issue, and it's addicted to the vast streams of tax revenue that return to it from that debt issuance. If we stop issuing total systemic debt, and start repaying it instead, the economy will crash. If we keep issuing debt, the economy will crash even worse, just later. So, the politicians always opt for 'later', and with their new subsidiaries that both create and insure debt, can do as much of that as they want, and can underwrite any idiotic loan they choose. The net effect will be a transfer of many trillions in profit to private entities, while the government shoulders the entire risk. It's looting of the public treasury on a scale that Halliburton would have wet dreams about.

As these debts go bad, as they inevitably will, the Federal government will now be on the hook to make them good. So they'll have to do more of what they're already doing, creating new money from nothing to pay off the bad loans. I'm not sure how it'll work via AIG. I think they might just hand over cash in exchange for title to the bad loan. (or, possibly, they may never take title of the loan at all, they might just hand over cash and get nothing for it.)

If things get bad enough, then either Congress or the Federal Reserve can step in and directly monetize bad debt, precisely as they've been doing for about a year now. The government lends banks a whole bunch of money, using the bad loans as collateral. So now they've got new money to lend with. If things go south, the government end up with the bad loans, but most likely, they'll never really try to collect -- they'll just issue more and more loans instead. It's an excuse to put money into the system, not a genuine transaction.

And, since all that inflationary money ALSO carries an interest rate, it's adding even more to the deflationary undertow. They can't stop stimulating because they are stimulating. And the apparent damage of failing to stimulate gets bigger with every day that passes, so they'll continue to make the problem perpetually worse. Things will get more and more and more unstable. I don't personally see any other possible endgame except a full deflationary crash or a full hyperinflationary spiral. I think the midgame scenario is probably stagflation, like the 70s, but far, far worse. I'm strongly suspicious that the constant healthcare cost increases are an early symptom of the monetary and debt inflation that's been going on for years already; that industry has tremendous pricing power, and appears to be using it.

The government and the Federal Reserve will do their very best to stop each swing, as we vibrate back and forth between the two impulses pushing the economy, but eventually, they're going to blow it. They almost blew it last year. And it's a damn shame they didn't, because a deflationary crash is MUCH better than a hyperinflation.
posted by Malor at 12:39 AM on September 21, 2009 [18 favorites]


Sorry, I said 80% of debt issuance when I should have said 80% of mortgages. Here's a related quote:

September 18 – Wall Street Journal (Peter Eavis): “More than half of U.S. residential mortgages are being made by just three large banks. It is a stunning change, but is it good for the housing market, and to what extent will it boost profits over the long term for this elite trio: Wells Fargo, Bank of America, and J.P. Morgan Chase? Right now, housing remains on government life support. Treasury-backed entities are guaranteeing about 85% of new mortgages, while the Fed buys 80% of the securities into which these taxpayer-backed mortgages are packaged.”
posted by Malor at 12:52 AM on September 21, 2009


Keen definitely has a bad reputation, and between the doom & gloom and at times outright misinformation its difficult to take him seriously sometimes. Too bad as he's actually got some good points, but grandstanding and other antics detract.

That being said, one of the current bubbles (yes, there is always a bubble inflating or deflating someplace), government debt, has everyone's interest and I bet will be a broad topic of conversation at the upcoming G20 meeting.

Of course while consumers faced with excessively large debt loads default and corporations enter bankruptcy (which, as Merton tells us, almost always occurs "not with a bang but a whimper" [ .pdf ]), governments are a little different - historically in developed nations we see "stealth defaults" i.e., engineered inflation rather than messy public bankruptcies.

I've long thought (and posted as much) that the US would engineer a wave of inflation to effectively negate the real value of the deficits, much like they did in the 1970s or in the 1930s. Keep in mind the 1930s were different in that The United States was still on the gold standard (yes, The Great Depression happened even though the Dollar was backed by gold), and inflation was engineered by restating the dollar/gold conversion rate from $20 / ounce to $34 / ounce, effectively debasing the US currency.

So the good news is as long as government debt auctions clear we shouldn't have any problems in the near term. The challenge for The Fed will be reducing the size of their balance sheet as the economy and indeed the business / credit cycles normalise. But inflation can cure lots of problems, and I'm sure The Fed has run the numbers and looked at what wonders a few years of double digit inflation can do to such impressively high deficits.

This is precisely what they did in in late 70s and early 80s, and that game plan was pretty obvious even back in 2004 / 2005. Time and time again countless administrations have shown that given a choise between protecting the US dollar or protecting savers assets, they'll sacrifice savers without hesitation; no worries of hyperinflation, just prepare for a few (more) years of double digit inflation.

Now The Chinese are in an unenviable position; thirty years ago when America technically defaulted on its debt (engineered inflation) the Japanese and Europeans got nailed, big time. So you can bet The Chinese have read the tea leaves and are covetously eyeing those seats on the exit row.

I've got data covering recent US Treasury auctions through June; there is no sign The Chinese are unloading (3.3% decline, nothing serious) although, as I've mentioned before, the are moving to the short end of the yield curve, seemingly getting ready to move so the handwriting is on the wall there.

In fact, it seems like The United States is encouraging the Chinese to move out of treasuries, or at least publicly approving such a trend.

And nobody in the administration seems concerned about the weak dollar, which makes one think (not looking at fundamentals, mind you) that further weakness is expected.

The Fed's immediate challenge seems to be keeping interest rates, in particular long term low (and this is a battle they won't lose); the generally unnoticed war in the bond markets shows no sign of abating - in fact this week we're seeing a record $112 billion being brought to market, and it will be fascinating to see what happens to the long end of that yield curve.


the duck by the oboe -- many thanks for pointing that out; I share an office at University with one of Keen's more vocal detractors, and she'll get a tickling out of this.
posted by Mutant at 1:00 AM on September 21, 2009 [23 favorites]


The net effect will be a transfer of many trillions in profit to private entities

goody; we can tax them, surely?

I'm strongly suspicious that the constant healthcare cost increases are an early symptom of the monetary and debt inflation

That's one theory but the other is that we are getting older, fatter, & sicker as a nation and the health providers would be pushing up their prices regardless, ie they care more about M3s than M-3.

I'm fully down with real estate falling 40% from peak since if you read Keen all he's arguing for is a replay of Japan's meltdown 1990 ~ now.

The only thing propping up the Japanese market is the 2 to 3% loan rates, at 2% even a million-dollar house is affordable -- that's just $1600/mo in interest!

Inflation is a tough case to argue with unemployment now at highs not seen since 1940 but if we can find a way we'll accomplish it. What cost a quarter when I was a newly-minted consumer-kid in the 1970s is now a dollar; what costs a dollar now may cost $5 when I'm an old fart.
posted by Palamedes at 1:24 AM on September 21, 2009


The core of this argument seems to be that borrowers (both corporate and consumer in the US at least) have reached the limit of borrowing in the aggregate. Any increase in lending results in more defaults as the repayments exceed net income.

In such an environment, the logic goes, it's very difficult to engineer the inflationary escape hatch that Mutant talks about, because nobody (consumer or company) will borrow the money in the first place.

In the limit, governments can create new money at the stroke of the pen & I guess that's what they'll do (The BoE & the Fed are already doing so, but on a limited scale relative to the expected defaults as I understand things). The trouble is that creating enough new money to pay off the debts would be extremely inflationary if done on the required scale, which is very damaging to the economy because it destroys the information flow that comes from the price of goods. Presumably the Fed is hoping that if they can do it slowly enough they'll manage to avoid that outcome.
posted by pharm at 1:26 AM on September 21, 2009


In a world of year-on-year double-digit inflation, a mortgage locked at something like 5.5% or so is a goose that is continually laying a golden egg, right? I mean, assuming you can afford it, and ignoring the underlying value of the house itself, assuming you're happy there and have no plans to sell?
posted by maxwelton at 1:31 AM on September 21, 2009


Mutant, the 1970s inflation was interesting in that the demographics of the baby boom meant that the bulk of America was entering prime productiveness (plus the full entry of women into the workplace damn near doubled this productivity), and the world was a lot more divided place, not to mention the US stood astride the globe in terms of international trade position.

But where is the wealth production today -- for a wage-price spiral to work its magic you've got to spike the wages of the workers. Nearly all computer jobs not requiring security clearances can be sent to Asia now; the $100k+ CS salaries of this decade are probably going away. Farming is such a small sector of the economy that it's not going to change anything. Manufacturing has been gutted since the 1970s.

I'm not terribly pessimistic since the top quintile of this country still controls 85% of its wealth. People may say "we don't have any money" but from the redistributionist perspective I beg to differ.
posted by Palamedes at 1:45 AM on September 21, 2009


In a world of year-on-year double-digit inflation, a mortgage locked at something like 5.5% or so is a goose that is continually laying a golden egg, right?

All depends to a large extent on how area wages react to this inflation -- rising energy and food prices can put downward pressure on rents and land values, should wages remain fixed. We pay the rent AFTER taxes and the basic requirements of modern life, not before, and rents are the basic basis of land values, the infamous "rent vs buy" calculation.

As touched on in the above, tax rates -- and/or mandatory health insurance premiums -- going up also put downward pressure on rents and home prices.

With double digit inflation also comes double digit mortgage rates and those really do number on home values . . . a household that can afford a $400K house at 5% interest can only afford $250,000 at 12%!
posted by Palamedes at 1:54 AM on September 21, 2009


maxwelton: only if that inflation feeds through to wages.
posted by pharm at 1:55 AM on September 21, 2009


The US economy appears to now need about 2, perhaps 2.5 trillion in new debt issuance each and every year just to remain functional.

Or they could, like, raise taxes or something. It's noteworthy
how people whining about the national debt never bring that up. I also don't think the national deficit is anywhere near that much. At the end of this fiscal year it looks like it will be about 1.38 trillion in this fiscal year, which includes all the bailouts and half the stimulus. according to projections the deficit should be about 3% of the GDP per the OMB or maybe 5% per the OMB.

Increasing taxes by 5% of the GDP, from 28% to 33% should cover that. Here's a comparison to other first world countries:

*China's tax revenues are 17% GDP
*Japan's tax revenues are 27% GDP
*Switzerland's tax revenues are 30% GDP, and so are Australia's
*Canada's tax revenues are 27% GDP
*Ireland's tax revenues are 34% GDP*
*Brazil's tax revenues are 38% GDP
*The UK's tax revenues are 39% GDP
*France's tax revenues are 46% GDP
*Denmark's tax revenues are 50% GDP

Etc. Here's a chart

(*remember how Ireland was held up as an idea of low taxation? We could close the budget cap and still be taxed less then them)

Whining about the deficit is really just a way for rich people to whine about the (reasonable) taxes they'll have to end up paying, not about some foundational problem with the United States. We have plenty of room to raise taxes to pay for all this stuff.

And, since all that inflationary money ALSO carries an interest rate, it's adding even more to the deflationary undertow. They can't stop stimulating because they are stimulating. And the apparent damage of failing to stimulate gets bigger with every day that passes, so they'll continue to make the problem perpetually worse.

Typical malor post: Lots of financial jargon mixed with in with negative superlatives. No math or numerical analysis whatsoever. Last year you were saying we were going to be "like Zimbabwe", with it's hyperinflation. So far, it hasn't happened.
posted by delmoi at 1:58 AM on September 21, 2009 [11 favorites]


delmoi: many of those countries get more for that tax revenue. Health care is the obvious missing element: add the 16% of GDP the US spends on health care to that tax take, and you're at 44% already.

If the thesis about the limit of consumer debt issuance is true, then raising taxes also has a pernicious effect on the default rate. I'm not completely convinced, but there's a good case to be made that consumer attitudes to debt are shifting.
posted by pharm at 2:08 AM on September 21, 2009


Oops: some of that 16% comes out of existing taxation of course. The point still stands though, if not quite as strongly :)
posted by pharm at 2:10 AM on September 21, 2009


delmoi: "Typical malor post: Lots of financial jargon mixed with in with negative superlatives. No math or numerical analysis whatsoever."

MONEY FIGHT

I'll heat up the (apocalyptically overleveraged) popcorn!
posted by Rhaomi at 2:17 AM on September 21, 2009 [2 favorites]


delmoi: many of those countries get more for that tax revenue. Health care is the obvious missing element: add the 16% of GDP the US spends on health care to that tax take, and you're at 44% already.

Health-care is 16% of the GDP in the U.S. If that were shifted over to the government, and spending levels were brought in line with what other countries pay, that could care of the entire deficit right there (or so).

What's interesting is that at this point in time there are more people getting healthcare from the government then getting healthcare from private insurers. That means people on medicare, Medicaid the VA, S-CHIP, etc actually outnumber the number of people on private plans. I don't know the spending differences, though.
posted by delmoi at 2:24 AM on September 21, 2009


In response to an email query -- how exactly did we get into this mess?

Well, I think we're gonna be arguing over the cause for decades, just as nobody today really knows precisely what hit investor confidence and kicked off the stock market crash preceding The Great Depression.

But a few reasons from my list of factors driving the most recent crash, in no particular order 'cause its a big big big topic and I'm not an Economist (note: not all my original ideas, some of these factors were floated at a seminar I attended maybe two months ago, they had more but I only repeat what I agree with. And I don't think the panel participants would claim this list as their original research either, lots of folks looking at this episode)

Just as today its fascinating to look back over the past year or two years with a little increased clarity, I'm looking forward to the perspective that a decade will bring. Lots of folks are researching the past year or so and it will be fascinating to see what better minds finally put on the table as the underlying causes.

Palamedes unless I'm reading your comments wrong (likely), it seems you and I differ somewhat in that I believe they can engineer inflation if and when it suits. We don't need $100K plus CS salaries - inject enough money into the system and you'll have inflation, especially if waiters and waitresses are now pulling in $100K. I haven't posted PMI numbers since July, but back then we were already seeing pricing pressure in the data.

Given the size of the deficits and the scale of the debt payments - both in nominal terms mind you - I do believe they'll engineer (have already engineered, actually) a few years of double digit inflation to render those sums manageable, in real terms.

Just what happened in the late 70s / early 80s, when everyone was up in arms about the deficits and, of course, our boogeyman of that era, Japan.

Now we've got the same handwringing about the deficits and a new boogeyman, China.

Don't see why they wouldn't trot out a tried and true solution, inflation.


maxwelton -- In a world of year-on-year double-digit inflation, a mortgage locked at something like 5.5% or so is a goose that is continually laying a golden egg, right? I mean, assuming you can afford it, and ignoring the underlying value of the house itself, assuming you're happy there and have no plans to sell?

Since I've been expecting higher inflation for a while now, about two years ago I switched to an interest only mortgage. I only owe about £60K on my flat, and I want some high inflation to erode the value of that debt in real terms.

I'm still fixed rate so you'd probably want to watch out there. My monthly payment is only £249.80, and someday I'll be able to chose between a cup of tea or paying my mortgage. Ha I don't expect it to get that bad, but I'm sure you get my point.
posted by Mutant at 2:40 AM on September 21, 2009 [4 favorites]


then raising taxes also has a pernicious effect on the default rate.

just need to avoid taxing poor people :)

I'm not completely convinced, but there's a good case to be made that consumer attitudes to debt are shifting.

The punchbowl has been taken away. So much of the consumption of this decade was financed by home equity withdrawals, HUNDREDS OF BILLIONS each year (graph). The baseline withdrawal from 2003 through 2006 was $80B/quarter with several quarterly spikes almost twice that.

$80B/qtr may not sound like much in a $10T+ economy, but it's six million McJobs @ $50K/yr per.
posted by Palamedes at 2:44 AM on September 21, 2009


delmoi: Wikipedia claims that Medicare & Medicaid cost 4% of GDP. Elsewhere I've read that more than half of US health-care expenditure comes from private sources, but not actual figures. No time to chase anything down right now unfortunately.
posted by pharm at 2:49 AM on September 21, 2009


Mutant: what's the transmission mechanism for the government to engineer inflation? Government borrowing & expenditure? (Which given the current low bod rates seems do-able.)
posted by pharm at 2:53 AM on September 21, 2009


bod rates == government bond rates :)
posted by pharm at 2:54 AM on September 21, 2009



pharm -- "Mutant: what's the transmission mechanism for the government to engineer inflation? Government borrowing & expenditure? (Which given the current low bod rates seems do-able.)"

Let's see - a few different way spring to mind.

"Normal" open market operations (purchasing government securities) or even open market operations targeting higher grade corporates or equity (while I don't like The Fed purchasing corporates, especially so higher grade, purchasing equity in the open market is alarming as we know The Fed has talked about just this possibility).

Bank holding company reserve requirements could be lowered, to the point of effectively eliminating them. Cash not held with the regulators would be freed up for lending, however there is alway the chance banks would use this to goose their margins.

That brings us to Manikw's idea. He's long held the view the The Fed should drive interest rates negative, a new take on Keynes' idea of a carrying tax on money. Cash not in circulation would be cancelled. Big incentive for banks to stop hoarding cash, and start putting it to work.

New Deal style government works programmes could be rolled out, although these days it seems between outright government ownership and defense we've already got such facilities in place. But I'm sure the government wouldn't hesitate to put more people to work on the public paycheque if they felt it necessary to get cash into circulation.

Seems as though the fine line The Fed is walking now is making sure enough money enters the system to counter the enormous deflationary forces currently at work.

As bad as inflation is we really, really don't want to see deflation in this country. Inflation is the lesser of these two evils, as anyone with a familiarity of Japan will attest.
posted by Mutant at 3:13 AM on September 21, 2009


Interest rates were far too low to entice liquid savings, so domestic yield hungry savers sought out assets, first financial (i.e., dot com stocks) and then hard such as real estate

. . .

As described in The Giant Pool of Money on the radio show This American Life, last year.


For all intents and purposes the US mortgage market was unregulated.

Deregulated by Republicans, yes.

We saw a grand shift in the business models mortgage issuers used i.e., changing from "originate to service" to "originate to distribute" model.

Yes, I had figured this out by mid-2005, when the housing bubble became table-talk at my 20yr reunion. I was able to make the observation to my friends that lenders were reloading their lending power by selling them to Wall Street.

Towards the end the lenders needed more and more suckers to enter the game to keep it going, so we got teaser-rate ARMS, subprime, interest-only, pick-a-payment / negative-amortization, 103% funding, stated income / stated asset lending. All these were being abused as "affordability" products, but with real estate all affordability does is jack the price up more since it is a good in fixed supply and unbounded demand (we all could use some more land, no?).

The primary confusatory factor was that the real estate bubble itself was supporting the entire economy in a feedback loop. Higher home prices -> more home equity withdrawal -> more spending -> more economic activity -> higher home prices. Rinse and repeat until the Greatest Fool was found, sometime in early 2007.

inject enough money into the system and you'll have inflation

Like Japan's? I'm no economist but I do know that labor lacks any aspect of negotiation power right now. On another side of the economic Mexican Standoff we've got 20 million empty homes in the US right now so I also don't see much negotiation power enjoyed by those who own income properties.

The question to me is how will the wage inflation obtain? Certainly people will refuse to work if it costs them more to work than not, but we are far far from that place right now. Rents and home prices are still well above year 2000 levels even if wages are not. A big part of the 1970s wage-price spiral was rising housing costs due to household formation of the baby boomers; we don't have that now, if anything the opposite as boomers will need to downsize now.

Wage inflation *will* arrive, but I just don't see how. We don't have any factory jobs any more, just a bunch of office jobs in the tertiary economy.
posted by Palamedes at 3:16 AM on September 21, 2009


Elsewhere I've read that more than half of US health-care expenditure comes from private sources, but not actual figures. No time to chase anything down right now unfortunately.

delmoi was talking about people, not expenditure. If my Mom's access to Medicare health services in Central California is anything to go on, private coverage outspends public by 4:1 or more. . .
posted by Palamedes at 3:20 AM on September 21, 2009


It's interesting to see Mutant and Malor's posts are becoming closer ;-)
Mutant even mentioned investing in physical gold recently.
Like Palamedes, I also suspect the Fed is finding it tough to generate inflation. If you had asked me 3yrs ago if nearly $1T in stimulus, rates at zero and a program of money printing...er...quantative easing would bring inflation I would have firmly expected Weimar Republic or Zimbabwe style wheelbarrows full of money. But now we have all those things and more, yet deflation appears to be the real threat.
There will be many a PhD written about this in years to come.
posted by bystander at 4:00 AM on September 21, 2009


delmoi: Last year you were saying we were going to be "like Zimbabwe", with it's hyperinflation. So far, it hasn't happened.

Of course it hasn't happened yet, and your comment is both snarky and useless. As I said at the time, it's a long, slow process, and it'll take probably fifteen years to fully play out. Short term, I said you would probably be seeing the first signs of inflation by the end of the year, and we certainly are -- commodities up substantially, dollar down about 15%. The Fed has backed off on monetary injection, so that will probably temper or even roll back soon, likely within the next month or two. But then the system will start showing stress again, so they'll have to resume the liquidity injections. They probably can't stop intervention anymore for any length of time. The economy has been managed into instability, and can't survive for very long without it.

We just almost had a deflationary crash, after the second big inflationary runup. (first was stocks; second was real estate. These phenomena absolutely were inflation, although I'm sure you'll come up with some snarky comment denying it.) An economy this big will not turn on a dime. It's not like someone waves a fucking wand and bread is a million dollars a loaf.

Plus, your whole thing about 'we can just raise taxes!' is completely chuckleheaded. Yay, let's reduce our standards of living! What a great fucking idea.
posted by Malor at 4:31 AM on September 21, 2009


In a world of year-on-year double-digit inflation, a mortgage locked at something like 5.5% or so is a goose that is continually laying a golden egg, right?

Yes... but you can't be sure that there will be year-on-year double-digit inflation until it happens. By which time they will have raised the fixed rates to match.

In today's Times, Anatole Kaletsky has an interesting argument:
But populist pressure is, ironically, forcing governments to behave much more "prudently" and "responsibly" than they ought to on purely economic grounds. Voters’ aversion to debt and deficits is creating irresistible political pressure to tighten fiscal policy even if such tightening is economically premature or unwise. This is especially true in the United States and Britain...

The upshot is that fiscal policy in many countries will probably be tightened faster than might be desirable from a strictly economic standpoint. But the good news almost certainly implied by such over-zealous fiscal tightening is that central banks will keep interest rates much lower for longer than many businesses and investors now expect...

It now looks, however, as if near-zero rates will be a fixture of global economic conditions for years to come. That, incidentally, suggests that homeowners and finance directors are making a costly mistake when they pay 5 per cent plus to "lock-in" fixed-rate loans, since short-term borrowing will probably be available at less than half that price for years ahead.
posted by TheophileEscargot at 4:33 AM on September 21, 2009 [1 favorite]


Let me add one more possible reason for at least exacerbating this financial crisis: Bush's $1.3 trillion in tax cuts to the super rich. Suddenly these people had a giant chunk of unexpected moolah and as rich people do, they looked around for where to park it and grow it. Real estate was hot, so many went there, bought second, third, sixth homes. Then when home values crashed, these people mostly walked away from their mortgages. That's easy to do when you're rich and don't really NEED a good credit score (because you can pay cash for everything when necessary), and these were also their 'extra' homes, so they still had a nice place to sleep at night. A foreclosure for a poor or middle-class person on their only home is devastating. A foreclosure on the fourth house, for a rich person, that's just a minor annoyance for them.
posted by jamstigator at 4:47 AM on September 21, 2009


bystander: it takes a long time for that stuff to really get going. And there are good arguments that we could still deflate, even with all this intervention. Ultimately, to ever get back to stability, we will have to go through one or the other, but which one is still an open question. Iceland or Zimbabwe, either could happen. And stagflation until one impulse or the other takes over is entirely possible.

I'm personally betting on inflation; many people I respect a lot are betting on deflation. The reason I think inflation will take hold is because the Fed has shown a complete willingess to ignore any existing rule, when that rule will give a result it doesn't like. Bernanke is playing Calvinball, not economics.

By the old rules, we should absolutely have been in profound deflation by now, the natural consequence of speculative manias. Manias are what set off panics and crashes. But the economy has been fundamentally re-engineered in the last year, possibly the single biggest change in any of our lifetimes, and the old rules don't all apply anymore. I think the deflationists believe too strongly in the system as is, and don't realize just how willing the government is to toss any semblance of fairness or consequence for bad actions out the window.

They are, as a group, absolutely correct about what should happen, but I think they're wrong about what actually will happen.
posted by Malor at 4:50 AM on September 21, 2009


Mission Accomplished, Part 1: Wrecking the World's Largest Economy. A typically great read from iTulip.

On inflation:

ND: So you were right about deflation. But where’s the inflation? Summarize your inflation forecast for us.
EJ: The primary source of inflation we forecast last year will result from currency depreciation. After a nine-month to one-year lag, we are seeing cost-push inflation from rising energy costs, especially oil. The second key source is supply destruction caused by industry consolidation through mergers and bankruptcies. The surviving firms will have enough pricing power to pass on the higher input costs that the Fed created when it put a floor on commodity prices with its anti-asset price deflation policies. The third source is the money supply itself, which after a lag will begin to feed into prices by Q1 2010 at the latest. There are others, but those are the main ones.


(several paragraphs later):

ND: Where will we see inflation show up first?
EJ: It already has, all around us in its all its nefarious forms. Most people thought that when the inflation started this year—the inflation that we forecast last year to start in the second half of this year—it would arrive with fanfare, with interest rates spiking up and double digit increases in food prices. Interest rates are rising gradually, as are some producer prices, but nothing dramatic. So far it's a slow grinding away of purchasing power.

posted by Malor at 5:17 AM on September 21, 2009


Dammit, I screwed up that link. Trying again:

Mission Accomplished, Part 1: Wrecking the World's Largest Economy.
posted by Malor at 5:19 AM on September 21, 2009


Malor -

I'm going to take your last post and jump into the fray here: I'm in the short-term deflation, long-term inflation camp. The amount of credit that has been sucked out of the system is staggering and I think that is going to force prices to be stagnant or decline in the short run. That said, I have absolutely no faith in the Fed to be able to 'predict' the precise moment when they should begin draining the liquidity swamp, hence we're going to be in for one heluva inflationary ride at some point.

I do agree with you, though, that the fundamental re-working of the economy in the past 12 months throws all traditional guides and barometers out of the window.
posted by tgrundke at 5:21 AM on September 21, 2009


I wonder how the human lifespan cycle affects this? People die all the time owing money, which disappears upon their deaths. People are born all the time owing no money, and become eligible to borrow roughly 16-20 years later.
posted by aeschenkarnos at 5:29 AM on September 21, 2009 [1 favorite]


bystander -- "Mutant even mentioned investing in physical gold recently."

Well, not only recently. On Metafilter I've been advocating gold since Q2 2005, having moved a bunch of my equity into metals summer 2004. Back then there weren't any ETFs so it was physical all the way.

I've been grabbing ETFs from time to time, but with the crunch last year I stepped up buying physical. Won't recommend it to anyone else, but it works for me (and I'm still doing it).

And in terms of the bigger picture, I haven't changed my view on the entire debacle since it's outset in July 2007; we're more than likely in for an extended period of stagflation, nobody can really predict duration but this outcome has more than likely been The Fed's endgame from day one.

Above trend inflation by no means implies hyperinflation; keep in mind we've just exited a period of extraordinarily low inflation rates, so mean reversion alone tells us we're gonna see a protracted period of above trend inflation. Not hyperinflation, but above trend. Big difference and, again, something we saw in the late 70s / early 80s crashes.

Hyperinflation is unlikely for the reasons I cited in this FPP, and the current near open warfare in the US Treasury markets bear witness to the fact that The Fed won't allow inflation to get seriously out of control. I'm not saying we won't see 15%, perhaps more, but that rate, if indeed realised, is hardly what we define as hyperinflation.

Near term I do see continued dollar weakness, but that's a suckers bet and already priced in. Probably a better trade until Q4 2009 would be equity market volatility; lots of opp there and in lots of different ways to play it. And hey! Markets globally are looking more than a little frothy, US alone is up some 60% since the March 9th low. Some developing markets are up over 100%.

These gains aren't sustainable on the basis of fundamentals alone, although the TA guys I work with are getting long big time. Oh well, that's what makes a market.

I like to keep in mind the quote attributed to Mark Twain when he discussing the stock market -- "September is the most dangerous month" .

Could get exciting around month end. No reason to exit but be careful.
posted by Mutant at 5:31 AM on September 21, 2009 [1 favorite]


So there are a number of comments here predicting US inflation, and I note that USD depreciation is happening. How does this translate for the rest of the world? China imported American inflation for many years, will an inflationary US push up prices worldwide, or will it cause deflation elsewhere?
From my reading, I think the understanding of inflation and deflation is one of the greyest areas of economics, especially at a global macro level.
And Mutant, I do remember your older comments about precious metals now that I am reminded. I am curious as to why you like physical. There is a premium in terms of transaction cost (bigger spread) and the security risk of holding a valuable commodity. Physical bullion is usually the preserve of those doubting the resiliency of the system, along with beans and ammo. Why not just ETFs? Are you hoping to gain leverage via the physical premium (that is, a 20% premium on a $1000 ounce is $200 but if it rises to $2000 the same percentage premium is $400?). Or is it a "just in case" hoard against that flock of dark swans?
posted by bystander at 5:51 AM on September 21, 2009


Plus, your whole thing about 'we can just raise taxes!' is completely chuckleheaded. Yay, let's reduce our standards of living!

or have them reduced for us by deflation or hyperinflation, as you keep predicting - what's better? - a managed reduction or a free fall?
posted by pyramid termite at 6:30 AM on September 21, 2009 [1 favorite]


Near term I do see continued dollar weakness, but that's a suckers bet and already priced in.

It's only a sucker's bet if you already know the outcome. Certainly people have been betting against the dollar for a while now, but only to the extent of their own personal pessimism. And if you ask me, people aren't nearly as pessimistic as they ought to be.

On Metafilter I've been advocating gold since Q2 2005

Q4 2004 for me.
posted by Civil_Disobedient at 6:35 AM on September 21, 2009


Or they could, like, raise taxes or something.

Or, even better, raise taxes and cut spending. Current spending on defense, counting both budgeted, supplemental, and WoT spending, is over a trillion a year.

I'm going out on a limb, but I'll bet that would could safely defend this nation for, oh, $600B. Actually, $400B is more than enough if we stop getting into useless wars overseas.

Funny what happens to the deficit then. Then, fix the tax structure, and we have have Health Care, infrastructure work *and* debt reduction.

It is fantastically easy to claim we're spending to much on everything else when you declare defense an entitlement spending item.
posted by eriko at 7:02 AM on September 21, 2009 [1 favorite]


Mutant: while I don't like The Fed purchasing corporates, especially so higher grade, purchasing equity in the open market is alarming

Um... So how would you feel about them outright buying a trillion dollars of mortgage-backed securities?
posted by sfenders at 7:58 AM on September 21, 2009


Delmoi, I'm sure there's a general trend towards more savings right now, but I wonder if that quote is really a good way to examine the way people spend their money. American Express customers are a self-selecting group of people who want a card that they need to pay off monthly. They are specifically people who are avoiding a long term line of credit. It'd be more credible, I think, if it were done by a traditional credit card company like Visa, where customers can choose to pay off debt monthly or rack up more and just pay minimum payments. Still, it's probably true.

Still, I think it's really more the politicians and libertarians who need to see these numbers. So often, we hear them say that the American people should be getting tax cuts/rebates rather than the benefits of government spending because "the individuals know what they need best." However, if the individuals are just putting cash in the bank or paying bills, that's not really stimulating the economy.
posted by mccarty.tim at 8:43 AM on September 21, 2009


I memailed the following question to Mutant, but he's probably got better things to do than provide free financial advice all day ;) Anybody have any ideas?

What should I watch for to get an idea when inflation is going to start to heat up? Obviously, the CPI, but I'd like to watch an indicator that will precede large increases in the CPI.

Here's why I'm asking: I've been in the market to buy a house (I'm in Massachusetts) for years, but I was convinced that prices were heading down, so I waited. I still think prices are going to decrease further, but I realize that if inflation starts heading up, I'm better off taking on the debt and not sitting on a bunch of cash.
posted by diogenes at 8:48 AM on September 21, 2009


A whole lot of partisianship in these comments. At some point, it'd be nice to see consensus turn from finger pointing to "we've been screwed up for decades"

Name something fucked up that Bush did, and I'll show you something that Clinton did, and then you can show something that Reagan did, but oh let's not forget Carter, that scoundrel.

It all just seems intellectually inept. The current president is a Dem and is making many of the same mistakes that he and his party accused the Bush administration of making.

We, as a country, regardless of party, are in a damned mess. Until we collectively admit this whole fiat currency thing may have some kinks in it we'll likely continue to be.
posted by rulethirty at 10:22 AM on September 21, 2009 [1 favorite]


The whole problem of debt and how I looked at it changed when I saw this guy on some TV show explaining how, in a sense, all currency represents debt. It was an idea I'd encountered before, and forgotten about, and I'd never really stopped to think about its significance. But literally, the statement "Legal Tender for all Debts Public and Private" printed on US paper bills is an acknowledgment of the fact: When we trade dollars, we are simply trading personal debts. A hundred dollar bill is a treasury-issued IOU that stands in for some implied unit of economic value. The introduction of the credit system on top of what's already inherently a debt-based system of exchange has complicated things, but ultimately, markets have always been all about debt.

If you perform a service for me and I pay you with a hundred dollar bill, I'm essentially saying "I owe you a hundred dollars worth of something in return for what you did for me, but instead of repaying that debt now with a hundred dollars worth of stuff or services myself, I'll give you this state-issued IOU, and others participating in our shared economy, like the retail store down the street, will also honor the value of this IOU because the fact that I can produce this legal note in the first place means others have pledged to repay me with stuff having an equivalent amount of economic value and that I am entitled to transfer my debts and credits to others."

In other words, all our economy has and has ever had to make it go around is debt in a certain sense.
posted by saulgoodman at 10:42 AM on September 21, 2009


diogenes, I'm not in MA but I suspect that urban housing prices are near bottom, barring some unseen cataclysmic event. If I was in your shoes, and I found a house in an area that I liked and could be happy there for several years, and the house was affordable (eg you have close to 20% or 25% down and can comfortably carry the mortgage), I'd jump now.

Even if this isn't the absolute housing bottom, by acting now you're going to save some rent, and put down some roots. Mortgage rates are great right now, too.

Caveat - I didn't ever like renting. We've had our house for 20 years.
posted by Artful Codger at 11:39 AM on September 21, 2009


A whole lot of partisianship in these comments.

huh? Butthurt much?

I mentioned the Republicans above because they were the ones involved in the active deregulation of the mortgage industry starting in 2001.
Regulators appointed by President Bush often have been more sympathetic to industry concerns about red tape than their Clinton administration predecessors. When James Gilleran, a former California banker and bank supervisor, took over the OTS in December 2001, he became known for his deregulatory zeal. At one press event in 2003, several bank regulators held gardening shears to represent their commitment to cut red tape for the industry. Mr. Gilleran brought a chain saw.
Pre-Murdoch WSJ, via this blog.

Clinton made his mistakes -- repealing Glass Steagall and getting rid of capital gains tax on houses for most people -- but they were done in good times and pushed by a Republican Congress, plus the mistakes were contributory to the bubble and not actively poor government.

The bottom line is that Republican-style governance in the 2001-2006 timeperiod really, really screwed the pooch.

Bringing up Carter in response is just an avoidance mechanism.

FWIW, I have no idea if Obama's team is doing a good or bad job. I sure as hell don't have any policy advice to give him.
posted by Palamedes at 12:23 PM on September 21, 2009


I'm not in MA but I suspect that urban housing prices are near bottom, barring some unseen cataclysmic event.

This is going to depend on unemployment and underemployment.

Home prices were bid up to the levels they were based on the availability of lending products that no longer exist. They have corrected somewhat but are still higher than prices from 2001-2002, while the wagebase is AFAICT not greater than 2001-2002.

Low interest rates are maintaining price levels to a great extent. People get loans based on the monthly payments, and the $400K house at 5% becomes a $300K house at 8%.

To follow home prices you have to watch rents and apartment vacancies. When the rents are going up, that's the time to buy.
posted by Palamedes at 12:29 PM on September 21, 2009


bystander -- "So there are a number of comments here predicting US inflation, and I note that USD depreciation is happening. How does this translate for the rest of the world?"

Ah this is a great question, 'cause the media tends to NOT look at what happens outside of the G8, perhaps the G20.

But as interest rates were lowered in America and the US Dollar devalued against other currencies, many developing nations saw sharp declines in GDP, with their own currencies taking a hit and weakening, sometimes significantly.

A brief look at 190 countries globally showed over 50 already had double digit inflation as of one year ago. I can't source more current data as I'm rushing off, but we know the dollar has declined big time over the past year so I don't see inflation in many developing nations as having improved much.

Very sad, as inflation in developing nations very often manifests itself as rising food prices.


bystander -- "I am curious as to why you like physical. There is a premium in terms of transaction cost (bigger spread) and the security risk of holding a valuable commodity."

Well, in my brokerage account my holdings are physical only because I established the positions before GLD or SLV launched. I did flip some of the physical into ETFs about two years ago, just to give me greater flexibility (i.e., its very difficult to change brokerages if you're holding physical in your account).

But I have since bought physical metal here in London for a couple of reasons: first, I'm a saver, and everytime I hit a cashpoint up for spending money, I force myself to later purchase a few ounces of silver or a Krugerrand or Maple Leaf or two, sorta of a personal tax, if you will. I don't have that much physical close to me, about one hundred ounces of silver and four ounces of gold. Keep most of it in a safe deposit box at the bank so minimal risk. I do keep a couple one tenth ounce gold coins and a few silver coins here to show my class at University what money looked like once upon a time.

Most are very impressed to learn that in the past that face value of the money itself was higher than the value of the metal.

A second reason were the shortages last year here in London; I found the idea of folks hoarding precious metals fascinating, and grabbed a bunch of gold and silver solely in the hope the shortages would get far worse, and I could make some serious money, albeit in small quantities. According to my dealer the shortages have eased, but demand for physical metal was still, as of two weeks ago (last time I dropped by to purchase metal) very high.


sfenders -- "Um... So how would you feel about them outright buying a trillion dollars of mortgage-backed securities?"

Gosh I'm with Bernanke here - just hold your nose and do it. Doesn't mean you've got to like it, but it helped achieve a positive end state, that was a plus.


diogenes -- "I memailed the following question to Mutant, but he's probably got better things to do..."

Ha I was painting my upstairs hallway, too cheap to pay anyone else to do it.

You know we do see commodity prices as a leading indicator of CPI inflation. Don't have a cite handy but I seem to recall there was a six to nine month lead, depending upon the commodity modeled.

Regardless, others upthread had good advise - if the numbers make sense and you like the flat don't bother trying to time, just buy it and even if prices decline a little afterwards you've still got a place to live.
posted by Mutant at 1:11 PM on September 21, 2009 [1 favorite]


So is this a time when one wants to incur debt?

If prices are going to skyrocket, then I should be purchasing a whole bunch of furniture and stuff that is on my "to do/to have" list as I reno my home.

Instead of waiting until I finish the livingroom, maybe I should be getting my sofa now. Ditto for a motorcycle, or car, or bathroom fixtures, or other big-ticket items I'm gonna be having to purchase anyway some time in the next five years.

OTOH, maybe it's best to hold onto my pennies? Plug away at the home renovations, but wait until all of that's done before I start purchasing furniture & stuff?
posted by five fresh fish at 2:09 PM on September 21, 2009


maybe it's best to hold onto my pennies?

All depends on wage inflation, and for Canadians, the exchange rate with the dollar. Canada seems to be in a much stronger position economically going forward, and it wouldn't surprise me to see a Loonie going for USD $2 in my lifetime.

Cash is king in a deflationary collapse. People with the right timing in the 1930s made out like bandits, buying eternally valuable assets for pennies.
posted by Palamedes at 2:52 PM on September 21, 2009


I do keep a couple one tenth ounce gold coins and a few silver coins here to show my class at University what money looked like once upon a time.

Ha! I carry around a $2 bill for the same reason. The reverse is one of the finest of any U.S. certificate ever issued.
posted by Civil_Disobedient at 5:36 PM on September 21, 2009


diogenes - surprised Mutant didn't mention it, but historically, the yield curve for bonds is a good forward indicator for inflation. At the moment, US bonds run to c. 4% for 10 to 30 year treasuries (see it here).
When the market believes inflation will rise, so do bond rates because investors want a higher return to counter the devaluing of their money over time. At current levels, the market believes very, very strongly inflation is not an issue. Well, that would be a true statement all my life, but for the last year bond returns have been much lower than seems reasonable because they are a very safe place to park money - you will get your capital back in full, something almost no other class of investment has offered lately.
So Mutant, Malor, C_D, me, fff and Palamedes are all a bit contrarian to what the market wisdom is saying, but I kind of rationalise it by believing the market moves quickly.
We aren't really contrarian, many observers agree that inflation is a very likely outcome of present policies. The trouble is, many also believe the deflation we have seen in property and equities (which has been somewhat reversed) may continue, and they will be able to swiftly change their investment when they sniff widespread inflation arriving.
For simple folk like me, who are trying to run a budget and maximise our meager savings, it is a bit arcane. If you had to decide today where to put your money for 30 years, buying a house would probably be a smart move. But you *might* make more money putting that cash in the bank for six months then buying the house. Or 7 months, or 8 months.
This is the devil of market timing. On the whole, if you want to buy a house, can manage the loan and still have some emergency money, then why not?
If the market falls another 5% or so, big deal, you won't want to move again anytime soon.
The risk is if deflation really takes hold, like it did in the Great Depression. Then, equities fell 50%, and looked cheap. They then fell another 80%! If you had bought at the top you lost 90%. If you bought when prices had dropped by half you still lost 4/5ths of your money. And it took years and a war to get equities back to the earlier mark.
Buying a house is a little different, as you get to enjoy the asset while you pay it off, so even if it falls or rises in price, it doesn't really matter unless you want to move.
You wouldn't want to give up that enjoyment (assuming you would value it) for the possibility you might save a few bucks, or the risk it might all end in Depression level tears. If you find a lovely place, go for it.
posted by bystander at 6:18 AM on September 22, 2009 [1 favorite]


bystander: There are two issues with using government bonds as a proxy for future inflation rates at the moment.

Firstly, the Fed is busily monetising the government debt sales by the back door, pushing down the rates. However, they're mostly doing this at the short end of the yield curve so we could presumably turn to the long end to see what the market thinks, which leads into the second problem that government bonds are percevied as the only truly 'safe' investment, in that your principle will always be returned (government default being spectacularly unlikely). In times of economic stress therefore, people will accept a lower rate on government bonds than would otherwise be the case: a small loss due to inflation is better than a larger loss in some other asset.

(The latter implies deflation in assets. Of course you can get asset deflation at the same time as the cost of living is going up: which is to say that the bond rates may not be predicting the inflation rate you actually care about.)
posted by pharm at 1:36 AM on September 23, 2009


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