The idea that home prices can continue to grow by 8% per year, just so long as the amount of credit issued continues to expand at 8% per year as well, is a typical currency crank opinion.
But as Alan Greenspan meant to say, "We can guarantee increases in home prices as far out and at whatever size you like, but we cannot guarantee their purchasing power."
Currency cranks, whether they call themselves monetarists or "supply-siders" believe that wealth is increased in direct proportion the amount of new credit issued.
This very seductive idea seems plausible to many. Double the amount of credit issued and asset prices do inflate. But in time so do the price of necessary consumables and the essential lie of currency crank magic is exposed. Doubling the amount of credit issued is merely inflation which devalues the currency. Not one penny of wealth is created.
Now, reduce the amount of credit issued and asset prices immediately decline. The price of necessary consumables will also decline, but with a delay - similar to the way in which they rose in response to increased credit issued. Reducing credit outstanding merely increases the value of the currency, making prices decline relative to money.
When an excessive amount of credit is issued, wealth is sometimes transferred from those with money to those borrowing money. This occurs when lending exceeds available savings - essentially introducing counterfeit money. In effect, the lending system becomes subsidized - not charging a sufficient price for borrowed capital. Currency crank systems, like all welfare programmes, have always been very popular among those with little capital and an over-supply of envy.
Ben Bernanke has even suggested the very low interest rates, produced by excess credit creation by the Fed and the US Banking system, is actually a symptom of "excessive savings." He believes other nations should lower their pathological savings rate of 6% or 12% of income to the "just right" rate of zero - which we are experiencing in the United States. Yet for all time, savings have formed the basis of wealth creation and the system known as capitalism.
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