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Strategies & Market Trends : The Residential Real Estate Crash Index -- Ignore unavailable to you. Want to Upgrade?

To: John Chen who wrote (3605)	7/26/2002 10:35:13 AM
From: Elroy Jetson	Read Replies (1) \| Respond to of 306849

Deferred inflation, no. Money Supply is the actual Money Supply (say M1) x Monetary velocity (the number of times it changes hands in a year) say Mv. If Demand (M1 x Mv) is greater than the supply of goods you have inflation. If M1 x Mv is less than the supply of goods you have deflation. If Mv declines, the supposed answer is to increase M1. The deflationary bubble problem is this - you can have insufficient demand in most sectors while at the same time excess demand in some sectors leading to a price bubble. Most economists believe the Fed's increase in M1 in response to a decline in Mv due to the Asia debt implosion stabilized demand and prices in total. If Mv picked up, the Fed would need to decrease M1 to maintain stability. More specifically the Fed actions resulted in a deflation in imported goods offset by inflation in locally produced services. But it also appeared to feed a bubble in financial assets (stocks) spurred on in part by an economy growing faster than it otherwise could have without the deflationary drag of Asia. As Asia stabilized post Jan 2000, the Fed reduced M1 causing a contraction of the stock bubble. It then continued expanding M1 to continue counter-acting the secular deflation and bring about a "soft landing". It appears the excess funds are primarily now entering real estate assets. Greenspan has commented that this is not a problem as the entire increase in real estate value is currently being recycled from home valuation to consumer spending through increased lending. So far so good. However, the flow of demand into real estate can be reversed as suddenly as from stocks - but in this case leaving the lending unsupported by adequate underlying assets. As Mv can change quickly with consumer and business confidence, the Fed is walking a tight-rope.