But let me ask you a hypothetical about the impact of a future housing bust, and/or GSE hairball.
Why do you think that would necessarily be deflationary, given the easy money cure that you continually see them (CBs) proposing. In fact wouldn't falling asset (home) prices lead to systemic failure of the GSE’s (which may already be failing), leading to a large scale and aggressive bailout via monetization of trillions of $US denominated debt? Worse, this would likely be accompanied by a severe revulsion of $US assets. Therefore, any efforts to intervene by Central Banks would be…that’s right, inflationary for all parties. A deflationary outcome would only occur, if they threw in the towel, did little new monetizing and money printing, and put up a strong goal line defense to defend the integrity of the USD. But at this late stage, even that wouldn't especially be deflationary in my book.
How can a housing bust be anything but deflationary?
Will there be lots more people out of work when there is a housing bust?
Will the value of homes decline in a housing bust?
If the answer to those question is yes, then to believe in credit expansion one has to believe in more credt being extended as people and companies are heading towards bankruptcy while the asset base supporting those loans is declining.
IMO that is a simple concept as well as THE stumbling point of inflationist theory.
Just what lenders are going to keep lending to bankrupt people in these conditions? This just is not the Weimar republic where germany was printing money to pay off debtors. It just is not. The conditions are quite different. Here are the conditions that led to our crack up boom: We had a reckless expansion of credit driven by the GSEs, tax cuts, business tax credits, lowered interest rates, and round after round of cash out refis, all at the same time.
Take a look now: Rates going up, tax credits are expiring in december, oil hikes are acting like a tax, wages are stagnant, jobs are stagnant at best, on a job loss vs gob gain basis wages are falling, an effort to rein in GSEs is starting, inventories are rising, cash out refis are going kaput, and leading economic indicators are headed south. Read that last sentence again and tell me exactly what parts are wrong and what parts are inflationary.
People out of work are going to turn to hard assets like copper? Sorry I do not buy it. The price of oil will be the price of oil and rising oil prices in the face of falling demand for goods and services that will happen in a housing bust is without a doubt the worst of all possibilities and enormously deflationary.
Now, if the US economy sinks please tell me what happens to the world economy. Is China, Japan, and Europe going to keep on producing cars, and furniture and appliance in the face of a falloff in demand in the US? If so please tell me who are they going to sell those goods to. IMO the crack-up boom is not about to happen it is about OVER! It already heppened. In order to keep it going CBs are likely to attempt to support the US$. Will it work? Probably not. But it is irrelevant. With no demand in their countries and no one to sell goods to, we are in for a serious rise in unemployment IMO, not just the US but worldwide. That can only add to the deflationary pressures that are building.
Rising inventories, lower wages, falling demand, higher oil, higher medical costs, rising unemployment, falling stock market, falling home prices.... Russ everyone one of those this is deflationary in my book.
What is amazing to me is that no one sees it.
No one.
Everyone thinks this boom can go on forever.
That home prices will keep rising, that the demand for credit
is unlimited, that the amount lenders are willing to lend is
unlimited, that we can defeat K-Winter even though Japan proved it can only be slowed not stopped.
Possibly the best thing in my favor is that no one sees it.
It is all right here in this simple idea:
Take a look now: Rates going up, tax credits are expiring in december, oil hikes are acting like a tax, wages are stagnant, jobs are stagnant at best, on a job loss vs gob gain basis wages are falling, an effort to rein in GSEs is starting, inventories are rising, home refis are kaput, and leading economic indicators are headed south. Read that last sentence again and tell me exactly what parts are wrong and what parts are inflationary.
Let me add one more thought.
No one will care if there is a collapse in the first year of a presidents term. Very few see the recession that is steamrolling our way and of the few that do, even fewer understand it will be a deflationary bust that has it roots in reckless economic stimulus that has simply exhausted itself by failure to create jobs, and failure to create demand outside of the US.
Mish
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