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

To: mishedlo who wrote (51566)	4/7/2006 1:34:21 AM
From: shades	Read Replies (1) \| Respond to of 306849

She said that a main culprit appears to be interest-only and other variable-rate loans that homeowners have taken out in huge numbers in recent years to reduce their monthly mortgage payments. Now I thought thouse 2 knights killed that mouse called bubbles! thereisnohousingbubble.blogspot.com./ So the prince declared throughout the land that he would send out his two most brave knights to slay this unearthly beast. They were two knights who knew no fear and could conquer any foe. They were Option Loan and his brother Interest-only Loan. These two Loan brothers were already legendary amongst the people of Realatopia. For all of the citizens of this coveted land knew how helpful these brothers could be in an emergency and there wasn't anything they couldn't accomplish with these two heroes at their side. Right now he simply has no choice whether he likes it or not. Market speculation is forcing his hand. bankdersysrisk.blogspot.com Dr. Bernanke thesis is that we did not inflate enough to prevent even the very few years of mild deflation we experienced during the 1930’s during the depression. He also believes that a country can grow their way out of a debt crisis. Given the right circumstances I do not disagree with him on this point if the growth is not dependent on the accumulation of debt and adds to the real economic base of the country. I do no feel that this economic recovery fits that mold as just building houses with debt, and they increasing the value of the houses by flooding the market with debt doesn’t in any way really add to the economic base of the country. If the country had increased the debt with jobs in manufacturing, engineering, and other real economy and wealth building functions that create an income stream I would expect the US to be in better shape than a society based on the expansion of credit. Of course if the money for manufacturing didn’t get allocated correctly, then massive oversupply would ensue. Can Dr. Bernanke fight hyperinflation, I doubt it. Just like every other country that faces hyperinflation the government has too many promises to keep, and too much money abroad. In our case the shear amount of money abroad and the speed of transition for foreign banks to get rid of US currency is far faster than any government in the history of the human race could deal with effetely. Dr. Bernanke does not make decisions on military, social security, or any of the other goodies that the government is giving to its people through the assumption of debt. He could not limit or get rid of these programs. I don’t think the President could either. So we are really stuck at our current spending level. How would Dr. Bernanke even be able to deal with the collapse of the negative trade balance? It’s not like you can run a massive negative trade balance for ever. At some time your currency devalues due to it proliferation all over the world. A sharp decrease in the purchasing power of currency is hyperinflation. If foreign banks stop buying our mortgages, then this US money coming into their countries through debt payments and a negative trade balance will no longer be trapped in a lending loop, it will now be free to devalue on the international currency market. There is no way out side of war that the US could stop this. This is precisely why we have this international lending loop whereas our money keeps coming back to the US in the form of credit. In many ways I feel sorry for Dr. Bernanke. He will go down as the Chairman of the Federal Reserve when the world goes off the US dollar. I cannot imagine what history shall show him as, but it will certainly not be positive. ....During this time financial derivatives where not really in wide use, therefore international holding of US consumer debt was not nearly so widespread. I could be therefore argued that raising the federal funds rate was effective in the 1980’s as most of the holders of consumer debt (i.e. mortgages, car loans, credit cards) were inside the country. At this period of time the securitization of debt into bonds easily defeats loan requirements and interest rates on credit are now far removed from the federal funds rate for the same reason. Once the debt left the country the Feds ability to manipulate it downward was dramatically decreased. I could only see direct intervention by the government to limit the expansion of credit through the limits on selling debt. This would put the fed back in power. It certainly gives the buyer of the bond cash stream of US money. If the bond is bought at a discount then this effetely lowers the purchasing power of money. If the bond is bought at a premium this effetely raises the value of money. Therefore securities held internationally in terms of debt do in fact adjust the buying power of the US dollar in terms of those countries desire to hold onto that debt. At this time the money paid on this debt is transported out of the US and to the foreign countries, where it is mostly sent back to the US in the form of mortgages. This held excess US currency out of our money supply by trapping it in MBS and ABS. HOLC money was sucked up by a comparable negative trade balance. This money also came back to the country in the form of MBS and ABS. Therefore I would argue that the money supply is really much higher than the Federal Reserve is recording it to be since effective money substitutes are now everywhere thanks to new check writing rules and derivatives. So how does this relate to CPI and PPI. I would agree that as the purchasing power of the dollar falls then prices go up and people are layed off, reducing the base of people who can purchase goods. Therefore this creates oversupply and prices are forced down. As prices rise due to the money supply more and more jobs are lost. I do not disagree with this analysis. What I expect to happen during the process is that the other countries with huge asset bubbles, I think this is a large percentage of all US trading partners, will experience the deflation of their asset bubbles at about the same time as the US for similar reasons. The bubbles are falling under their own excessive weight. As these countries go into a banking crisis they shall start to bail out their banks by printing money. I would say borrow money, but who could you really borrow from. Even if you did borrow money, it is really just that country monetizing their debt in order to extend credit at this stage, and this would just add to the supply of money in their country. This will effetely cut off effective borrowing. Not that countries won’t borrow from each other, just that the borrowing is really monetizing the debt instead using money from savings. This will cause a situation whereas money is created in both economies, the lender and the borrowing economy, increasing the money supply in both countries. In this period I also expect democratic governments to increase spending on public works, military and social programs. In no way will the governments reign in current spending. As the US dollar is the most widely used currency on the planet I would also expect to see foreign banks dumping US assets as they shift away from a US dollar standard to a basket of currencies. This will flood the international market with US securities, discounting them, and devaluing the purchasing power of the US dollar. As the US dollar is highly overvalued in purchasing power I would expect to see the US dollar fall faster than other currencies. This will in effect make it cheaper to produce things in the US again and rebuild our manufacturing base. The US negative trade balance with the world will also stop as countries start selling things to other countries. This will eliminate the negative trade balance and give the US a positive trade balance eventually. The US government has expanded its spending with GDP growth induced through the assumption of debt. This spending will not be reduced, but increase during the crisis. Government spending will now inject US currency into the US economy and into the US currency general circulation within the country. US dollars will be returning through the foreign banks divulging themselves of US securities. Therefore even though I agree with your argument for CPI and PPI, I think that the international banking system and our own government spending will bring too many dollars into the country, bring with it hyperinflation. Until the US gets a firm hold on its spending, gets rid of many social programs, public works and such, then the US is in serious danger of chronic hyperinflation for years to come.