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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: John Vosilla who wrote (94235)	5/14/2008 3:11:45 PM
From: GST	Read Replies (1) \| Respond to of 110194

All true if the US existed on its own -- and not true at all if the US is economically embedded in a robust global economy with billions of other people. A house is a place to live, it is a bunch of things, it is land. As a bunch of things it is worth its replacement cost. As a place to live it is worth what rent would cost. The wild card is always land -- when real estate is expensive it is due to its 'positional' nature. Put simply, if we both have money, or access to money, and if we both want to live in the same "place", then we will drive up prices far beyond the value of the lumber and fixtures. It does not take long before it is a matter of how much you can borrow -- that is driven in part by incomes. For most of America, a house is a matter of me versus you -- there is not a sizable global market for your house. If you and I get into trouble and owe more on our houses that it can be sold for, it means nothing to global consumers. The only question is whether or not a drop in our consumption is enough to drag global growth down. So far the answer is quite clear -- the answer is no. Given that answer, the question is what happens as we experience a recession -- and the answer to that is also clear -- inflation. Why inflation? Because our assets (the ones that trade globally -- not your house) are worth less on global markets when we are in recession -- and that is what we use to pay our bills. Net net -- your crappy house breaks the back of the economy and that breaks the back of the dollar -- and so prices go up.