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

To: neolib who wrote (257561)	6/30/2010 3:20:41 AM
From: Elroy Jetson	Read Replies (1) \| Respond to of 306849

Living on income borrowed from the future takes many different forms from person to person, but in aggregate these stories are crafted by the central bank setting the interest rate. The central bank can accept periodic recessions, or ride the interest rate curve down to zero and then experience an economic depression. If the debt to income ratio is slightly out of balance, it's possible to correct this with a period of stagnant reduced income growth rather than a shorter economic recession. Once you've ridden the interest rate curve to zero there's no realistic possibility of growing your way out of your problems. Riding the interest rate curve to zero is merely the creation of an economic depression. By this time the debt bubble has greatly distorted asset prices and has resulted in huge amounts of misallocated capital whose value is largely extinguished as growth stops and income quickly declines. The borrower of last resort, the government, can continue to take on debt as Japan has done for twenty years and purchase yet another temporary postponement of the collapse, but no actual growth or prosperity, merely transfer payments. In the end this additional debt makes the collapse even more fearful. We don't face a temporary panic, or a liquidity event. We face the structural problems of excessive debt to income, a solvency problem which require the recognition of the prior destruction of much of our capital through misallocation. The recognition takes the form of declining assets prices, bankruptcies, and foreclosures. .

To: neolib who wrote (257561)	6/30/2010 3:55:45 AM
From: Elroy Jetson	Read Replies (1) \| Respond to of 306849

Just some rough economic depression math. If your economy moves from spending 106% of it's income each year and is suddenly constrained to live on it's income alone, that's nearly a 6% decline in income. Asset prices in your economy are based on 100% of your income and future growth, not 94% of your income. This triggers a default of marginal borrowers, which in turn recognizes capital losses resulting in further reductions in both spending and income. This new income reduction results in further declines in asset prices. Japan is the only story I'm aware of which hasn't resulted in dramatic deleveraging, and their story is far from the final chapter. .