And thanks, CR, for giving the hat tip to Fleck for "housing ATM." I have vague memories of a commenter a while back in high dudgeon who 'splained to us that he/she/it would never read CR again because any website that quoted Fleck was FOS and not worth reading. It may have been around the time Fleck was reporting the coming carnage in the "scratch and dent" whole loan market, and there was some scoffing over his source for that. Yep, just another short with 'tude, nothing to see here, move along.
Ah, the slings and arrows of outrageous fortune. What would the net be without them? If only there were some way to piss off that circus bear dude sufficiently to make him stalk off in a huff . . .
China will probably make up more than 6.5% in the next week or so. I don't understand how a 0.3% tariff can have any effect on a market that's gaining 1% everyday.
When the turn does come, it will be unlike anything we have ever seen before,'' said Iain Burnett, 43, managing director of Morgan Stanley's special situations unit in London.The scale of it could be considerable because of the size of some of these leveraged deals,'' said Burnett, who began his career in London a month before the October 1987 stock market crash.
"China will probably make up more than 6.5% in the next week or so. I don't understand how a 0.3% tariff can have any effect on a market that's gaining 1% everyday."
If it's 0.3% on every trade, it does add significantly to the trading costs. Remember that just a few days ago they were trading more than the rest of Asia combined.
I am always enlightened by the comments section of CR. First I read about the Woodhills telling their children: No more impulse purchases or frivolous shopping trips . (Frivolous shopping trip? What the heck do you do on a frivolous shopping trip?)
And then I click on one of Yals links to read this:
Rufina Rodriguez, a 46-year-old mother of three, is feeling the squeeze in Mexico City. Her brother, who picks strawberries in California, has sent her less than $100 this year, down from about $230 each month in 2006.
By the way, Tanta I thought circus bear baiting ended back in the 1600s.
While you've certainly covered it thanks for posting the more MSM - a nice indicator of broader awareness. Seriously - if the path was visible last summer with a careful look but only now getting covered how long will it take for the real realities to sink in ?
Put another way how're these folks making their decisions - just one running what they see out ahead in a straight line ? Oops. Now how many of Wall St's finest are doing that ?
Last two weeks have seen a lot of coverage of carry, leverage and covenent-lite financing in buyouts, equities, etc. We don't have the vis into that but it looks like the same mechanisms as housing. Hmmm...
This is one of the reasons I don't think a bailout will help anybody. The picture in the paper says more about the problem than the article, but they don't have the picture online. In the print picture, Ms. Williams is standing in front of her new Lincoln Navigator wearing some nice accessories and squinting through slits almost sealed shut from a gluttonous lifestyle. I do feel sorry for people losing their home and know what it is like when all of your choices are hard. But that is no reason to make everyone else pay for their bad decisions. These people should be examples of what not to do, of what to avoid and not as innocent victims. These people were "living high on the hog" while others were saving for their future. The unfortunate lesson will be the people that saved will be the people that pay.
Reading the 3rd last paragraph; the wife is concerned about being able to pay for college for their son. In the last paragraph, the father indicates that if they can make another equity extraction, he'll put a new deck on the roof.
"Sorry kiddo. Daddy has his priorities. Here's $100. Go to the mall."
Lots of interesting news. Soon Sebastian will have learned that those indices he has been touting as proof we are not going into recession are coincident or lagging indicators which (especially in their "pre-adjustment" incarnations) don't herald a bust by gradual deterioration, but rather inflect abruptly in Wile E. Coyote moments at boom end.
I urge banks to closely evaluate the risks that they're taking, not only in a context of a highly liquid, benign financial environment, but in one that would conceivably be less liquid and less benign,'' Bernanke said at a conference on May 17.We do think it's very important for banks to be quite aware of the risks that are associates with working with private-equity firms.''
Our Fed Chairman is fire fighting LBO's. Fires are ablaze in the mortgage markets and now in with home building industry.
Seb, the Wile E. Coyote comment by jm is probably referring to a likely crash style when the markets realize nothing is supporting things. It was first mentioned in an economics paper on the US dollar and exchange rates by Paul Krugman where he asked and discussed if global perceptions and CB intervention might give the dollar a Wile E. Coyote cartoon-like moment of hanging in air and then crashing.
What effect would a dollar decline have on already-established fixed rate mortgages? My thoughts are that fixed rate mortgage holders would find their monthly payments getting easier as wages rise to compensate for the declining dollar. Am I wrong about that?
Eventually, yes - the payments would be easier as wages rise. The catch is the window of time where everything is rising in price but wages haven't caught up. Oh, and the risk that your profit-seeking employer doesn't raise the wage to the same extent costs have increased.
But yes, if a home-owner can get past that rough period, the payments are a significantly smaller burden.
Not necessarily Outsider. Wages are paid domestically and are typically not pegged to the exchange rates. We just get to pay more for the goods we want until it rebalances. However, as I also understand it, it also typically takes a while for headline inflation to work its way through and is reflected in wages and COLA increases.
You're right, as I understand it, a dropping dollar would have an inflationary effect domestically as we have to pay more for imported goods and that inflation will eventually have a wage increase effect. However, it's just that sort of endemic baked-in inflation that the Fed watches like a hawk for. They have been proven in the past (under Volker in the 80's) to be willing to sacrifice the short term health of the economy (risk recession by jacking interest rates) to gain the longer term health of a low inflation environment. The caveat in this, according to most of the sources I've read recently, is that they don't want to crater the economy too much and trigger a recession or more serious economic crisis, causing them to have to drop rates, thus their waffling recently. This jacking of rates would also help dampen out the speed and pain of any foreign exchange deficit/rate rebalance by paying more interest.
I side with Andrew - no reason US domestic wages would have to rise just because the dollar fell & caused 'inflation'. Not in a wage arbitraged world... Not until labor cost (corrected for productivity differences) has approached parity between the various trading partners.
In the case of China and India, we got a way to go... especially considering their productivity is improving faster than our currencies are rebalancing.
Yipes! Thanks dryfly. I had forgotten about the effect a lower dollar had on the unit cost of labor and relative productivity.
That's one nasty way to make the U.S. worker swallow what is, in effect, a pay cut and a lowering of their standard of living compared to the rest of the world.
I agreee with dryfly's point generally,
but have a modification to this part:
Not until labor cost (corrected for
productivity differences) has approached
parity between the various trading
partners.
...as long as the currency pegs hold, any dollar devaluation won't fix the labor arbitrage problem. The dollar would have to devalue AND the pegs (China, Japan, ...) would need to break (along with the carry trade and debt recycling vendor financing), before we'd finally see real wages stop falling (let alone rise, which I don't think is likely until we figure out how to productively occupy the 2 billion new global workers).
Whenever the pegs finally break, there will still be a huge amount of US debt to pay off in now cheaper dollars, but it's still going to be just about as hard as it is now to earn a dollar in the US (contrary to an purely inflationary wage period), so paying off debt is still going to be difficult while imports (oil, ...) will become more expensive making for tighter budgets or more BKs.
That, to me, is the single biggest problem with the current environment....we'd have to devalue (Heliben would say hyperinflate) beyond what's required to equalize labor pricing pressures until we reached the point where wages had room to rise (by undershooting the global price point) which is the only way I can think of to begin easing the pain of outstanding debt.
This is probably why Roach and others think we'll be going protectionist instead...if you lock out imports, labor doesn't have to compete on price (which is both a problem...think monkey wrench in the global economy....and a peg-pressure pain reliever)
I left out one point: protectionism is viable only because it does not require anything from those who peg to the US currency.
We cannot hyperinflate unless the peggers want to let us do so. And why, exactly, would our biggers creditors want to allow us to hyperinflate if hyperinflation and protectionism both result in them losing the ability to be uber-exporters, while hyperinflation alone (and not protectionism) will devalue their $1T US currency reserve?
"...as long as the currency pegs hold, any dollar devaluation won't fix the labor arbitrage problem."
Aaghh! Anyone know the way to the 'beginner' blog?
I am overwhelmed by the incredible amount of knowledge posted here. But the only 2 variables my outdated program understands at this point are "yes" and "no".
And before anyone says we can hyperinflate the debt away while pegged, please be prepared to include a method for stopping FCB sterilization (i.e. debt recycling, vendor financing), which works to suppress our interest rates with our own printing, not raise them.
The short answers Outsider are: No, a dropping dollar will not ease the burden on fixed rate mortgagee's, at least not in the short term. They are still getting paid in dollars and employer's don't give you a pay bump because the dollar tanked. You'll pay the same amount for rent or mortgage here in the US (your cost of living will not have increased much domestically), but a pint of lager in the UK will now cost you and arm and a leg (trips and stuff from overseas will have shot up in price).
Long term, however, the answer is "Yes", but that is due to inflation in general, which can be affected by the dollar exchange rate (effective domestic inflation goes up if the dollar tanks due to imported stuff (gas, oil, Walmart goods) costing more, but this is an extremely delayed effect)
A good example of the inflation effect we're talking about is a friend of mine who stretched to build a really huge new house in 1997, where his wife and him barely made enough to make the payments. He now is sitting pretty in a gorgeous $500k appraised house that he "only" owes $200k remaining on, and in the meantime their salaries have increased so that they can easily make the payments. It's amazing what 10 years inflation and a housing boom will do.
However, in the meantime, the ups and downs of the dollar in those 10 years (and it did go up and down) have had a negligible direct effect on the house price and their take home pay, aside from adding or subtracting some from the base inflation rate.
Outside - if this hasn't been beat to death a couple more small points. A falling $ is likely to lead to a higher rate for a couple of reasons, including defending exchange rates. It depends on a balance between foreign interest rates and exchange (fixed/pegged or not). Rising rates will tend to dampen inflation. In any case there's no direct link between exchange rates and wages. If the $ falls demand theoretically goes up for our goods which might raise wages if the increase is sufficiently large. Unlikely in a world where China & India have surplus labor for the next 30 years. Not surplus skilled labor mind you. An existing mortgage holder would therefore likely see a) no impact on his note b)a rise in rates dampening demand for houses and possibly a decline in his house value, but c) perhaps greater job opportunities if aggregate demand grows due to export growth (bearing in mind domestic demand might be decreased much more than by rising rates).
Not where you headed but the biggest danger we face is if a falling $ means the foreign reserves from, e.g., China move elsewhere because the combination of rates and currency impacts gets so poor. Then our rates would have to rise rapidly and dramtically to gain that inflow back. OUCH.
You're welcome Outsider. I wouldn't worry about feeling overwhelmed, there are no stupid questions. If there were I'd have been tossed out of here long ago. Keep asking and keep a sense of humility about your opinions. This is how we learn. As I've heard it said, ignorance is not a sin, but remaining intentionally ignorant is.
A crashing dollar will have other nasty effects (I've heard it said various places that the Fed will have to choose between reviving the economy and raging inflation from a devalued dollar - ice or fire; also see my above post on Krugman's Wile E. Coyote theory of a dollar plunge, it's a bit heavy going, but even just the overview from it is educational), but it won't directly affect the mortgagee burden (unless you count lack of job security from the resulting recession).
Actually, Andrew, it was your post about Wile E. Coyote (I did read your link of Krugman's paper and found it very interesting) that got me started thinking about this subject. When he mentioned the dollar crashing, I started thinking - how is that going to affect those in fixed rate loans? Vs. variable rate loans? My premise was that as inflation shot up, wages would too, and the outcome would be more actual dollars, making fixed rate loans easier to manage and variable rate loans much more difficult. But I see it's a bit more complicated than that.
No, you got the effect right. It just occurs on a larger timescale and thus won't help immediately.
However, as I understand it a dropping dollar value will have the effect of increasing the mortgage and long term interest rates, folks are going to want more interest to run the risk of loaning you money in a falling dollar/higher inflation environment. The higher interest rates are going to kill variable rate borrowers when their rates reset and freeze other buyers out of the housing market until prices drop to compensate. People sitting in houses with fixed rates are probably going to be stuck for the duration, unless they are willing to drop their prices and take the hit.
As I mentioned, if the dollar crashes the Fed is going to have to choose between defending the dollar/staving off inflation by increasing the interest rates (and probably send the economy tanking into a recession, stagflationary or even deflationary spiral - the ice option) or boosting/reviving a tanking economy by increasing the money supply/dropping rates and risking a huge spike in inflation and a further crash/run on the dollar (a nasty unwind of the carry trade/current account deficit, goodbye Asian funding of the American Dream - the fire option). The Fed's actions will all revolve around what they see as the bigger risk to our long term health, inflation or economic contraction. At the moment, with Asian Central Bank financing supporting American debt and consumption (funding our Federal and trade deficits, increasing the money supply), everything I've read seems to say that they're focusing on inflation and trying for a gradual cooling by keeping rates moderate-high and talking up inflation. However, that being said, the markets move much quicker than central bankers and may move/decide for them and they'll be in a reaction mode doing damage control.
Whoops.. Thanks for the correction. As an infrequent visitor to the UK and as a sometime connoisseur of the fruit of the barley I most sincerely apologize. I should have known better. I'm shocked and mortified.
I personally prefer Speckled Hen or New Castle Brown. However, I did manage a passing clone of Old Peculiar in my home brewing recently. My joker of a brother took to calling it and the original bottled stuff "Old Weirdo". Sigh
Back to the headache stuff - RPs post above on the peg - he's right about the peg slowing rebalancing down... A LOT.
But wages are rising in China regardless... so there is 'hope'.
A friend of mine went to China last year to help site a plant... was told Shanghai was out of the question as labor had got too expensive, a skilled worker would cost the equivalent of $2000 per year! That was a 200-300% increase over the last 4 years he was told.
Not to worry though - just 200km west in Wuxi they could find wages still in the 'reasonably affordable' 30-40 cent an hour range... and that's where they built the plant. Gee I wonder how much farther back into China those cheap wages go?
Fact is if the RMB floated... those wages would be MUCH higher already... in dollar equivalents if not RMB. The Chinese workers who get employed, al though somewhat fewer of them, would be living better & our workers would be facing less job loss threat.
Of course equity holders of the MNCs & CCP party aparatchiks would be far LESS better off in a floating-currency less-wage-arbitrage world but that's just a minor hurdle to clear on the road to 'social justice', right? Right?
Who cares about any of this as long as they approve my loan...
Andrew, I've never met a British or Irish brew that I didn't like. They really know how to do it. Same with the Germans and beer.
It's no wonder that Budweiser is losing market share to all of them. You'd think the Busch family would wise-up and start brewing something worth drinking.
dryfly said: "Fact is if the RMB floated... those wages would be MUCH higher already... in dollar equivalents if not RMB. The Chinese workers who get employed, although somewhat fewer of them, would be living better & our workers would be facing less job loss threat..."
And the rest of us would be paying higher prices for imports.
"Protecting" U.S. jobs in non-competitive industries costs all the rest of us in higher prices. It's a trade-off: Do we "protect" U.S. jobs for 1 million people, if the cost is higher prices for the other 299 million of us? Or do we let economic forces work as they should, and have those million workers "re-tasked" to do something else in a different, more-competitive industry?
There are two sides to this story, and like the housing "bust" story the other side never gets addressed.
"Protecting" U.S. jobs in non-competitive industries costs all the rest of us in higher prices. It's a trade-off: Do we "protect" U.S. jobs for 1 million people, if the cost is higher prices for the other 299 million of us? Or do we let economic forces work as they should, and have those million workers "re-tasked" to do something else in a different, more-competitive industry?
Allowing currencies to 'float' isn't exactly the same as 'protectionism' now is it? That is unless your idea of 'protection' is protecting merchantilist behavior on the part of MNCs and their partners & benefactors in 'the party'.
To what extent does the money not being spent on new mortgage originations by the first-time buyers on the sidelines counter the decline in MEW? Was the savings rate so low because people were buying too much house? That money that was going to be spent on an overpriced house can now be spent on toys.
Was the savings rate so low because people were buying too much house?
Steve the savings rate is a peculiar thing... they really aren't measuring savings rather they measure income & consumption... two numbers they have a pretty good handle on... then calculate savings by:
Income - Consumption = Savings
More complicated but something like that.
Point is 'income' doesn't include MEW... so if we spend (consume) our income AND some of our MEW... we get a number for consumption greater than income hence 'negative savings'.
I don't see another big 'pool' of wealth average consumers can tap into equivalent to MEW... maybe some stock market gains for wealthier folks or additional credit extended via plastic... but nothing likely in the near future to replace MEW in magnitude.
And I certainly can't see 'savers' who didn't buy homes stepping in and picking up much of the slack... two reasons (1) not enough money there (2) they aren't spenders.
That's the 'popular meme' anyway. Who knows what'll really happen.
http://thumbsnap.com/v/xngbpEhC.jpg
Now people will turn to credit cards....
getting ready for credit markets crash:
Looming Crash Prompts Jump in Distressed Debt Hiring (Update1) - Bloomberg.com
In my opinion, there are 2 things which could, in theory, panic the markets.
Hmm, maybe that's just one thing come to think of it.
China seems to be tanking -300 (-7.0%) into the close.
Yal,
I worship you. You are truly an extremely able contributor to these comments.
I now click on your links without exception.
Thanks.
China sure does seem to be coming apart at the seams. Only 6.5% so far, but they've come so far, so fast.
May they live in interesting times.
"I would love to put a deck on the roof," Paul said. "If this thing goes up in value more, maybe we'll do it."
My jaw dropped when I read that.
Good luck, Paul. I think you're going to need it.
And thanks, CR, for giving the hat tip to Fleck for "housing ATM." I have vague memories of a commenter a while back in high dudgeon who 'splained to us that he/she/it would never read CR again because any website that quoted Fleck was FOS and not worth reading. It may have been around the time Fleck was reporting the coming carnage in the "scratch and dent" whole loan market, and there was some scoffing over his source for that. Yep, just another short with 'tude, nothing to see here, move along.
Ah, the slings and arrows of outrageous fortune. What would the net be without them? If only there were some way to piss off that circus bear dude sufficiently to make him stalk off in a huff . . .
China will probably make up more than 6.5% in the next week or so. I don't understand how a 0.3% tariff can have any effect on a market that's gaining 1% everyday.
Looming Crash Prompts Most Hires for Distressed Debt Since 2002
Looming Crash Prompts Jump in Distressed Debt Hiring (Update1) - Bloomberg.com
When the turn does come, it will be unlike anything we have ever seen before,'' said Iain Burnett, 43, managing director of Morgan Stanley's special situations unit in London.The scale of it could be considerable because of the size of some of these leveraged deals,'' said Burnett, who began his career in London a month before the October 1987 stock market crash.
still rising:
Housing Slump, Crackdown Cut Flows, Hurt Mexican Peso (Update3) - Bloomberg.com
"China will probably make up more than 6.5% in the next week or so. I don't understand how a 0.3% tariff can have any effect on a market that's gaining 1% everyday."
If it's 0.3% on every trade, it does add significantly to the trading costs. Remember that just a few days ago they were trading more than the rest of Asia combined.
my prediction is that China will recover. 0.3% is not enough.
0.6% or 0.75% may do the trick.
what about our bonds ?
3 yr note auction is canceled.
2 yr had little deamnd
10 yr yield is rising.
Has China gov stopped buying US bonds ?
On a separate note, I also thought today's Steven Pearlstein column today about the middle class was worth a link...
US mortgage applications fell last week-MBA
| Reuters
Dear All,
I am always enlightened by the comments section of CR. First I read about the Woodhills telling their children: No more impulse purchases or frivolous shopping trips . (Frivolous shopping trip? What the heck do you do on a frivolous shopping trip?)
And then I click on one of Yals links to read this:
Rufina Rodriguez, a 46-year-old mother of three, is feeling the squeeze in Mexico City. Her brother, who picks strawberries in California, has sent her less than $100 this year, down from about $230 each month in 2006.
By the way, Tanta I thought circus bear baiting ended back in the 1600s.
Best regards,
While you've certainly covered it thanks for posting the more MSM - a nice indicator of broader awareness. Seriously - if the path was visible last summer with a careful look but only now getting covered how long will it take for the real realities to sink in ?
Put another way how're these folks making their decisions - just one running what they see out ahead in a straight line ? Oops. Now how many of Wall St's finest are doing that ?
Last two weeks have seen a lot of coverage of carry, leverage and covenent-lite financing in buyouts, equities, etc. We don't have the vis into that but it looks like the same mechanisms as housing. Hmmm...
this is the problem:
U.S. Junk-Bond Risk Premiums Decline to a Record Low (Update5) - Bloomberg.com
This is one of the reasons I don't think a bailout will help anybody. The picture in the paper says more about the problem than the article, but they don't have the picture online. In the print picture, Ms. Williams is standing in front of her new Lincoln Navigator wearing some nice accessories and squinting through slits almost sealed shut from a gluttonous lifestyle. I do feel sorry for people losing their home and know what it is like when all of your choices are hard. But that is no reason to make everyone else pay for their bad decisions. These people should be examples of what not to do, of what to avoid and not as innocent victims. These people were "living high on the hog" while others were saving for their future. The unfortunate lesson will be the people that saved will be the people that pay.
'Subprime' Aftermath: Losing the Family Home - WSJ.com
Reading the 3rd last paragraph; the wife is concerned about being able to pay for college for their son. In the last paragraph, the father indicates that if they can make another equity extraction, he'll put a new deck on the roof.
"Sorry kiddo. Daddy has his priorities. Here's $100. Go to the mall."
Lots of interesting news. Soon Sebastian will have learned that those indices he has been touting as proof we are not going into recession are coincident or lagging indicators which (especially in their "pre-adjustment" incarnations) don't herald a bust by gradual deterioration, but rather inflect abruptly in Wile E. Coyote moments at boom end.
From Bloomberg Article posted by Yal
I urge banks to closely evaluate the risks that they're taking, not only in a context of a highly liquid, benign financial environment, but in one that would conceivably be less liquid and less benign,'' Bernanke said at a conference on May 17.We do think it's very important for banks to be quite aware of the risks that are associates with working with private-equity firms.''
Our Fed Chairman is fire fighting LBO's. Fires are ablaze in the mortgage markets and now in with home building industry.
Is there any water left to put out these fires?
NJMortgages,
water is liquid so maybe this is why Ben is fighting the fires with more liquidity ?
Bill Fleckenstein and Wile E. Coyote as sources for the bearish argument?
Sebastia
4 houses and six kids? What the hell is WRONG with these people? Yeesh, they have no self-control at all.
Jay thanks for mentioning the Pearlstein article. He just hosted a chat and I was able to get a last comment in on the credit and real estate bubble.
Seb, the Wile E. Coyote comment by jm is probably referring to a likely crash style when the markets realize nothing is supporting things. It was first mentioned in an economics paper on the US dollar and exchange rates by Paul Krugman where he asked and discussed if global perceptions and CB intervention might give the dollar a Wile E. Coyote cartoon-like moment of hanging in air and then crashing.
http://www.econ.princeton.edu/seminars/WEEKLY%20SEMINAR%20SCHEDULE/SPRING_05-06/April_24/Krugman.pdf
Economist's View: Krugman: Will There Be a Dollar Crisis?
What effect would a dollar decline have on already-established fixed rate mortgages? My thoughts are that fixed rate mortgage holders would find their monthly payments getting easier as wages rise to compensate for the declining dollar. Am I wrong about that?
Yal - thanks. Bingo, that be it.
Shall we all chant, "thar she blows" ?
Outside,
Eventually, yes - the payments would be easier as wages rise. The catch is the window of time where everything is rising in price but wages haven't caught up. Oh, and the risk that your profit-seeking employer doesn't raise the wage to the same extent costs have increased.
But yes, if a home-owner can get past that rough period, the payments are a significantly smaller burden.
Not necessarily Outsider. Wages are paid domestically and are typically not pegged to the exchange rates. We just get to pay more for the goods we want until it rebalances. However, as I also understand it, it also typically takes a while for headline inflation to work its way through and is reflected in wages and COLA increases.
You're right, as I understand it, a dropping dollar would have an inflationary effect domestically as we have to pay more for imported goods and that inflation will eventually have a wage increase effect. However, it's just that sort of endemic baked-in inflation that the Fed watches like a hawk for. They have been proven in the past (under Volker in the 80's) to be willing to sacrifice the short term health of the economy (risk recession by jacking interest rates) to gain the longer term health of a low inflation environment. The caveat in this, according to most of the sources I've read recently, is that they don't want to crater the economy too much and trigger a recession or more serious economic crisis, causing them to have to drop rates, thus their waffling recently. This jacking of rates would also help dampen out the speed and pain of any foreign exchange deficit/rate rebalance by paying more interest.
I side with Andrew - no reason US domestic wages would have to rise just because the dollar fell & caused 'inflation'. Not in a wage arbitraged world... Not until labor cost (corrected for productivity differences) has approached parity between the various trading partners.
In the case of China and India, we got a way to go... especially considering their productivity is improving faster than our currencies are rebalancing.
Yipes! Thanks dryfly. I had forgotten about the effect a lower dollar had on the unit cost of labor and relative productivity.
That's one nasty way to make the U.S. worker swallow what is, in effect, a pay cut and a lowering of their standard of living compared to the rest of the world.
I agreee with dryfly's point generally,
but have a modification to this part:
...as long as the currency pegs hold, any dollar devaluation won't fix the labor arbitrage problem. The dollar would have to devalue AND the pegs (China, Japan, ...) would need to break (along with the carry trade and debt recycling vendor financing), before we'd finally see real wages stop falling (let alone rise, which I don't think is likely until we figure out how to productively occupy the 2 billion new global workers).
Whenever the pegs finally break, there will still be a huge amount of US debt to pay off in now cheaper dollars, but it's still going to be just about as hard as it is now to earn a dollar in the US (contrary to an purely inflationary wage period), so paying off debt is still going to be difficult while imports (oil, ...) will become more expensive making for tighter budgets or more BKs.
That, to me, is the single biggest problem with the current environment....we'd have to devalue (Heliben would say hyperinflate) beyond what's required to equalize labor pricing pressures until we reached the point where wages had room to rise (by undershooting the global price point) which is the only way I can think of to begin easing the pain of outstanding debt.
This is probably why Roach and others think we'll be going protectionist instead...if you lock out imports, labor doesn't have to compete on price (which is both a problem...think monkey wrench in the global economy....and a peg-pressure pain reliever)
I left out one point: protectionism is viable only because it does not require anything from those who peg to the US currency.
We cannot hyperinflate unless the peggers want to let us do so. And why, exactly, would our biggers creditors want to allow us to hyperinflate if hyperinflation and protectionism both result in them losing the ability to be uber-exporters, while hyperinflation alone (and not protectionism) will devalue their $1T US currency reserve?
"...as long as the currency pegs hold, any dollar devaluation won't fix the labor arbitrage problem."
Aaghh! Anyone know the way to the 'beginner' blog?
I am overwhelmed by the incredible amount of knowledge posted here. But the only 2 variables my outdated program understands at this point are "yes" and "no".
And before anyone says we can hyperinflate the debt away while pegged, please be prepared to include a method for stopping FCB sterilization (i.e. debt recycling, vendor financing), which works to suppress our interest rates with our own printing, not raise them.
Okay, RP, you win...
Until I can figure out how to sterilize an FCB (I hope it's not painful), my keyboard is officially off-limits.
The short answers Outsider are: No, a dropping dollar will not ease the burden on fixed rate mortgagee's, at least not in the short term. They are still getting paid in dollars and employer's don't give you a pay bump because the dollar tanked. You'll pay the same amount for rent or mortgage here in the US (your cost of living will not have increased much domestically), but a pint of lager in the UK will now cost you and arm and a leg (trips and stuff from overseas will have shot up in price).
Long term, however, the answer is "Yes", but that is due to inflation in general, which can be affected by the dollar exchange rate (effective domestic inflation goes up if the dollar tanks due to imported stuff (gas, oil, Walmart goods) costing more, but this is an extremely delayed effect)
Thank you Andrew - you are a kind soul.
I was assuming that a tanking dollar equated high inflation rate, but I see that's not a given, at least not right away.
A good example of the inflation effect we're talking about is a friend of mine who stretched to build a really huge new house in 1997, where his wife and him barely made enough to make the payments. He now is sitting pretty in a gorgeous $500k appraised house that he "only" owes $200k remaining on, and in the meantime their salaries have increased so that they can easily make the payments. It's amazing what 10 years inflation and a housing boom will do.
However, in the meantime, the ups and downs of the dollar in those 10 years (and it did go up and down) have had a negligible direct effect on the house price and their take home pay, aside from adding or subtracting some from the base inflation rate.
Andrew -- I actually meant more of a dollar crash. Like the big time kind. As opposed to the general ups and downs of the dollar.
Outside - if this hasn't been beat to death a couple more small points. A falling $ is likely to lead to a higher rate for a couple of reasons, including defending exchange rates. It depends on a balance between foreign interest rates and exchange (fixed/pegged or not). Rising rates will tend to dampen inflation. In any case there's no direct link between exchange rates and wages. If the $ falls demand theoretically goes up for our goods which might raise wages if the increase is sufficiently large. Unlikely in a world where China & India have surplus labor for the next 30 years. Not surplus skilled labor mind you. An existing mortgage holder would therefore likely see a) no impact on his note b)a rise in rates dampening demand for houses and possibly a decline in his house value, but c) perhaps greater job opportunities if aggregate demand grows due to export growth (bearing in mind domestic demand might be decreased much more than by rising rates).
Not where you headed but the biggest danger we face is if a falling $ means the foreign reserves from, e.g., China move elsewhere because the combination of rates and currency impacts gets so poor. Then our rates would have to rise rapidly and dramtically to gain that inflow back. OUCH.
You're welcome Outsider. I wouldn't worry about feeling overwhelmed, there are no stupid questions. If there were I'd have been tossed out of here long ago. Keep asking and keep a sense of humility about your opinions. This is how we learn. As I've heard it said, ignorance is not a sin, but remaining intentionally ignorant is.
A crashing dollar will have other nasty effects (I've heard it said various places that the Fed will have to choose between reviving the economy and raging inflation from a devalued dollar - ice or fire; also see my above post on Krugman's Wile E. Coyote theory of a dollar plunge, it's a bit heavy going, but even just the overview from it is educational), but it won't directly affect the mortgagee burden (unless you count lack of job security from the resulting recession).
Actually, Andrew, it was your post about Wile E. Coyote (I did read your link of Krugman's paper and found it very interesting) that got me started thinking about this subject. When he mentioned the dollar crashing, I started thinking - how is that going to affect those in fixed rate loans? Vs. variable rate loans? My premise was that as inflation shot up, wages would too, and the outcome would be more actual dollars, making fixed rate loans easier to manage and variable rate loans much more difficult. But I see it's a bit more complicated than that.
No, you got the effect right. It just occurs on a larger timescale and thus won't help immediately.
However, as I understand it a dropping dollar value will have the effect of increasing the mortgage and long term interest rates, folks are going to want more interest to run the risk of loaning you money in a falling dollar/higher inflation environment. The higher interest rates are going to kill variable rate borrowers when their rates reset and freeze other buyers out of the housing market until prices drop to compensate. People sitting in houses with fixed rates are probably going to be stuck for the duration, unless they are willing to drop their prices and take the hit.
As I mentioned, if the dollar crashes the Fed is going to have to choose between defending the dollar/staving off inflation by increasing the interest rates (and probably send the economy tanking into a recession, stagflationary or even deflationary spiral - the ice option) or boosting/reviving a tanking economy by increasing the money supply/dropping rates and risking a huge spike in inflation and a further crash/run on the dollar (a nasty unwind of the carry trade/current account deficit, goodbye Asian funding of the American Dream - the fire option). The Fed's actions will all revolve around what they see as the bigger risk to our long term health, inflation or economic contraction. At the moment, with Asian Central Bank financing supporting American debt and consumption (funding our Federal and trade deficits, increasing the money supply), everything I've read seems to say that they're focusing on inflation and trying for a gradual cooling by keeping rates moderate-high and talking up inflation. However, that being said, the markets move much quicker than central bankers and may move/decide for them and they'll be in a reaction mode doing damage control.
Andrew,
I must clear up a very, very important point...
It's a Pint of Bitters, or Ale in the UK. Never, ever Lager.
"It's a Pint of Bitters, or Ale in the UK. Never, ever Lager."
Guest, it's nice to know that at least a few of the lurkers here know what's really important.
Had any Old Peculiar lately?
Whoops.. Thanks for the correction. As an infrequent visitor to the UK and as a sometime connoisseur of the fruit of the barley I most sincerely apologize. I should have known better. I'm shocked and mortified.
I personally prefer Speckled Hen or New Castle Brown. However, I did manage a passing clone of Old Peculiar in my home brewing recently. My joker of a brother took to calling it and the original bottled stuff "Old Weirdo". Sigh
Back to the headache stuff - RPs post above on the peg - he's right about the peg slowing rebalancing down... A LOT.
But wages are rising in China regardless... so there is 'hope'.
A friend of mine went to China last year to help site a plant... was told Shanghai was out of the question as labor had got too expensive, a skilled worker would cost the equivalent of $2000 per year! That was a 200-300% increase over the last 4 years he was told.
Not to worry though - just 200km west in Wuxi they could find wages still in the 'reasonably affordable' 30-40 cent an hour range... and that's where they built the plant. Gee I wonder how much farther back into China those cheap wages go?
Fact is if the RMB floated... those wages would be MUCH higher already... in dollar equivalents if not RMB. The Chinese workers who get employed, al though somewhat fewer of them, would be living better & our workers would be facing less job loss threat.
Of course equity holders of the MNCs & CCP party aparatchiks would be far LESS better off in a floating-currency less-wage-arbitrage world but that's just a minor hurdle to clear on the road to 'social justice', right? Right?
Who cares about any of this as long as they approve my loan...
Andrew, I've never met a British or Irish brew that I didn't like. They really know how to do it. Same with the Germans and beer.
It's no wonder that Budweiser is losing market share to all of them. You'd think the Busch family would wise-up and start brewing something worth drinking.
dryfly said: "Fact is if the RMB floated... those wages would be MUCH higher already... in dollar equivalents if not RMB. The Chinese workers who get employed, although somewhat fewer of them, would be living better & our workers would be facing less job loss threat..."
And the rest of us would be paying higher prices for imports.
"Protecting" U.S. jobs in non-competitive industries costs all the rest of us in higher prices. It's a trade-off: Do we "protect" U.S. jobs for 1 million people, if the cost is higher prices for the other 299 million of us? Or do we let economic forces work as they should, and have those million workers "re-tasked" to do something else in a different, more-competitive industry?
There are two sides to this story, and like the housing "bust" story the other side never gets addressed.
Sebastia
And the rest of us would be paying higher prices for imports.
Ya it sure is nice having slaves again, eh Sebastien?
"Protecting" U.S. jobs in non-competitive industries costs all the rest of us in higher prices. It's a trade-off: Do we "protect" U.S. jobs for 1 million people, if the cost is higher prices for the other 299 million of us? Or do we let economic forces work as they should, and have those million workers "re-tasked" to do something else in a different, more-competitive industry?
Allowing currencies to 'float' isn't exactly the same as 'protectionism' now is it? That is unless your idea of 'protection' is protecting merchantilist behavior on the part of MNCs and their partners & benefactors in 'the party'.
You against floating the RMB? Who you protecting?
dryfly said: "...You against floating the RMB? Who you protecting?"
If the RMB rises, what happens to the price of Chinese imports for all American consumers?
Who are you protecting?
Sebastia
Currency exchanges have markets too Sebastien... By floating RMB vs USD I'd be protecting the market. And you?
To what extent does the money not being spent on new mortgage originations by the first-time buyers on the sidelines counter the decline in MEW? Was the savings rate so low because people were buying too much house? That money that was going to be spent on an overpriced house can now be spent on toys.
Was the savings rate so low because people were buying too much house?
Steve the savings rate is a peculiar thing... they really aren't measuring savings rather they measure income & consumption... two numbers they have a pretty good handle on... then calculate savings by:
Income - Consumption = Savings
More complicated but something like that.
Point is 'income' doesn't include MEW... so if we spend (consume) our income AND some of our MEW... we get a number for consumption greater than income hence 'negative savings'.
I don't see another big 'pool' of wealth average consumers can tap into equivalent to MEW... maybe some stock market gains for wealthier folks or additional credit extended via plastic... but nothing likely in the near future to replace MEW in magnitude.
And I certainly can't see 'savers' who didn't buy homes stepping in and picking up much of the slack... two reasons (1) not enough money there (2) they aren't spenders.
That's the 'popular meme' anyway. Who knows what'll really happen.