flat world + low interest rates + easy credit = Current US Economic Environment.
Which of those will change enough to alter the course of the economy, and when?
And more importantly, who the hell would say "If actions are taken to reduce federal government dissaving, pressures to borrow from abroad will presumably diminish."
Which of those will change enough to alter the course of the economy, and when?
I some what agree... that until some event chages that formula... it will be pretty much steady as she goes.
But the thing about 'chaotic systems' like economics is it can change fast & in unpredictable ways... similar to the straw that breaks the camel's back.
But since so much of the current situation is driven by RE and RE is so 'sticky' on the way down... a correction could still be a long time coming even if the equation shifts.
But since so much of the current situation is driven by RE and RE is so 'sticky' on the way down... a correction could still be a long time coming even if the equation shifts.
In the past 2 years, 40% of the demand for houses has come from speculators. Add in funny-money loans into the mix that will be re-setting in 2006 and 07, and real estate might not be as "sticky" as it has been in the past.
I like your "chaotic systems" analygy ... we just might be seeing it from front row center seats in the near future. It wouldn't surprise me.
Because of risky borrowing, people are already starting to lose their homes at an increasing pace.
Foreclosures all across the U.S. are rising.
Hyman Minksy talked about the 7 stages of a financial crisis. We are now at stage 4 where houses prices have peaked ... if people/speculators panic and start racing for the exit doors, there will be no "sticky" downward trend to the correction in home prices. It will be a crash.
In the past 2 years, 40% of the demand for houses has come from speculators. Add in funny-money loans into the mix that will be re-setting in 2006 and 07, and real estate might not be as "sticky" as it has been in the past.
I could be different this time but I'll have to see it to believe it. I've always discounted the 'optimistic' scenario of why it is different this time... that same skeptic in me wants to discount the 'pessimistic' scenario too. I'll just have to see it happen.
Don't get me wrong - I think things will unwind due to debt & hollowing out of our tradeable productive capacity - I just think it is going to take longer than any of us expect.
FWIW - I went to Mall of America yesterday. It is near the airport & our daughter was flying in from NY for Spring Break... they lost her luggage (plus it was her birthday) so we did a little shopping. The place was packed to over-flowing... more crowded than it typically is over the holidays... you could hardly walk. I was stunned by our American consumer once again.
How much did they spend? Who knows. But folks had packages. If this is any indicator the credit cards are still flying around out there.
if 70% of americans own their own houses, what will the spec buyers (i doubt the 40% figure) do with their unsold flippers? the housing bust scenario should leave america with a wonderfully affordable rental housing market for many financially unqualified renters.
The trade deficit increases when the economy goes on a boom (before 2000). However, it has increased even faster after the boom was over (after 2001).
In raw terms, our trade deficit increased by 57 billion during 2002, by 77 billion the next year and by 123 billion in 2004. 2005 provided an increase of only 102 billion.
The increase in the value of the dollar in 2005 should have increased the growth of the trade deficit. This suggests other forces are slowing down the growth in the trade deficit.
If the U. S. stock market growth continues to lag overseas stock market growth, the value of the dollar should decline and the cheaper dollar should slow down or perhaps reverse the growth of the trade deficit.
The mortgage market enters this picture only as it influences the growth of the stock market and thus the value of the dollar.
When you add investors, 2nd home purchasers, homeowners who are stretching about what they really afford (think sub-prime borrowers), I'm confident 40% is a reasonably good number for the total % of speculators driving the market in the last 2 to 3 years.
Those $600,000 vacant homes are going to make lousey rentals here in SoCal. They only get $1,800 to $2,000 per month in rent. They'll look better at $350,000, which I suspect is where they're going before the imbalance is corrected.
If the U. S. stock market growth continues to lag overseas stock market growth, the value of the dollar should decline and the cheaper dollar should slow down or perhaps reverse the growth of the trade deficit.
Two issues:
(1) as long as Asian CBs & OPEC petrodollars continue to but US debt the dollar will not weaken appreciably - see Setser's Blog for more on this.
(2) Even if the dollar fell vis-a-vis other currencies (even the RMB) there is a lot of inertia in trade so it would take time as in years to push back significantly...
First we'd be buying oil that would be FAR more expensive (although oil is quoted in dollars it is effectively 'market' priced if the dollar falls look for oil to increase in dollars). So even if we buy less it will cost more.
Secondly many of the non-oil imports are manufactured components & consumer products on long term contract... many years out. The stuff we'll be seeing on the shelves NEXT Christmas is already contracted & into pre-production debugging & will be built this spring & summer... they are well into the holiday buy for 2007 now.
So if the dollar fell the pipeline of projects still runs out two years or more from here.
In a world full of financial assets, why is the stock market the magic conduit of mortgage market flows? Cash outs go for consumer goods. The marginal propensity to import consumer goods is high. Why is the stock market an intermediate step?
The slope of the housing decline would be a LOT easier to predict if we had ANY evidence the years of egregiously easy mtg. money are over. But, all I hear is rhetoric: rhetoric from the Fed, rhetoric from the office of the Comptroller of the Currency, rhetoric from Congress, rhetoric from the MBA. Anyone have any evidence of tightened mtg. lending policy?
I do not think the trade deficit will stabilize or even decline slightly this year. As the inflation goes up and economy slows, more and more business are outsourcing to China. Look at the Jan trade deficit, the percentage of industry goods are up. As long as the exchange rate changes little (2~3 percent), more deficit are expected (at least from China). That will cause our gov more impatience and a possible trade war. If we can avoid the trade war, likely chinese currency will go up. If not, the chinese currency will go up more (US are the powerful one, China is actually weaker than Japan. Look the history on japanese currency). It will be harmful to our economy anyway. Inflation is unavoidable in any of those situations. More rate hike, economy slows further. Fed will have a hard time to decide to fight inflation or boost economy.
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flat world + low interest rates + easy credit = Current US Economic Environment.
Which of those will change enough to alter the course of the economy, and when?
And more importantly, who the hell would say "If actions are taken to reduce federal government dissaving, pressures to borrow from abroad will presumably diminish."
"Dissaving"? Are you shittin' me?
Which of those will change enough to alter the course of the economy, and when?
I some what agree... that until some event chages that formula... it will be pretty much steady as she goes.
But the thing about 'chaotic systems' like economics is it can change fast & in unpredictable ways... similar to the straw that breaks the camel's back.
But since so much of the current situation is driven by RE and RE is so 'sticky' on the way down... a correction could still be a long time coming even if the equation shifts.
JMHO.
dryfly,
In the past 2 years, 40% of the demand for houses has come from speculators. Add in funny-money loans into the mix that will be re-setting in 2006 and 07, and real estate might not be as "sticky" as it has been in the past.
I like your "chaotic systems" analygy ... we just might be seeing it from front row center seats in the near future. It wouldn't surprise me.
one more thing ...
Because of risky borrowing, people are already starting to lose their homes at an increasing pace.
Foreclosures all across the U.S. are rising.
Hyman Minksy talked about the 7 stages of a financial crisis. We are now at stage 4 where houses prices have peaked ... if people/speculators panic and start racing for the exit doors, there will be no "sticky" downward trend to the correction in home prices. It will be a crash.
Hmmmm personal bankruptcies continue their unhealthy 10% rise; business bankruptcies stay fairly level (down a little).
It's a'coming. Maybe it is time to predict dates.
Well, that staistic is just another piece of data to support conclusions here. If you have bad credit then you need to try to fix it here...
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In the past 2 years, 40% of the demand for houses has come from speculators. Add in funny-money loans into the mix that will be re-setting in 2006 and 07, and real estate might not be as "sticky" as it has been in the past.
I could be different this time but I'll have to see it to believe it. I've always discounted the 'optimistic' scenario of why it is different this time... that same skeptic in me wants to discount the 'pessimistic' scenario too. I'll just have to see it happen.
Don't get me wrong - I think things will unwind due to debt & hollowing out of our tradeable productive capacity - I just think it is going to take longer than any of us expect.
FWIW - I went to Mall of America yesterday. It is near the airport & our daughter was flying in from NY for Spring Break... they lost her luggage (plus it was her birthday) so we did a little shopping. The place was packed to over-flowing... more crowded than it typically is over the holidays... you could hardly walk. I was stunned by our American consumer once again.
How much did they spend? Who knows. But folks had packages. If this is any indicator the credit cards are still flying around out there.
if 70% of americans own their own houses, what will the spec buyers (i doubt the 40% figure) do with their unsold flippers? the housing bust scenario should leave america with a wonderfully affordable rental housing market for many financially unqualified renters.
The trade deficit increases when the economy goes on a boom (before 2000). However, it has increased even faster after the boom was over (after 2001).
In raw terms, our trade deficit increased by 57 billion during 2002, by 77 billion the next year and by 123 billion in 2004. 2005 provided an increase of only 102 billion.
The increase in the value of the dollar in 2005 should have increased the growth of the trade deficit. This suggests other forces are slowing down the growth in the trade deficit.
If the U. S. stock market growth continues to lag overseas stock market growth, the value of the dollar should decline and the cheaper dollar should slow down or perhaps reverse the growth of the trade deficit.
The mortgage market enters this picture only as it influences the growth of the stock market and thus the value of the dollar.
When you add investors, 2nd home purchasers, homeowners who are stretching about what they really afford (think sub-prime borrowers), I'm confident 40% is a reasonably good number for the total % of speculators driving the market in the last 2 to 3 years.
Those $600,000 vacant homes are going to make lousey rentals here in SoCal. They only get $1,800 to $2,000 per month in rent. They'll look better at $350,000, which I suspect is where they're going before the imbalance is corrected.
If the U. S. stock market growth continues to lag overseas stock market growth, the value of the dollar should decline and the cheaper dollar should slow down or perhaps reverse the growth of the trade deficit.
Two issues:
(1) as long as Asian CBs & OPEC petrodollars continue to but US debt the dollar will not weaken appreciably - see Setser's Blog for more on this.
(2) Even if the dollar fell vis-a-vis other currencies (even the RMB) there is a lot of inertia in trade so it would take time as in years to push back significantly...
First we'd be buying oil that would be FAR more expensive (although oil is quoted in dollars it is effectively 'market' priced if the dollar falls look for oil to increase in dollars). So even if we buy less it will cost more.
Secondly many of the non-oil imports are manufactured components & consumer products on long term contract... many years out. The stuff we'll be seeing on the shelves NEXT Christmas is already contracted & into pre-production debugging & will be built this spring & summer... they are well into the holiday buy for 2007 now.
So if the dollar fell the pipeline of projects still runs out two years or more from here.
This thing will not correct quickly.
W. R. Mills,
In a world full of financial assets, why is the stock market the magic conduit of mortgage market flows? Cash outs go for consumer goods. The marginal propensity to import consumer goods is high. Why is the stock market an intermediate step?
The slope of the housing decline would be a LOT easier to predict if we had ANY evidence the years of egregiously easy mtg. money are over. But, all I hear is rhetoric: rhetoric from the Fed, rhetoric from the office of the Comptroller of the Currency, rhetoric from Congress, rhetoric from the MBA. Anyone have any evidence of tightened mtg. lending policy?
I do not think the trade deficit will stabilize or even decline slightly this year. As the inflation goes up and economy slows, more and more business are outsourcing to China. Look at the Jan trade deficit, the percentage of industry goods are up. As long as the exchange rate changes little (2~3 percent), more deficit are expected (at least from China). That will cause our gov more impatience and a possible trade war. If we can avoid the trade war, likely chinese currency will go up. If not, the chinese currency will go up more (US are the powerful one, China is actually weaker than Japan. Look the history on japanese currency). It will be harmful to our economy anyway. Inflation is unavoidable in any of those situations. More rate hike, economy slows further. Fed will have a hard time to decide to fight inflation or boost economy.
Hi, Thank you for having this info on the web. I enjoyed your post. If you may have any interest in
debt consolidation
then I know where you may get your solution. For your comfort, I have enclosed the link, so if needed you can visit the site. Thanks again for your lovely blog. credit