Monday, March 21, 2005

Will Your Editor Get Priced out of the New York Housing Market?

Jay Taylor

With 20/20 hindsight, your editor regrets having sold his house more than two years ago. The house we sold has since gained about 45% in current market value. Will housing prices continue to rise in New York, and thus price Mrs. Taylor and me out of the New York home market? Will the inflationary view that endless amounts of new money creation prevail such that it automatically leads to infinitely higher housing and other prices? To that question I would answer, “yes,” if we were back in the Kondratieff summer (1966-1980) when wages were rising as fast or faster than overall prices. But that is clearly not the case now in 2005, which leads me to believe the current housing bubble as well as the U.S. economic bubble, which has been maintained through artificial stimulus via monetary and fiscal policy

Although the labor market has gained some strength in numbers, the quality of jobs has been in decline and the average salary in real terms actually declined last year. Wages were up 2.5% but inflation grew at 3%. What we are seeing is that the quality of jobs is in decline. In his March 7, 2005 essay titled, “From Jobless to Wageless,” Stephen Roach pointed out that a full 50% of the jobs created in the U.S. during the latest 12-month period were in the following industries:

  • Administrative (temp dominated) and waste services – 385,000 jobs
  • Health care and social assistance – 332,000 jobs
  • Construction and real estate – 321,000 jobs
  • Restaurants – 257,000 jobs

At the start of this latest 12-month period, these sectors contained 36% of America’s jobs.

Except for the housing bubble-related construction and real estate sector, these other sectors really do not provide well-paying jobs. And none of these sectors are real wealth-creating sectors. Stephen Roach points out that this recovery is really quite strange. First there was a lack of job growth, and now there is a lack of wage growth, both of which are highly unusual, compared to past recoveries. In my view, this is just one piece of the puzzle that is leading to a major long-term decline in the standard of living for Americans.

So, wage constraint is one reason I am not terribly worried about housing prices getting out of hand any more than they have already in the New York market. There has to be a limit, even if the bond bears are wrong and interest rates don’t rise significantly any time soon. But I do worry a little that long rates might continue to decline and thus allow America’s housing bubble to remain inflated much longer than most people believe. And this has almost caused me to reconsider buying a house in New York City again. If interest rates continue to decline, that could offset the effect of stagnant wages on house affordability.

True, if we had a free global economy rather than one that is increasingly manipulated by the ruling elite, interest rates would rise dramatically to reflect the enormous imbalance between American consumption and a lack of savings. Increase demand for money and decrease supply by saving, and you get a sharply rising price, namely in interest rates. Print massive amounts of money to meet that supply shortage, and the value of money should go toward zero, which would also result in higher interest rates as savers/lenders would demand compensation for lost purchasing power.

Trouble is, we are moving closer and closer to totalitarian economics. The mechanism of the market place is prohibited by our totalitarian leaders to work efficiently. Even Alan Greenspan admitted that when he recently told Congressman Paul that central bankers are now so smart they can manage the economy without a gold standard. And so, once again, let me say I think the theories of Antal Fekete are very worth considering. While ultimately the laws of economics will prevail and fascist economics will be defeated, given economic collusion between the U.S., who owns the world’s reserve currency on the one hand, and England, Europe, Japan, and China on the other, distortions caused by the ruling elite could conceivably allow the party to continue much longer than many of my free market oriented friends and I have believed. The question now is how do we play this possibility?

Andy Xie of Morgan Stanley Joins the Deflation Parade

In his article dated March 7, 2005, Andy Xie, Morgan Stanley’s Hong Kong-based economist who covers the Asian beat, joined a growing chorus of folks starting to perceive rising threats of deflation. In his March 7 essay titled “The Liquidity Conundrum,” Mr. Xie stated the following:

“The global economy is experiencing the biggest bubble ever. The bubble began with the Asian Financial Crisis and went through the tech bubble, the property bubble and, finally, the China bubble. It has been one big and long bubble. The main reason is because the major central banks have been targeting inflation in a fundamentally deflationary environment, releasing too much liquidity into the global economy. How is it going to end?

“There are two obvious trends in this bubble: Anglo-Saxon consumers have been borrowing a lot against their rising property values to support consumption, and Chinese companies (actually, government-related entities) have been borrowing a lot to create production capacities. To mirror the surge in liquidity, the indebtedness of Anglo-Saxon consumers and Chinese investors has risen sharply. The current boom, therefore, is debt-funded. Debt levels can continue to rise as long as asset prices keep rising.

Whatever triggers the collapse, it will show up first in declining asset prices. Property is the likely candidate. Property prices in New York, London, and Shanghai could decline at the same time. When property prices begin to decline, it would cause the global economy to weaken. The weakening economy would decrease the cash flow of property speculators who would have to sell to unwind. The unwinding would lead global asset prices to collapse in general.

“The major central banks may try to ease aggressively to fight the unwinding spiral. However, it would be too late to revive money demand. Most speculators who are driving demand for money today would have been cut down already. The global economy is likely to experience a period of debt deflation.”



QUESTION: J, your recent article predicts that a deflationary compression will take place in assets and therefore cash (U.S. dollar) will be king. Evidently this will have no effect on government finances and their ability to pay interest and debt back. If government is running 400 billion deficits when times are good what are they going to be in a depression? The U.S. government debt will become junk and will be defaulted on; why would anyone want to sell any assets to raise cash in a worthless piece of paper? Des Moines.

EDITOR’S RESPONSE: I think it may be telling that the Senate, with the cooperation of 11 Democrats, passed a bankruptcy law this past week that makes it much more difficult to declare bankruptcy. Over twothirds of the Senate voted in favor of this bill. Why now? Simply put, I think the banking institutions are realizing that following the party, there is going to be a whale of a hangover. In other words, when the margin clerks begin to “cluck,” the government, which is in bed with the banks, is going to force people to make good on their debts or they will lose their homes and cars and other items that the bank in fact owns until they are repaid in full.

What will become junk will not be government debt because unlike all other debt, government debt does not retain credit risk. And as folks are forced to sell all manner of luxury goods and non essential items to raise cash to keep a roof over their heads and food on their tables, prices will begin to fall, corporations will go out of business, and we will have very high levels of unemployment. Where will you go for income in that instance other than government debt?

It is hard for us to understand the reversal of leverage. It isn’t so hard for my mom and dad who are now 83 and who lived through the Great Depression.

QUESTION: If a market collapse were imminent in 2005 or 2006 what would happen to the dollar ?

EDITOR’S RESPONSE: I believe there is likely to be a short squeeze on the dollar when the margin clerks begin to “cluck” during the Kondratieff winter. This view reflects the thinking of Bob Hoye and, to a lesser extent, Antal Fekete. However, as Robert Prechter told us in our interview published this last week, he is not certain that the dollar will rise vis-à-vis other currencies, although he is certain it will rise vis-à-vis goods and services in America.

In fact no one knows for sure how all this will pan out. During the 1930s, the U.S. dollar did get stronger vis-àvis other currencies, but then we were net creditor nation. Now we are the largest net debtor nation in history, which would suggest a weaker currency vis-à-vis other paper frauds. However, as Bob Hoye points out, the senior currency has, through history, gotten stronger following major bubbles like the one we are still working our way out of. Why so? I believe it is because indebtedness in the senior currency is so, so much greater than in other currencies that when the margin clerks begin to call their loans the liquidity crunch becomes much larger in the senior currency. Of course this line of thinking is not widely accepted. Much more acceptable is the notion that with the U.S. printing so much money, it will be come worthless. Problem with that line of thinking is that we really don’t have money now. Our fiat currency is debt money, not asset money. Were we on a gold standard and if suddenly the world’s gold supply were doubled, we would have an enormous amount of inflation. But now, whenever the money supply is increased, the debt supply is increased by almost as much. As Bob Hoye says, the party will be over, not when inflation rises, but when deflation gets the upper hand. It is indeed inflation that has the Fed so worried, which is why they give us the panic talk about dropping dollars out of helicopters. This rhetoric is geared to keep you spending and going into debt “for the good of your country.” It follows the Keynesian notion that if only policy makers could have talked our grandparents into not being so stupid—if they would have spent their fool heads off rather than saving for a rainy day, the Great Depression could have been avoided. But that line of reasoning is completely fallacious, because you don’t build wealth with debt. Rather you ultimately destroy it. Yes, this kind of rhetoric, coupled with massive printing press exercises, has delayed the depression. But unfortunately it hasn’t eliminated it. It has made the ultimate deflationary bust all that much worse.


At 12:42 AM, Blogger Sir GreenSPan Con-UN-Drum said...

There can be only ONE valid long-term answer to
Chairman Alan Greenspan Conundrum
The Activating Message for X-it & Security.

Chairman Alan Greenspan is the official political hack of The Partners of the X-it in Washington.


Post a Comment

<< Home