We may feel rich for the moment, but clearly all we are doing is diluting the money supply… Thus we see that while an increase in the money supply, like an increase in the supply of any good, lowers its price, the change does not—unlike other goods—confer a social benefit.
Whereas new consumer or capital goods add to standards of living, new money only raises prices—i.e. dilutes its own purchasing power. The reason for this puzzle is that money is only useful for its exchange value…its utility lies in its exchange value, or “purchasing power.
December 30, 2006
In that golden period right before hyperinflation kicks in, the people always feel rich
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Hyperinflation has a very low possibility of happening (maybe 1-2%.) In order to really run a housing bubble blog, I don't see how you can even be a hyper-inflationist.
Think about it: if hyper-inflation happens along with some wage inflation, there really won't be much of a housing bubble and the FB's and GF's win (haha.) Not to worry though, there will be massive deflation instead as cascading cross-defaults will destroy all debt and the FB's and GF's will lose big-time. Coming this summer to an economy near you...
The dollar versus other currencies will become more and more worthless
I'm not sure if we'll see domestic deflation as the economy collapses, or inflation as the prices of goods and services continues to skyrocket. Or both.
But I think we'd all agree we've already seen asset price hyperinflation. The question is now how bad we'll see asset price deflation
Oh, poor Ben.
Many lower income folks will see hyper-stagflation even while houses in bubble areas are locked into a deflationary spiral. Of course the Wall Street grifters and those who suckle the ample teat of Uncle Ben's bosom will have money galore. Trouble is brewing.
Yes anon#1111, think about it. When in recorded history has a government allowed itself to fall out of power when it had the means to prevent its collapse? You are suggesting the Central Banks and governments of China, Japan, Korea, and the U.S. will allow their economies to fall into chaos while debts are repudiated and written off.
You know that will not happen because they can print the money needed to delay/solve the problem. The result will be runaway inflation in the U.S. economy and a lower standard of living for workers here. In dollar terms, there will be no deflation because prices and wages will be adjusted upward.
One look at M3 growth will tell you all you need to know:
http://tinyurl.com/m7bs7
anon, what makes you think that a parabolic M3 translates into higher wages for J6P? Oh yeah, they'll raise the minimum wage. Bwahaha!
The idea for buying a house as a hedge against inflation is to buy low and pay it off with inflated money. Buying high with the anticipation of higher wages in the future is, well, a stupid gamble.
I think we have been in hyperinflation for some time now. Look at the prices of gas, heathcare, food, and houses in the last 6 years alone.
I hope Keith doesnt mind I put this question on here. I'll click on the ads for you - cheers!
Am I the only one, or does anyone think prices on import cars is super inflated for what you get?
I have heard that prices have never gone down for cars, and never will. Whats realistic in new car prices if nothing is selling?
What's realistic in new car prices if nothing is selling?
Buy slightly used for pennies on the $. Pay cash. Smile alot. :-)
Mish says Deflation. It is all so confusing.
http://globaleconomicanalysis.blogspot.com/
The credit risk is being 'insured' throught the use of derivatives. The size and magnitude of the derivative market has grown so much that a problem would overwhelm the balance sheets of the major banks who have created this Frankenstein. But the banks can in the process screw over the public when a problem comes. Thereby they'll do just that and force a government bailout. That's when you'll get hyperinflation. The Feds will have to run the printing press night and day to create enough $1,000,000 dollar bills to pay off the derivatives. Congress will hold hearings and the public will wonder why there was no supervision of the derivatives market. Then will get some new laws but it will be too late. Those most responsible will have covered and insulated themselves long ago, having made a mint off the problem they knew they were creating the whole time. The rest of the public will suffer terribly...
So, yet again, it's all about the derivatives market!!!
Oh Keith The Great...
HomeOwner pays $60 today in mortgage and make $100 in wages. Tomorrow after hyperinflation kicks home owner still pays $60 but makes $200 in wages.
You Mr. Renter, make $100 in wages and pay $40 in rent. After hyper inflation kicks in you make $200 in wages, but your rent is now $80.
Who's better off?
A fixed mortgage payment is about the best protection against hyperinflationout there. Gold, shmold. Get a 30 yeard fixed interest payment.
One of the first signs of a hyperinflation is people start to buy goods they do not need right away, they start hoarding things. They know these goods will be more expensive so they stock up.
Once this starts happening it is only a short time before any cash received is immediately traded for ANY goods in an effort not to loose purchasing power. At this stage the currency becomes worthless.
The only real job for the Fed is to manage inflationary expectations to prevent this from happening. Helicopter Bernake is a real poor choice since everyone knows he will power up the blades when things get rough. This makes hyperinflation much more likely.
anon 12:52:51 PM,
You've got it all backwards. Deflation allows the existing power structure to remain intact as those with large cash positions (ie ultra-rich globalist power elite and corporations with lots of cash and little debt) ride out the deflation with no problem. Great Depression and Japan come to mind - deflation with no regime change.
Hyper-inflation on the other hand, will almost always result in regime change as those with heavy debt (FB's for example) make out like bandits if they have fixed rates, and those with large cash positions are screwed. Weimar led to a regime change for this exact reason. The Nazis bought up tons of Real Estate using little cash down and fixed rates. When the hyper-inflation came, they were able to pay off the RE for a song and own lots of assets free and clear with almost no real money (as anon 4:31:27 PM rightly points out.) Other countries with hyper-inflation more recently have undergone large political shakeups as the rich elite change places with the leveraged borrowers.
Yes, the US government itself is the world's largest debtor, but this doesn't really matter. The US can simply declare bankruptcy and install a new fiat currency and there's nothing the world's creditors can or will do about it. The "end-game" can only be played out in a manner that insures the true invisible government (rich global elitist oligarchy) remain in power.
The hyper-inflation scenario is a bill of goods being sold to Wall St. and Main St. to keep everybody's eye off of the ball while the groundwork for the true plan is being laid by those that know better. Yes, a terrible depression is coming but it's all by design so the globalists can implement a giant power-grab and consolidation. Heli-Ben, the great student of the depression, was selected so that he could bring us right into the middle of one. I knew the fix was in when Greenscam did the tour encouraging everybody to get an i/o arm so that they could be "sophisticated" (haha.)
In summary: the power brokers of the world will NEVER turn over power to the FB's via hyper-inflation. Not going to happen.
Kieth:
http://www.buffalonews.com/editorial/20061230/1045657.asp
"Bridge tolls to go up
Those with U.S. cash will pay 50 cents more to cross border
If you are paying with American money, tolls will increase by 50 cents for passenger cars on the Rainbow, Whirlpool Rapids and Lewiston-Queenston bridges as of Feb. 1.
For those using Canadian money, rates will remain the same.
The prolonged weakness of the U.S. dollar against other world currencies is the reason for the increase, the first since 1998, according to the Niagara Falls Bridge Commission.
The only way out of this is to take the bitter pill, high interest rates.
The housing bubble is going to deflate no matter what. Trying to save overextended homeowners is going to sink the entire ship. You know in those submarine movies where one compartment is flooding and you have to close the hatch before all the guys get out or else the entire ship goes down? Well, that's what we have here.
Everyone is sooooo sure the Fed is going to lower rates at some point. My guess is that inflation will become more and more apparent in the new year and the Fed will raise rates to everyone's shock.
Usually, it's the unexpected that gets you.
The form of the destructor will be a surprise to everyone.
a new fiat currency
++++++++++++
How would this affect home debtors with fixed rates?
"The form of the destructor will be a surprise to everyone."
Correct. This is why deflation and a depression will happen, because its the last thing anyone expects.
"a new fiat currency
++++++++++++
How would this affect home debtors with fixed rates?"
Hard to say - it depends on just how we came to that place. Here's one possible scenario:
Housing tanks and pulls down the derivatives market and the rest of the bubble economy. Cascading cross-defaults lead to a rapid and almost total destruction of all credit and money supply (credit demand really) falls off a cliff.
A new currency will be nothing more than a ruse to allow the US Gov to declare bankruptcy under the guise of a global depression and the peeps will buy it. Assuming the new currency rate is comparable to existing (EU style) then the dynamic doesn't change. If a home debtor with a large yoke and fixed rates can remain employed (and that's a BIG if) then he will weather the storm. Many more will go into foreclosure and that will further tank housing (much to the delight of the rich with a lot of cash as they will be able to buy up large chunks of property for a song.)
I suppose bozonian could be right and the Fed will simply raise interest rates a lot to protect the currency. Dramatically rising rates assures the cascading cross-default scenario as the cost of the debt service surpasses the demand for and the creation of additional debt. So we still wind up in the same place - deflationary depression.
Our famous 12 private banks that make up the federal reserve and their stockholders are "printing paper money" with the paper dollar's value decreasing while the nickel is going up. In about 15 years the nickel will be worth more than the paper dollar. How sad the debasement of our currency is happening and our standard of living is slipping and there is nothing we can do to stop it.
No wonder the US Mint came out last week and said it was a crime to melt
copper and nickel coins for profit. One wonders if coins will slowly vanish like the silver coins of the
past.
deflationary depression
++++++++++
Well, okay. We have devaluation in Housing. We are watching it. Everything else is more expensive.
(my car insurance went from $40.00 a month to $135.00 a month, Home insurance up, taxes doubled, HOA 50% increase in a year, gas rising, food up). Can't you have both deflation in some things (housing) and hyperinflation in other markets at the same time?
I am obviously no expert, but this seems to be so now and could continue to happen, interest rates up or down.
With Fed Bank Printing press on, and International Diversification out of USD, then I see hyperinflation bullying the deflationary segments and dominating our future.
Just an opine from one who does not really know economics.
We will NEVER have a new currency unless the U.S. implodes completely, and I mean the total destruction of the social order, new constitution and all.
Why not? Because there are so many crooked dollars in existence. People who own this crooked money will be unable to explain where it came from when they come into a bank to exchange it for "ameros".
New currency? Never happen. We are stuck with the dollar as much as I'd love to see crooked money devalued to zero.
Just let the public get a credible whiff of "new currency" and watch gold and silver shoot up astronomically.
This would be all the crooked dollars being converted (laundered) so the owner doesn't have to explain where he got those dollars.
"Can't you have both deflation in some things (housing) and hyperinflation in other markets at the same time?"
Sure, and this is what some of the more knowledgeable economic analysts have been saying for some time. You really have two economies, one is known as the financial sphere where financial services, real estate, and insurance live, and the other is the economic sphere where all of the stuff that you actually need lives.
Up until recently, both have been inflating pretty badly and the Fed has had to do a lot of monkey business to keep this hidden from view. However, it has been the huge expansion of the financial sphere that presents the real systemic risk. Derivatives, insurance, low risk-premiums, bonds, stocks, real estate have all been inflating with this unprecedented credit growth. Usually tremendous growth in the financial sphere is bad for the economic sphere - its just another sign of a credit-induced boom. This is the basic reason why hedge fund managers can make $300M a year and the rest of us can't get much of a raise and our real purchasing power is steadily eroding.
In theory, the Fed would love to just continue expanding credit at a rapid pace but this expansion always fuels the financial sphere first and only sometimes trickles down into the economy in predictable ways. Right now it takes 10 dollars of debt growth to equal 1 dollar of GDP growth. This is dangerous and unsustainable.
The real problem comes in when you have a real estate bust and that is why intelligent people are so fascinated with the current unfolding situation. RE is the one asset class that has the ability to traverse financial and economic spheres more than any other. Even if you don't believe any of the "Amero" theories and take everything with the Fed at face value, you still have to acknowledge the tremendous debt and credit destruction that a housing bust will unleash. Housing has the ability to prick the larger credit (financial sphere) bubble and when that happens credit will basically become unavailable. To imagine what a deflation will look like simply imagine a world where credit is hard to come by and nobody can get it because its either unavailable, too expensive, or there's no demand for it. This theory is nothing new, just classic Austrian school which says all credit induced booms end in collapse.
My boss (owner/operator)of a construction company in So Cal. has lost is mind! In the last year his wild spending on expensive 'toys' boats,cars...etc. (over 300k so far) even though he see's a tightening of work has all employee's worried.
He say's "I feel rich', might as well enjoy it!!!
"If you are paying with American money, tolls will increase by 50 cents for passenger cars on the Rainbow, Whirlpool Rapids and Lewiston-Queenston bridges as of Feb. 1."
On the west coast- all the bridges in the bay area are going up $1 on the Jan 1 to $4.
Anyone know what the new toll for Golden Gate Bridge will be?
Have to pay for that bay bridge boondoggle somehow.
okay got it.
So, it is possible a 30 year fixed works out no matter what, if there is enough “equity”. Either pay it off with devalued dollars (lighter debt). Or at least you have a home, when no one else can even get a mortgage (bright side).
Unless housing tanks a.k.a. Japan, in which case most everyone except the very rich, or a renter with cash, or outright homeowner (paid for homestead) is screwed, especially spec u vestors (already happening).
The costs of living are just along for the $ ride.
Over simplified, I reckon. Just trying to wrap my "creative right brain" around some of these 'left brain' theories.
HUH?
My insurance just got renewed this week. Went from $550/6 months to $557/6 months. An increase of 1.3%.
I pay two HOAs. One was $26 last year, went to $28 for '07. The other was $46 in '06 and will the the same in '07. An increase of 2.8%.
Gas rising? Las year at this time average gas price was $2.30. Now it's $2.35.
Taxes doubled? My taxes are capped at 3% a year.
--------------------------------------
"Everything else is more expensive.
(my car insurance went from $40.00 a month to $135.00 a month, Home insurance up, taxes doubled, HOA 50% increase in a year, gas rising, food up).
OK so now bridge tolls go up and it's hyperinflation time. As usual you people have no context associated with your headline news.
Bridge tolls don't go up by inflation. If a toll is $4 and inflation is 4$, the toll doesn't rise to $4.16 the next year since that would make for some pretty long wait tims while change is given. No, bridge tolls go up in increments of $1 or $2 dollars every so many years.
So yes you can look at a toll going from $4 to $5 and scream about 25% hyperinflation. But in reality that $4 to $5 is over a multi-year perdiod meaning the YEARLY raise is 3, 4, 5%.
meant to say inflation is 4% not 4$
Dude with ballsack for chin,
and hot goth chick (FMW). Heres the
deal. Inflation is monetary.
How that money shows up in the
actuall prices of things, like houses,
depends on a lot, like for example,
inventory. At any time, that money
can slosh from houses to food to oil to
gold. Its pretty clear its left housing.
Just because we have high inflation,
does not mean housing or the stock market
is a safe bet. Got it ballsack?
-mc
Thank you mc.
This post speaks for itself.
iw
+++++++++++++++
The Fed is solely responsible for inflation by creating money out of thin air. It does so either to monetize federal debt, or in the process of economic planning through interest rate manipulation. This Fed intervention in our economy, though rarely even acknowledged by Congress, is more destructive than Members can imagine.
This imbalance, which until now has permitted us to live beyond our means, eventually will give us higher consumer prices, a lower standard of living, higher interest rates, and renewed inflation.
Rest assured the middle class will suffer disproportionately from this process.
The moral of the story is that spending is always a tax. The inflation tax, though hidden, only makes things worse. Taxing, borrowing, and inflating to satisfy wealth transfers from the middle class to the rich in an effort to pay for profligate government spending, can never make a nation wealthier. But it certainly can make it poorer.
July 10, 2004
Dr. Ron Paul is a Republican member of Congress from Texas.
Aren't we supposed to ignore what Republicans say? Especially Republicans from EVIL TEXAS?
Now you fucknuts are quoting Texas rethugs (or is it repugs)?
Make up yer minds will ya.
Keiths lists of sights
ignore the tardtroll;
# Live Gold Prices
# Wiki US Bubble
# Paranoid Ben's boring blog
# Real Estate Decline
# Forsakencraft
# BusinessWeek Hot Property
# Bubble Meter
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# YouTube
# Patrick.net
# Housebubble blog
# Drudge Report
# Bubble Blog News
# Voice of San Diego
# Real Estate Bloggers
# Osman's Boulder Blog
# Housing Watch Price Tracker
# Housing Tracker
# Moneyfiles Bubble Blog
# Financial Sense
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# Marin Bubble
# Young & Broke
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# Sacramento Landing
# Piggington
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# Mish's Global Economic
# Paper Money
# housingbubbleresearcha>
# Iamfacingforeclosure.com
# Seattle Housing Blog
# Charles Smith
# What Bubble?
# Congressman Ron Paul
# Crooks & Liars
# Big Picture
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If Bush were truly a great president he would issue this order as Lincoln did in 1864 with the New York Times subsituted
"You will take possession by military force, of the printing establishments of the New York World and Journal of Commerce... and prohibit any further publication thereof... you are therefore commanded forthwith to arrest and imprison... the editors, proprietors and publishers of the aforesaid newspapers"
The credit risk is being 'insured' throught the use of derivatives. The size and magnitude of the derivative market has grown so much that a problem would overwhelm the balance sheets of the major banks who have created this Frankenstein.
Not necessarily.
Consider options trades on a stock exchange.
The entire set of options outstanding are all derivatives, just like OTC derivatives. But for each winner there's a loser. Does the presence or absence of options on a stock change in any truly essential manner the underlying risks? Not really, it just moves them around.
An Enron will crater, regardless of derivatives.
Similarly, if there is some large bond default, exactly the same amount of money that is being defaulted upon will be lost. Derivatives just end up cycling the loss into unexpected places and cause some strange gyrations. But there has to be some net conservation of loss because in the end, there is some underlying.
The reason why the derivatives are popular is that they are more liquid than the underlying bond. Only Treasuries and other foreign equivalents are very liquid. The bond derivatives separate out interest rate risks and credit risks which has some merit.
Actually that's a great conspiracy theory for how a Plunge Protection Team operates and a covert way of increasing money supply. Through various shell companies the Fed et al end up as buyers of credit risk. They just keep on buying---if there is some crash, the Fed just magically creates money to neutralize the debit from the derivative. The system doesn't collapse, everybody gets paid, and in some likely recessionary environment, liquidity is automagically injected.
To the outside world all that will appear to happen is that there is big news of some bond default (e.g. Ford, airlines, big telecom) and people proclaim doom. Doom doesn't come around, as no bank admits to having taken any ginormous loss. World keeps on spinning. Cramer says buybuybuy.
This is how a collapse of Fannie or Freddie would be handled. The Fed or Treasury doesn't EXPLICITLY bail out Fan and Fred---they default, and yet the default doesn't screw the system, and the assets of Fan and Fred get merged into Fan II and Fred II. Hedge funds rejoice.
Your grocery and gasoline bill go up just a little bit more.
All you people who bought after January 2005 are just polishing brass on the Titanic. It's all going down soon.
Re: the Plunge Protection Team. How come we hear no side effects of the Amaranth debacle? Isn't 6 billion dollars significant? Who actually lost this money? Who were the investors that Amaranth shafted?
"bozonian said...
Re: the Plunge Protection Team. How come we hear no side effects of the Amaranth debacle? Isn't 6 billion dollars significant? Who actually lost this money? Who were the investors that Amaranth shafted?"
A: The derivative market is the insuring arm. It's growing at a rate of between 25 and 50% a year. Major banks are covering their tails (ie bad loans) with lots of derivatives. In short, derivatives are hiding a lot of stuff, and no one knows how it will unfold. A derivative market meltdown may well be the single best reason to buy precious metals. Because at a $370 trillion plus size the banks won't want to take the hit, but rather look for a Fed bailout. And that will mean cranking up the printing presses unless you can think of another way of coming up with multiple trillions.
---------------------
This is how a collapse of Fannie or Freddie would be handled. The Fed or Treasury doesn't
--------------------
Talking of Fannie Mae and Freddie Mac, the housingdoom blog on 12/29 picked up on the OFHEO press release stating that Fannie Mae was "signficantly undercapitalized" in 02Q4 and 03Q4( I read the PR closely and I can interpret it to mean the WHOLE of FY02 and FY03).
Fannie Mae only filed their 2003, 2004 results recently ( at a cost of 1BILLION and 1000 accountants no less.. WHAT A HELL OF A SCANDAL)
"Significantly undercapitalized" is a GRADE that the regulatory body assigns and is just 1 grade above "critically undercapitalized"
With such long lead times - 30 year mortgages and all that - computer model projections are necessary to back-project the future into current capital requirements - the evaluation in 2006 of 2003 has the benefit of 3 years known environment.
NE phul must wonder - if they got into this mess in 2003, 2004, and haven't changed the computer models and didn't change their conformance criteria till recently, what does 2006 look like ? And the grade was assigned with 3 out of 30 ( 10%) accounting periods known for sure. What will a grade for 2006 be with no terms known ? - How conservative have they been ? Of course they'll have to file 2006 first.. In 2009 ?
All banks deal in money nothing else. Capital is their lifeblood, not an accounting nicety. UNDER-capitalized is not good.
-K
Hellas Said...
How will the collapse of housing affect the USD /Euro/Yen relationship? When do you think will be the bottom of the Real Estate market?
no 6 billion is not a lot of loss lately, what with the trillions being looted from the economy, or hundreds of trillions, yet i paid 56 cents for a supermarket orange today, 2 blocks from where there is an overproduction of oranges, that if they do not get picked, prison labor, will pick them for free, not including the costs in tax of prisons?
http://chicagonorthshorehousingbubble.blogspot.com/
we all will be poor soon enough and adjudged criminal (hopefully unlike those criminals? that saddam killed, or the adjudged criminal saddam, now hung,} or we will be miners on the national defense roads, ingresses and egresseses, for the new owners, the foreign corporations, who will pay below subsustience, for the resourses that are, (were} ours
all paid for in inflationing dollars
How come we hear no side effects of the Amaranth debacle? Isn't 6 billion dollars significant? Who actually lost this money? Who were the investors that Amaranth shafted?"
Pension funds.
The thing is that the Big Banks turned out to make huge amounts of money by being on the other side of the book in Amaranth's case.
Amaranth had a "big swinging dick" energy trader, who demanded that he be given very free latitude to trade however he felt. He had previously made Amaranth huge amounts of money and so he had great negotiating power---if he left then another fund would take him.
So they promised him the moon, and he went out and shot his wad. Apparently he was very well known and lots of other energy traders could "figure out" what his position was. And when they smelled blood, they squeezed the bejeezus out of him and Amaranth. They had huge banks and capital supporting them knowing that he was going to break first.
The whole point is that many of the derivatives are zero sum---losers and winners are the same. Hence in the end, since all the trades cleared---after the banks assumed the debts at a deep discount---the people who were whacked were just Amaranth fund holders. And this made some other people rich.
No systematic risk. By the way, reconstituted LTCM has returned very high profits to its investors after 1998.
This zero sum nature of the derivatives is different from stocks , where you trade cash for something of a fundamentally different nature, i.e. shares which have a subjective value. And when you have credit creation then you can get authentic bubbles.
So what will happen is that there will be isolated cases of blowups after some unusual event. But enough people will be making money off the other side of the trade that the whole system won't collapse.
Real collapse has to come from something real: a true valuation bubble, or physical shock to the real economy. That's an A-bomb or peak oil.
I don't believe cascading-cross defaults will be allowed to happen in any normal environment.
Lots of banks and the Fed is very aware of the problem. If they start to smell smoke, they will slow down or halt redemption of the derivatives. They will intentionally force suspension until the first batch clears and they can evaluate the situation.
If a big bank appears of the verge of default, the Fed will lend them unlimited money at the discount window to preclude cascading default.
Think about it this way: what would Rich Powerful People want? That's what will happen.
They sure don't want their stocks and bonds to collapse.
When things look scary they will squeal and whinge and whine. The Captains of Industry will ominously threaten to lay off millions of registered voters because of a hypothetical financial catastrophe. If the Fed doesn't want to bail out the banks, Congress will, in that environment, fire Bernanke or whoever and put in some puppet who will. In the end it it all about preserving Rich People's Money.
Now, if the Federal Reserve system collapses after 15 terrorist nuclear weapons destroys all the Fed regional banks, computers and communication systems then we have a problem. But the problem of financial derivatives won't be your primary concern in that event.
That's a picture of the Australian Prime Minister and Treasurer. Sydney's property boom ended late 2003/early 2004. Since then prices have dropped on average only 10 percent. Interestingly, our stockmarket has boomed ever since the housing bubble burst. Will the American Stockmarket do the same???
And this year prices in Sydney have started inching back up while Perth is up 40% YOY.
We're where Australia was in mid-2005. By mid '07 prices will be increasing again.
And this year prices in Sydney have started inching back up while Perth is up 40% YOY.
We're where Australia was in mid-2005. By mid '07 prices will be increasing again.
Anon #1111 thinks the "rich" will prefer economic chaos from a deflationary depression over the chaos from a chronic/hyper-inflationary environment. He suggests those rich and powerful guys in the shadows will cackle with glee as they scoop up bargains left and right using their cash hoards to buy undervalued assets.
It all sounds great until you realize one simple truth. In a deflationary environment, there is no bottom, and once it takes hold, a deflationary spiral is difficult to control. And what exactly does a rich investor do with a factory or apartment building when there are no workers or renters?
Inflation is limited by the laws of thermodynamics and finite resources. Yes, it is also chaotic and damaging, but the big problems of debtors are solved by inflation. As a debtor nation, The U.S. stands to gain by allowing inflation to reduce public and private debt burdens.
Will the American dollar last? The past of paper currencies is a list of failures: Every fiat currency in history has ended essentially worthless.
History is littered with the wrecks of paper money adventures. In hundreds of cases, in all lands, at all times, the story has been the same: loss of confidence in and eroding value of fiat currencies. Paper money does not work; the temptation of the printing press is too great. Emperors, kings, presidents, prime ministers and central bankers have not been able to resist the temptation: When faced with economic problems or overspending, they have all chosen to create the money needed to pay bills or fight wars.
The world’s first known experiment with fiat money (paper money not backed by tangible assets like silver or gold) was in 10th-century China. At first successful, it was abandoned a few hundred years later because it, like all the paper currencies that followed, was found to be too susceptible to inflation. But, to the Chinese’s credit, a few hundred years is actually pretty successful as far as paper money goes.
By 1200, the Chinese had forgotten this earlier failure and launched another paper money scheme, this time under Kublai Khan. Marco Polo was so impressed, he reported that Kublai Khan “had the secret of alchemy in perfection” and that he “causes each year to be made such a vast quantity of money that it must equal in quantity all the treasure of the world.” But Marco Polo visited Kahn’s empire during a time that American historian Alexander Del Mar called “the most brilliant period in the history of China”—which, it turns out, was just before its collapse. “Kublai Khan entered upon a series of internal improvements and civil reforms, which raised the country he had conquered to the highest rank of civilization, power and progress. … Population and trade had greatly increased, but the emissions of paper notes outran both, and the inevitable consequence was depreciation. … Excessive and too rapid augmentation of the currency resulted in the entire subversion of the old order of society. The best families in the empire were ruined” (Bullion Vault, October 27; emphasis ours).
Fiat currency adventures in Europe also have a history of painful failures. For hundreds of years, the Roman Empire reigned, increasing in power and influence. Even when Nero decided to start debasing the currency by taking the silver out of the coins, Rome prospered for a while. However, as Rome decayed, successive emperors continued to remove the silver content of the denarius to pay the bills. At the beginning of the first century, the denarius was essentially pure silver. By the time of Nero, in a.d. 54, the silver content of the denarius had slipped to 94 percent; by a.d. 68, it had fallen to 81 percent; by a.d. 218, only 43 percent was silver. Philip in a.d. 244 had the silver content reduced to 0.5 percent. At the time of Rome’s fall, silver content of the denarius was 0.02 percent and pretty much everyone was refusing to accept it as payment for anything (LewRockwell.com, November 4).
But central banks and governments are poor students of history.
During the 1700s, France stands out as a paper-currency basket case. John Law first established a paper currency in France in 1716. Backed by King Louis xv, who declared all taxes had to be paid with paper dollars, it gained wide acceptance—more so than coinage, in fact. But as with all paper currencies, excessive printing, additional moneymaking schemes (the Mississippi bubble), and fraud eventually blew up the system, wiping out many people’s investments and savings.
During the late 18th century, a new French government again adopted fiat currency, which was called the “assignats.” But again, money-creating destroyed it: By 1795 inflation had reached 13,000 percent. Napoleon replaced the assignat with the gold franc, inflation subsided, and a century of relative economic stability resulted. In the 1930s, the French again adopted a paper franc. In 12 years, its currency lost 99 percent of its value.
Weimar Germany is another example of a failed currency. At the end of World War i, Germany decided to print the money needed to pay the debts it owed foreign nations. By the time the government was done printing money, the currency had been so debased that postage stamps cost millions of Deutsche marks.
In 1932, before adopting a paper currency, Argentina was the eighth-largest economy in the world. Since abolishing their precious metal-backed currency, Argentineans have been plagued with continual currency inflation—even hyperinflation reminiscent of Weimar Germany. The latest bout was in 2001, when the peso lost 75 percent of its value in one year.
Each couple of years it seems like another nation’s fiat currency falls apart. In 1992, Finland, Italy, Norway and other European countries suffered when their currencies devalued. In 1994, it was the Mexican peso “tequila hangover” crisis, which spread through several Latin American nations, including Brazil, Venezuela and Argentina. 1997 was the year of the “Asian flu” contagion, which started with the Thai baht and then within days spread to Malaysia, the Philippines, Indonesia, Hong Kong and South Korea. The currency collapses associated with “bahtulism” were still destabilizing currencies in 1999. 1998 saw the Russian ruble fall apart and experience massive devaluations. February 2001, the Turkish lira lost 40 percent of its value in one day.
To attempt to chronicle the massive currency devaluations that are endemic to many African nations would require stacks of paper, but Zimbabwe is too clear cut of an example to pass up. Formerly known as Rhodesia, Zimbabwe was one of the wealthiest countries in Africa. In fact, at the time of its independence in 1980, the Zimbabwe dollar was worth more than the U.S. dollar. Then along came President Robert Mugabe, who decided to seize virtually all property owned by white people to give to black people. The upheaval within society caused an economic collapse. With a non-functioning economy and falling tax revenues, Mugabe decided to just print up the money needed to pay the bills, destroying Zimbabwe’s currency and any of his people’s savings in the process. As of May 2006, it cost $416 Zimbabwe dollars to purchase a single two-ply square of toilet paper, while a whole roll cost $145,750.
Why should we think America is somehow special and immune to currency crisis? In fact, go back and study history: In addition to the fact that the U.S. dollar has lost 92 percent of its purchasing power since 1913, and 41 percent in the 1934 revaluation, there have been times when the dollar lost even more value. Maybe you have heard the expression “not worth a Continental.” That expression developed in regards to America’s paper money during the Revolutionary War era (not Ford’s Lincoln Continental luxury vehicle). The U.S. government again tried a paper currency experiment during the Civil War. The Legal Tender Act of 1862 allowed the Lincoln administration to issue paper money, backed by nothing but the government’s decree that it be accepted for trade. The paper money lost value so quickly that the practice of fiat currency in America fell out of favor until the Federal Reserve System was put in place in 1913. Paper money in the South by the end of the Civil War was worth even less.
The sad part is that when governments resort to mass currency creation, it is the common person’s savings that get destroyed. The interest earned in savings accounts never keeps up with mass-printing induced inflation.
For the U.S. dollar, its final link to a hard, tangible asset was severed 35 years ago. Today, the majority of dollars are little more than bits of electronic information zooming between banks and corporations that people don’t even see, and that they need computers with super calculators to keep track of. How much confidence is left in the inflated U.S. dollar—a dollar whose value remains high not for any tangible reason, but only because so far America’s trade partners are still willing to accept it?
In Weimar Germany, when the mark was inflated into practical worthlessness, at least the German people were left with tinder. When the dollar collapses and no one wants it, most of it will probably just be deleted.
anon 2:19,
You are correct, the end game will play out such that it suits the rich and powerful. Be rest assured that a hyper-inflation doesn't benefit the rich at all as they are the ones that hold the strongest cash position and have little in the way of debt. A strong bout of inflation helps leveraged FB's more than anyone and true hyper-inflation would almost certainly result in a regime change (not good for the rich and powerful.) A deflation won't cause any of these things and in fact just helps the rich solidify their positions. It's been said that the greatest fortunes ever made were in times of depression. I hear you about the rich not wanting to see their stocks tank in a perfect world. But this world is far from perfect and if the CFR crowd (global elitists) decide that a deflationary depression is the best way to advance their agenda, it seems to me that the uber-rich would need to prepare by liquidating stock options and building large cash positions. Hmmmm....come to think of this, that is EXACTLY what has been happening. Don't you guys see the writing on the wall?!?!?
Anon 5:15,
Simply re-read this part of my post until it sinks in:
"In theory, the Fed would love to just continue expanding credit at a rapid pace but this expansion always fuels the financial sphere first and only sometimes trickles down into the economy in predictable ways. Right now it takes 10 dollars of debt growth to equal 1 dollar of GDP growth. This is dangerous and unsustainable."
I agree that it SEEMS logical that the Fed would love to just inflate away our troubles, but thanks to Greenscam, Pandora's box has already been opened and it can't be closed. In other words, more credit into the system at this point doesn't go where they intend and instead just fuels an already overcharged financial sphere that has become critically unstable. We got a small taste of this earlier this year when oil and gold were having their skyrocketing breakout. The Fed had been injecting gross amounts of credit into the system (as usual) and things started going sideways, so they had to dump gold onto the open market and change the GS gas index to bring some air out of the commodities futures. Now they are pumping like mad and its just fueling another stock and M&A bubble and isn't helping with GDP or fixed investment at all. Live by the sword and die by it, I guess.
Everytime I go to the ATM I keep getting newly printed bills. I dont like how they stick together. What can be done about this expanding money supply so I dont have to deal with these sticky bills?
Great to have all these topics covered, but a critical analyst would pose all kinds of questions here, and not just to NAR:
1. How does somebody not trained in economics really know what will happen globally to increase hyperinflation? Didn't globalization surprise everyone by keeping interest rates low for years?
2. Aren't we talking about a f-ked company mentality here, circa 2000? How long did it take for that shake-out to occur? 1-2 years? If you didn't invest in internet stocks or the Dow in 2003, woops.
3. Do we really live in a country that lacks the dynamism to overcome and adjust to a large glut in inventory, oversupply? What happens when people rent? Don't they drive up the value of rent, driving up investment capital, stabilizing markets?
I know knee-jerk always sells books, blogs, magazines. No question I'll be back to this blog, it's compelling. But what Americans really need to do more of in their own time is just stop, slow down, and think before they react. Old fashioned stuff that got this country through two World Wars.
So here is the answer to the debate according to Ben.
iw
Real Estate and the Post-Crash Economy
December 29, 2006
By John Mauldin
........That anti-deflation speech turned out to be quite prophetic: Bernanke eventually became Fed Chair, and he put those printing presses to good use. Bond desks would nickname him "Helicopter Ben," thanks to his speech that threatened a metaphorical money drop as a way to stave off deflation...........
http://www.2000wave.com/article.asp?id=mwo122906
The point of the toll/bridge article is that the tolls are going up only for those paying in US dollars, but remaining the same for those paying in Canadian dollars.
The reason, as elicited by the bridge authority official- a weak US dollar, i.e., inflation.
About 6 years ago when the dollar was 1.25 against the Euro you were probably freaking out because American goods were too expensive and the trade deficit would balloon.
Now the dollar is weak and you're freaking out about inflation.
No matter what you people will never be happy.
I don't see America producing anything that can be exported with these cheap dollars. I'm sure there would be more tourists if it were not due to security and terror war.
The Fed can only control interest rates, which affect the bond market somewhat, but only partially. They are utterly powerless to affect price, which can be set by the market, and that is what is going to be hard to control in a deflationary cycle. We had the Fed all through the great depression.
China doesn't have yen you dolt.
I love all this knowledge and predictions from people who don't even know the currency of China.
Too funny.
Well, the US Congress may be set to tax China at 27% unless they let the Renminbi (RMB) (means "The People's Currency")or yuan float against the USD. Current import/export agreement between the two countries expires today.
That sounds like price control to me, not the Fed Bank, but part of the same system.
so it's not the YEN flyingmonkey? Nice little edit job there
When this 27% fails to materialize will you delete that last post too?
How very 1984 of you.
Thanks. I can not spell worth a Sh!t.
FMW
Glad Trolls can edit HP.
FMW
Not knowing the difference between YUAN and YEN is not a spelling mistake. It is a lack of knowledge about something very basic....at least for such financial geniuses that claim to know as much as they do
nananananana FMW doesn't know anything.
Just an opine from one who does not really know economics.
She said so, NA NA NAAA NA
YUAN and YEN and Yawn FMW.......
Duh.
anons are the smartest on HP.
FMW
LMW
SXK
OPW
FMW is smart. Keith told me so.
http://tinyurl.com/yb8lqy
Pic of the HP Troll
I think FMW is a Hot dolt.
How many people on the coasts can afford a 30 year fixed? Nearly all have to get toxic loans that will kill them in the case of hyperinflation. I plan to buy a foreclosure home when this house of cards collapses in the next year or two. The FB's who bought the past 2-3 years will be the biggest losers. Maybe they can make a new reality gameshow about FB's.
Well, the US Congress may be set to tax China at 27% unless they let the Renminbi (RMB) (means "The People's Currency")or yuan float against the USD. Current import/export agreement between the two countries expires today.
That sounds like price control to me, not the Fed Bank, but part of the same system.
Sunday, December 31, 2006 10:02:21 PM
=================================
The "yuan" has been pegged to the dollar. The only interests pressuring China to "float" it's currency are the big speculators in the "(slime") mold of George Soros.
The "yuan" has been pegged to the dollar.
+++++++++++++++
Oh, and the New Dems and angry Repubs.
Not really. "Toxic" loans have caps, usually 10%.
I realize as renters you all think everyone on an ARM is paying 30%, but that's OK, you go on thinking that and the fact that the dollar will be worth .25 in March if it makes you feel better.
-------------------------------------
"Nearly all have to get toxic loans that will kill them in the case of hyperinflation."
Please check Profiles HPers.
Sock Puppet Loose again.
Ignore them.
Nice.
BMI 18.5%
Not Lesbo
No debt.
FMW
hi
(;
18.5 BMI....oooh a little skinny for my liking, I like a little something to grab onto...22-23 BMI minimum for me
Not FMW Pay no attention Keith will delete the post.
I have no life. I monitor HP 24/7 looking for trolls.
and cannot take a joke
I am posing as Troll Alert
look out there are trolls everywhere...i'm afraid to look in the closet even
anon #1111 lost his credibility when he said:
"You really have two economies, one is known as the financial sphere where financial services, real estate, and insurance live, and the other is the economic sphere where all of the stuff that you actually need lives."
As though you don't actually need real estate to live. Indeed, in the realm of subsistence, real estate is the foundation for everything else.
Nice WSJ consumer price comps.
http://online.wsj.com/public/resources/images/
YE-AA267B_CONSU_20070101184455.gif
or
http://tinyurl.com/ymcuh2
Jim Bowery is a troll. Ignore him.
I am posing as Troll Alert
I like HP. I like to keep tabs on what the extremists are thinking/doing. If blogs were around back then, who knows, the OKC bombing may have been prevented.
All I can hope for is that the FBI is watching, taking notes and recording IP addresses.
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