Last night’s US economic statistics make you understand why the Chinese are so mad with the Americans.
The Americans’ $600 billion QE2 money printing exercise is like pumping huge quantities of water down a blocked pipe without first removing the blockage. Some water gets around the blockage but the majority floods the surrounding landscape.
The blockage in the pipe is the US housing crisis which is linked to the fact that about a quarter of US home loans have negative equity and there are about 4 to 5 million homes in the so-called ‘shadow inventory’, where loans have been foreclosed or are about to be foreclosed.
The foreclosure process has been stalled because of poor administration of the documents involved, which in turn is building up the foreclosure pressure on the market and pushing down house prices further — in other words, making the blockage worse.
Last night’s statistics were exactly what I and many others have been expecting — housing starts slump (who wants to build a house when pre-owned houses sell at a fraction of the cost?) and negative-equity scared consumers won’t spend unless prices are cut, so inflation is low, and so it goes.
The remedy (removing the blockage) involves first getting the foreclosure process back on track, and that is starting, but given the US legal system it will drag on. Secondly the banks are scared stiff of the housing market and while their housing loans are at low interest rates, the bank equity requirements are so high that most people can’t meet them — so house prices keep falling because buyers can’t raise the cash to buy.
To fix the problem you have to have something like a home buyer’s grant or some other mechanism to get Americans to borrow money to buy houses and lift prices, which will return equity to consumer balance sheets and kindle consumer confidence — that is, remove the blockage.
But the powerful bankers on Wall Street do not like that idea, so instead the Americans began printing money. And because the housing blockage remains, the ability of that enormous money printing exercise to turn the US around is stunted, although some money will get through the blockage and accelerate growth.
But most of the money is flooding into the surrounding landscape with big impacts on speculative markets around the world. Chinese inflation, which was already on the rise, is likely to accelerate. So the Chinese are taking action and screaming from the roof tops to anyone who will listen how risky the whole situation has become. If China oversteps the market, it will tip itself into a correction which will boost unemployment.
None of these dire events have happened, but from time to time fears of them taking place along with the fragile situation in Europe will lead to global share market corrections like we saw yesterday.
I’m just an Arts major, Geography actually, so what I don’t understand is why and how there can reasonably be so much emphasis on these details, rather than on the simple basic fact that the USA is now openly creating money out of thin air to fix its problems.
Historically speaking, this isn’t a first. But historically speaking such a course of action leads to only two outcomes – hyperinflation or default.
Has something changed that negates the lessons learned in the last four thousand years of recorded history of governments doing this?
Robert,
The problem is not that house prices are falling, it’s the huge amounts of private debt that have been unproductively accumulated to buy houses. Private debt to GDP ratio in America is 290% and the deleveraging is causing a massive contraction in aggregate demand – the complete opposite of the last 20 years. Add to that the skyrocketing unemployment rate, lack of job creation and wages growth, it is no wonder that the macro-economy is failing, and people are struggling. Every 34th wage earner in America in 2008 earned NOTHING in 2009.
http://www.tax.com/taxcom/taxblog.nsf/Permalink/UBEN-8AGMUZ?OpenDocument
This system of private debt financed economic growth cannot be sustained and has to correct. This is why economists such as Steve Keen have far more creedence by pointing out the dangers of a debt economy.
http://www.debtdeflation.com/blogs/2010/11/15/why-credit-money-fails/
The financialisation of any economy is a recipe for disaster. If you have policy making that rewards speculation on derivatives markets or allows complex financial products like collateralised debt obligations to build up exponentially, you have a system that is so far removed from the ‘real economy’ that does nothing productive for society and everyday this insanity of wall st tyranny to persist, makes peoples lives worse.
I think Americans should use the mantra of Michael Hudson “debts that can’t be repaid won’t be repaid”. It is time to push back against this obscene class war against sovereign governments and its people, rather than take it lying down. Loans that were fraudulently written or designed to fail, should not be honoured.
“The foreclosure process has been stalled because of poor administration of the documents involved”
There are many allegations (including a number that have been proven in court) that the foreclosure documentation problems are not a simple mistake, but part of a massive bank-driven fraud against the MBS holders (pension funds etc) and mortgagees, with the original mortgage documents deliberately lost or destroyed because they could prove that the original mortgages failed to meet the MBS securitization requirements, with the result that the securitizers (mostly the 4 biggest US banks) could be forced to repay the MBS holders 100 cents in the dollar of their original investments of hundreds of billions of dollars for assets that are now worth approximately 50% of their paper value. The result of acknowledging this fraud would be that these banks would be instantly insolvent.
here are a couple of links.
http://4closurefraud.org/
http://fedupusa.org/
The Americans are now exporting their problems, something Ireland cannot do as they are pegged to the Euro.
In our society speculation is accepted and can be handsomely rewarded, what happened to hard work and productivity. Speculation does nothing for the real economy yet everyone seems fixated that this is where the money is. I am guessing aggregate demand of speculative assets has done well over the past few decades because of the ease one can borrow to speculate. Once borrowing stops so will the returns.
While I am on this subject, does the ASX200 really reflect the true nature of the stock market? If a company drops out of the ASX200 it is automatically replaced, so what would happen if you showed the index according to the top200 in 2007? It would more likely be the ASX 190? Markets go up because indexes are bias, by no means are they a good reflection of the market as of one year ago.
If your a broker, your just guessing…right? Casino is tax free….at least you know the odds instead of being fed B.S.
Scottyea – you have it dead on. Default is only worthwhile when there is some prospect of recovery – the amerikan century (barely 60 yrs) is gorrnnnn.
The raving konspiracy freaks have been going on about “fiat” money (bank created without backing, once gold, but in the late 20thC at least deposits, even if only 10-20%) – just being crazy doesn’t mean that they were incorrect.
A current, quickie, book has a title (paraphrased, sorry ..) “Why everybody owes everyone and nobody can pay”. The money loaned, up to 90% of which NEVER EXISTED, so to try to repayment just taxes generations yet unborn. Which is exactly what TARP in the USofA and NAMA in Ireland sought to do.
LETTS anyone?