Housing Bubble Bursting?

[Jozsef Poor]

Yesterday global warming and stock experts are today's real estate market forecasters.

 

[Randolph Kinney]

6 Steps to Reality—Velocity Inflation and the Dollar By Wilfred J. Hahn

Good article Moh!

Classical economists have always had a ready definition with which to identify such bubbles. Modern-day central bankers may protest that this is not possible, yet, all boom/bust cycles have had the same basic five ingredients.

• A large expansion in debt relative to income, either driving an overconsumption or an overinvestment binge.
• A heavy reliance on capital gains for income and reported profits.
• A sharply higher participation level in the stock market (marketable items of some kind that can be readily borrowed against, usually securities) either directly or indirectly.
• Crucially, a misreading of underlying credit and inflation trends.
• A “great new world” impulse, usually represented by a technological shift of some kind. (IT, the telephone and the automobile were impulses contributing to past booms.)

In short, today, the impulse is the combination of globalization and securitization wrapped in the celebration of financial innovation and aided by “valuefree” capital and manipulated currencies.

Various symptoms of the above include: 1. Credit & debt growing faster than savings (or vice versa); 2. Chronic external account imbalances; 3. Enormous shifts on the household balance sheet; 4. Widening income and wealth skews, both at the country and international level; and 5. Gross distortions in the input/output structure of economies.

As you will note, however, there is a twist. These last five conditions apply to both surplus and deficit countries. The excesses of this current bubble have unfolded in a uniquely modern form, the effect of which is to make the current financial balloon a global hydra … more virulent and deceivingly unsustainable than before. The present financial bubble is more complex, involving reciprocal deformations.

 

[Riick]

Given what I've read recently about high money creation in China, and the market-madness in valuing that new oil company,
China will have no need to revalue the Renbi. Good news for the USA, bad news -somewhere down the road- if your in the China stock market.

So -according to that paper- the blow off is an inflation followed by a deflation?
Anyone care to enlighten me (a link would be fine) as to how/why a deflation?
.

 

[Randolph Kinney]

Given what I've read recently about high money creation in China, and the market-madness in valuing that new oil company,
China will have no need to revalue the Renbi. Good news for the USA, bad news -somewhere down the road- if your in the China stock market.

So -according to that paper- the blow off is an inflation followed by a deflation?
Anyone care to enlighten me (a link would be fine) as to how/why a deflation?
.

Here is a link to a New York Times article:
FISHER SEES BUSINESS GAIN; End of Depression Is at Hand, He Tells Stable Money League.

This article is dated:

May 27, 1921, Friday

Section: Business & Finance, Page 32, 276 words

"The depression was the result of the natural reaction from overexpansion and the shutting down on credit which the banks were forced to make," declared Professor Fisher. "We might have been saved a lot if the banks had taken this action immediately after the armistice. There was an excuse for this expansion of credit during the war, but it could not be justified after the war."

"Wholesale prices may go a little lower in the next month or two. After that there will be a gradual rise coincident with the rise in the stock market. Retail prices have not yet come down to match the wholesale price drop, so that we may ..."

Irving Fisher on the international transmission of booms and depressions through monetary standards.

Irving Fisher's debt-deflation theory: its relevance to current conditions

[SIZE=+1]Abstract[/SIZE]
The essence of Irving Fisher's debt-deflation theory was an interactive process whereby falling commodity prices increased the debt burden of borrowers. Despite the absence of falling prices today, this paper argues that a modified debt-deflation process is still possible. As the 1987 stock market crash demonstrates, the modern debt-deflation process encompasses falling asset prices, debt repayment difficulties, a reluctance to lend, a financial crisis, the impact on the banks, and the inter-dependency of the financial system. Recent debt-deflations have been aborted by lender-of-last-resort intervention and government support of the financial system.

 

[Randolph Kinney]

Preventing asset deflation in the money market funds

Banks prop up money market funds

Banks and mutual fund managers are being forced to prop up their money market funds to prevent ratings agencies from downgrading the funds, as the credit crisis spreads further through the financial system.

Bank of America on Tuesday said it would spend $600m on supporting its money market funds, some of which were exposed to troubled securities.

Money market fund assets have risen by $640bn to a record $2,340bn in the year to date, according to iMoneyNet, the market information provider. Investors are pouring record amounts of cash into the funds, which have a reputation for safety but are not insured by the Federal Deposit Insurance Corporation.

Standard & Poor's advised two weeks ago that any funds that contained securities issued by Cheyne Finance - a structured investment vehicle which had been downgraded to default status - would lose their AAA rating unless the funds guaranteed 50 per cent of the value of the Cheyne securities held.

Legg Mason, which has close to $100bn in money market funds, said it had put $100m into one of its funds and set up a $238m line of credit for two other funds.

Credit Suisse and SunTrust are among others whose funds hold Cheyne securities and who have propped up their funds as a result.

Wachovia Bank during the third quarter bought $1.1bn in securities from its Evergreen money market funds, and booked a $40m loss on the securities to avoid the money funds taking the loss.

Investors have not lost money on a US money market fund since 1994 and it is unlikely any fund operator now would allow such an event to occur.

My bold. Irwin Fisher describes the linkage of money, credit and asset prices. You can't have asset deflation without debt deflation or visa versa. Commodity prices are linked also. It takes money and credit to propel prices. Once credit is restrained, money will contract along with prices. Losses become real when forced liquidation occurs to satisfy debt repayment. Money market funds are based upon same as cash debt instruments, some of which are asset backed. They are suppose to be highly liquid because they are a demand deposit. They are substituting for bank deposits except there is no FDIC guarantee of funds.

The day one money market fund share price drops below its $1 net asset value, investors take a loss when they attempt to redeem their shares. This will cause a run on the fund with mass redemptions. We will find out just how liquid these debt instruments are. It just may be the FED that buys them pushing that many more dollars into circulation. In the short term, investors scramble for safety going to US Treasury debt, risk free. That pushes interest rates down as the investors bid up the price of Treasuries.

Gee ... isn't that what is happening now? But wait! It has not really started in earnest yet. How low can she go? But wait! The FED funds rate is at 4.5% (cost of bank overnight borrowing) while the 2 year T-note is pushing down to 3.55% with the 3 month T-bill at 3.48%

 

[Riick]

Mr. Kinney....
I can follow the theory, and was confused by the inflation followed by deflation idea.
I fully expect that Helicopter Ben (and Billiary) would rather debase the Dollar
and get all the debtors out of the hole, by making their Mortgage debt and CCard debt
- or for the big players, liabilities, like Social Security -
into mere pocket change - ala the German Mark - post WWI.
Thus: "Recent debt-deflations have been aborted by lender-of-last-resort
intervention and government support of the financial system. "

Inflation is what eventually happens to Fiat currencies -like the Dollar.
At least that's what I think history tells us.
OTOH... there's Japan, interest rates at Zero, and they still had a deflation that lasted what, 10 yrs?

On a political level, a massive inflation leads to financial death of the (annoying, bourgeois) middle class,
and makes the populace government-dependent.
Ripe compost for the growth of a Nanny-State and/or (again from what I've read) a "Great Leader".

~~~~ Oooops... My paranoia is showing.

 

[Austin]

I remember back in the hyper inflation days around the early 70's when speculators started buying up huge blocks of commodities. I specifically remember the Hunt brothers, Bunky and Funky, of Texas trying to buy up all of the silver and they took a licking on the deal.

The reason I mention this is that when inflation sets in that will probably start again. Speculation with commodities is the name of the game when inflation sets in. If you want to go along for the ride you need your own vehicle.

I am going to buy a tanker truck and haul water to Georgia. $1 a gallon right out of my fish pond. Virginia's finest vintage 2007 or there abouts. Maybe buy up all of the toilet paper or something to do with creature comforts. :Eyecrazy:

 

[Austin]

http://www.bis.org/publ/work176.pdf

BIS Working Papers
No 176
Debt-deflation: concepts and
a stylised model
by Goetz von Peter
Monetary and Economic Department
April 2005

“and if the over-indebtedness with which we started was great enough, the liquidation of debts cannot keep up with the fall of prices which it causes. In that case, liquidation defeats itself.
While it diminishes the number of dollars owed, it may not do so as fast as it increases the value of each dollar owed. Then, the very effort of individuals to lessen their burden of debts increases it, because of the mass effect of the stampede to liquidate in swelling each dollar owed. Then we
have the great paradox which, I submit, is the chief secret of most, if not all, great depressions:
The more the debtors pay, the more they owe. The more the economic boat tips, the more it tends to tip. It is not tending to right itself, but is capsizing. But if the over-indebtedness is not sufficiently great to make liquidation thus defeat itself, the situation is different and simpler. It
is then more analogous to a stable equilibrium; the more the boat rocks the more it will tend to
right itself.”
Irving Fisher (1933) p. 344-45, Fisher’s emphasis.

 

[Terrel L. Shields]

specifically remember the Hunt brothers, Bunky and Funky

That's a great name for them. They obviously didn't get all the old man (H L Hunt's) craftiness. Had a crazy Bro. A ½ bro (Ray Hunt) is still well known as a Dallas Oil man.

Bunker also bought huge chunks of land. One was a ranch he purchased from Wintrop Rockefeller down near Atoka, Ok. Also farmland in the delta. They lost their shirts on them too. And in the process, nearly starved 300 head of cattle to death. Had it not been for neighboring ranchers who fed them the Hunt Bro. cattle would have starved to death. They were scumbags. I am glad they lost their butts.

 

[moh malekpour]

In Subprime Crisis, the Worst Is Yet to Come
Part 2: Foolhardiness and Greed