Housing Bubble Bursting?

[Austin]

If you guys haven’t discovered Fox business channel yet, you are missing something good.

Last night they discussed an unusual money scam. One of the Republican presidential candidates, I can’t even remember his name, was the object of this money scam although not personally involved. Some of his supporters were minting gold, silver, and copper coins with this candidates’ image on the coin. The coins were being accepted as currency and freely exchanged because they were looked at as more stable than US currency because of their specie value. You can run but you can’t hide.

The FBI raided the operation and took all of the gold, silver, copper and minted coins. They reported other script and private notes floating around out there. There are increasing cases of bartering and trading in lieu of currency transactions. This clearly demonstrates the lost faith in US currency.

Dix is French for 10. The word Dixieland came about when back in the 1800’s a New Orleans bank issued a $10 bank note. It was know as the Dixie. It was circulated in the South and hence the reference to the South as Dixeland. The history of the early 1800’s is a real education in the quality of money and credit.

Economics is an interesting science. For example, in my opinion the current pending recession and current financial crisis is the result of actions taken back in the 1970’s when we went off the gold standard as it then existed. This had the effect of throwing the economy into an inflationary cycle that continues to this day but has run its course. The problem was masked for about 35 years by money policy that was offsetting the system’s defect with another defect.

When you start seeing signs of people turning to alternative forms of money, the end is near.

 

[Randolph Kinney]

It's a regular slow motion train wreck. :Eyecrazy:
http://www.economist.com/opinion/displaystory.cfm?story_id=10134118

The dollar's decline already amounts to the biggest default in history, having wiped far more off the value of foreigners' assets than any emerging market has ever done.

The bad news for America is that the world also has less need of the dollar.

To the degree each country has a trade surplus with the US, we cheated them when they accepted dollars in exchange for their goods.

The problem for China and India, where is the replacement market where they can sell their goods, if not the US? Europe has a strong currency but, it has weak demand growth due to its tax policies. Consumption in the US is promoted by the tax code. It is why 70% of the US economy (GDP) is powered by consumer spending. We produce less, we have negative savings, we consume more, so we finance both consumption (trade deficit) and spending deficit. We cheat the people who buy our debt and sell us their goods giving them dollars and pass the savings back to us.

 

[moh malekpour]

To the degree each country has a trade surplus with the US, we cheated them when they accepted dollars in exchange for their goods.

The problem for China and India, where is the replacement market where they can sell their goods, if not the US? Europe has a strong currency but, it has weak demand growth due to its tax policies. Consumption in the US is promoted by the tax code. It is why 70% of the US economy (GDP) is powered by consumer spending. We produce less, we have negative savings, we consume more, so we finance both consumption (trade deficit) and spending deficit. We cheat the people who buy our debt and sell us their goods giving them dollars and pass the savings back to us.

China and India cannot sustain for ever their cheap price exporting goods to the US market that has kept US inflation low so far if we keep paying them back in lower value dollars. They may have to raise the price of their exporting to US in order to offset the loss from the dollar that they get just the same way that the oil exporting nations are doing.

 

[Austin]

Moh and Randolph just gave to perfect examples of what I was talking about in my above post. All the US is doing is putting off the enviable by manipulating tax policy and currency.
Randolph’s example are of the tax code to encourage spending that leads to inflation being offset by currency devaluation. Moh’s example is the result of what Randolph just addressed.
It is a game of offsetting defects to keep the scam going another day. How much longer than this go on?


http://en.wikipedia.org/wiki/Gresham's_Law

Gresham's law is commonly stated as "Bad money drives out good" - or more precisely, "When there is a legal tender currency, bad money drives good money out of circulation." Or, more accurately, "Money overvalued by the State will drive money undervalued by the State out of circulation."
Gresham's law applies specifically when there are two forms of commodity money in circulation which are forced, by the application of legal tender laws, to be respected as having the same face value in the marketplace. It is named after Sir Thomas Gresham, an English financier in Tudor times.

 

[moh malekpour]

The Discipline Of the Dollar By David Ignatius

See if you can identify the following country: Its currency is falling sharply in global markets; its speculative real estate bubble has burst; its financial sector is weakened by bad loans and lack of transparency. This economy is teetering on the edge of recession, and, thanks to borrowing so heavily abroad, its economic future is at the mercy of international creditors.

I'm talking about Thailand, of course, as it stood 10 years ago -- on the edge of the devastating Asian financial crisis. But if that description bears more than a little resemblance to the United States today, then I have made my point: We have reached a junction in international financial markets -- and whether this produces a smooth transition or a convulsive crisis will be shaped by decisions made in coming months.

America illustrates the old saw about how a debt can grow so big it becomes the bank's problem rather than the borrower's

 

[Randolph Kinney]

China and India cannot sustain for ever their cheap price exporting goods to the US market that has kept US inflation low so far if we keep paying them back in lower value dollars. They may have to raise the price of their exporting to US in order to offset the loss from the dollar that they get just the same way that the oil exporting nations are doing.

Moh,

Look at Japan. It has continued to pile up a trade surplus with the US for many years. Japan practices currency manipulation and has an export lead economy. Its people are not consumers. Its people are excessive savers, the same as China (30% savings rate). Japanese 10 year government bonds have been below 1% for years, was at zero. They are a natural for taking their excess savings aboard after their stock market crash and real estate crash to get higher returns.

John Maynard Keynes would have the Japanese government turn consumer. Why? Because its people don't consume, they save. The government should run a spending deficit to consume the excess production of Japan. But instead, the government participates in propelling exports to give people jobs. It has a problem with deflation because its currency is held artificially cheap to enhance its trade surplus making imports expensive. This is the monetary policy of Japan. Speculators actually keep Japan from deflation by selling Japanese 10 year government bonds (short selling) and taking the Yen to buy dollars and dollar denominated bonds that pay a higher yield. The Japanese government is forced to print Yen. This is known as the carry trade. It literally screws the Japanese people. When the speculators exit the carry trade, they unwind their positions, the Yen goes up in value. That hurts the Japanese trade position.

As long as the US has several countries that are excess savers and excess producers that also are playing the cheap currency game, we help them when we sell them are debt and buy their goods. They help us maintain are standard of living, keeping our interest rates lower than they would be, and supply us with cheap goods, cheaper than we can produce them.

Our government runs the gambit of both a fiscal and monetary policy to keep unemployment from rising. Our economy is based upon both government and consumer spending and the velocity of money to propel growth.

 

[moh malekpour]

Moh,

Look at Japan. It has continued to pile up a trade surplus with the US for many years. Japan practices currency manipulation and has an export lead economy. Its people are not consumers. Its people are excessive savers, the same as China (30% savings rate). Japanese 10 year government bonds have been below 1% for years, was at zero. They are a natural for taking their excess savings aboard after their stock market crash and real estate crash to get higher returns.

John Maynard Keynes would have the Japanese government turn consumer. Why? Because its people don't consume, they save. The government should run a spending deficit to consume the excess production of Japan. But instead, the government participates in propelling exports to give people jobs. It has a problem with deflation because its currency is held artificially cheap to enhance its trade surplus making imports expensive. This is the monetary policy of Japan. Speculators actually keep Japan from deflation by selling Japanese 10 year government bonds (short selling) and taking the Yen to buy dollars and dollar denominated bonds that pay a higher yield. The Japanese government is forced to print Yen. This is known as the carry trade. It literally screws the Japanese people. When the speculators exit the carry trade, they unwind their positions, the Yen goes up in value. That hurts the Japanese trade position.

As long as the US has several countries that are excess savers and excess producers that also are playing the cheap currency game, we help them when we sell them are debt and buy their goods. They help us maintain are standard of living, keeping our interest rates lower than they would be, and supply us with cheap goods, cheaper than we can produce them.

Our government runs the gambit of both a fiscal and monetary policy to keep unemployment from rising. Our economy is based upon both government and consumer spending and the velocity of money to propel growth.

Randolph,
Carry trade doesn't mean printing yen, it means borrowing at lower rates and lending it at the higher rates. Bank of Japan with zero or 1 percent historical interst rate has been the source of golabal carry trade for many years especilly last few years. Local or foreign banks and investors borrow yen at 1% rate and lend them in other countries like US at 4 or 5% rate. This is 3-4% profit for doing nothing. BOJ has threatened that is going to raise the yen but the Japanese economy is in shamble and not ready to increase its rate and the world is relying on the BOJ for borrowing too.
No nation in the world is more spender than the US households. US household saving rate has been -1% of the income meaning that people not only don't save, they spend more than their incomes.
The Chines save 40% of their income. Their income is less than American but whatever it is, they saved 40% of it. If the average daily wage in China is $5 , they save 40% of $5. China totally relies on exporting. It doesn't have a local market for its goods because people don't buy and don't spend.
In Japan they save 10% of their income. It is just a tradition and culture of Asian nation to save mostly because some of them don't have job security, retirement, health insurance, and government assistant.

 

[Randolph Kinney]

What about deflation?

Mathematically, the economy is transaction based with a supply of money, a demand for money, that allows for a transaction to take place at any given price.

Irving Fisher modeled the GDP by using a simple mathematical expression:

MxV = PxQ

where M is the money supply, V is the velocity of money, P is the average price level and Q is the total number of transactions.

Deflation is a general reduction in the level of prices, or of the prices of an entire kind of asset or commodity. It is a symptom of changes either in the supply of money or the demand for money. The result of a change in money supply (decrease) / demand for money (increase) affects the velocity of money.

Looking at the banking system and debt instruments, when enough defaults occur on paper being held, the money flow contracts, the demand for new money increases. This causes a hording of cash if the supply of money does not increase. Transactions of the debt instruments cannot occur at the same rate and must adjust downward followed by a downward adjustment in price to balance with the new demand for money and limited supply of it.

A demand for money, if not supplied by the banking system, will be supplied by the sale of assets in general. Thus, what was a problem in one asset class spreads to other assets as liquidation sales occur to supply new money. That new money is horded as the fear of not having enough cash on hand increases or the fear of not having access to your money increases or the fear of falling asset values increases.

We are seeing increasing volatility in the value of stocks, bonds, commodities, and currencies. The Treasury yield curve illustrates a flight to safety and a demand for money with increasing yield on non-Treasury debt. People would rather receive 3.2% on a same as cash 3 month T-bill than buying a new car or buying a new house. Banks will not supply new money for loans when the cost of new money is higher than the needed return to supply a favorable cash flow from holding bad paper.

The velocity of money is slowing down. The number of transactions is slowing down and prices are beginning to fall on more assets.

Look for another FED funds rate reduction come December 15 as the FED attempts to increase the money supply.

 

[MARK JOLLIFF]

I love reading what you guys post on here. Your knowledge of economics is amazing. I've found some great websites that you guys have mentioned and those websites recomended other ones. I read dollar collapse, iTulip, calculated risk and others that are very informative.I consider myself reasonably intelligent but I swear trying to understand the dollar and money supply and it's effects is extremely difficult. I must have a mental block or something. I would find it easier to learn commercial appraising in chinese than trying to understand money supply and the dollar! I'm just going to keep shorting the market and wait to buy repos later next year. Thanks for the info you guys provide!

 

[Randolph Kinney]

I love reading what you guys post on here. Your knowledge of economics is amazing. I've found some great websites that you guys have mentioned and those websites recomended other ones. I read dollar collapse, iTulip, calculated risk and others that are very informative.I consider myself reasonably intelligent but I swear trying to understand the dollar and money supply and it's effects is extremely difficult. I must have a mental block or something. I would find it easier to learn commercial appraising in chinese than trying to understand money supply and the dollar! I'm just going to keep shorting the market and wait to buy repos later next year. Thanks for the info you guys provide!

Mark,

For your next assignment, research "currency sterilization" as a way to manage foreign exchange rates.