You just can’t tell them much.

In the majority of the world people work for money. They work. Americans want to talk about stock portfolios, the value of money, and how expensive things are. Oh my goodness the price of housing is so high.

Speaking of Japan. A family from Japan bought a house close to me. They bought brand new from a builder and made a deal. We hardly ever saw them. There were two or three brand new cars in front from time to time. The cars would come and go. There were six adults and some children. We saw the children very seldom.

They sold when the property was paid off, less than ten years, a blip on the screen.

Do you really want to make money? Do you have debt? Work.

Asians come to Seattle every day, both legally and illegally. They walk across the Canadian border every day. They live together and avoid us. They work two jobs to pay any debt, then work some more to save. They shop in their own community, lend money within the Asian community, and in general circulate dollars within the community.

You don’t want to do that, do you? You want to have a life.

In my comments on sniglets pod cast I recommend every person in the United States live in the Third World. There is no documentary to explain what our economic system has done to huge swaths of people in the world. Your IRA and 401K does well because other people starve to death, for you, and your ability to have a savings account cushion.

Business is war. Some people fight the war and others talk about it.

Just to add to this idea a little…Unemployment shot from 5.4% to 6.2% in Seattle last month. Statewide it went up to 7.1%. It’s well-known that WA unemployment typically lags the rest of the country but eventually catches up and corrects later. We’ve heard the “Seattle is special” propaganda since the economy began to correct in other states. But really we were simply experiencing the WA lagging trend. Now we are witnessing the demise of the “Seattle is special” campaign as Seattle unemployment rates have caught up with other cities in the rest of the country. This means our recovery most likely will lag as well.

We are witnessing a similar lagging phenomenon in the Seattle housing market. House prices are a function of historical ratios to rents and incomes and are affected by other factors as well such employment levels, consumer confidence, and availabilty of credit. Things got out of whack for a while where prices skyrocketed based on uninformed speculation and lax credit. This period is over, and Seattle prices have nowhere left to go except to levels of historical affordability. Artificial conditions no longer exist to keep prices above what families can historically afford to pay.

The Seattle unemployment rate is already bleak, and the axe hasn’t even dropped yet at MS and Boeing. The bottom line is don’t buy a house in Seattle right now. Prices are in a period of downward adjustment, but they are still artificially high due to recent memory of highly inflated prices driven by economic circumstances no longer present and not likely to return anytime soon.

House prices are derived from a function with a multi-parameter input. If you change some or all of the parameters, such as availability of credit, it changes the output of the function. Anybody who believes home prices will return to 2007 peaks anytime soon needs to explain how the parameters of the function will change to support this hypothesis. Catchy slogans like “good time to buy” are nothing more than hopeful statements from blithering con artists or idiots unless the overall changes to the function are sufficiently explained.

On another note: Sniglet has brought up the concept of thermonuclear war, which he equates to the U.S. government increasing the money supply through printing non-bond backed money. He feels this is an unlikely possibility due to the catastrophic affect it would have on the reputation of U.S. bonds. Not to disagree with his viewpoint, but I do see the possibility of the government will attempting to aim at middle ground between deflation and inflation. In this scenario the government would increase the money supply by printing printing money with the goal of pulling the money back out of the economy at a critical point where the economy is stimulated but not overblown. Despite the hype we could hear about such a plan, I don’t believe the government is capable enough to properly time the pullout. Thus, we’ll have heck to pay if this plan is ever enacted. Hopefully we don’t go this direction a couple of years from now. If we do, I believe there will be plenty of time to adjust one’s investments from deflationary to inflationary as the policy will not be enacted without media attention.

Sorry for the long post.

Money supply is through the roof.

this is an interesting read on the subject

http://www.hoisingtonmgt.com/pdf/HIM2008Q4NP.pdf

Because money in the broader sense is being destroyed at an even greater rate by the collapse of banks.

“Or do they have all the money parked in treasuries?”

The only way that borrowing money would be deflationary is if the federal reserve notes were sitting in a vault. To some extent the banks are doing just that, but that is fine because otherwise things would be even worse because banks would have no reserve at all.

In reality, the treasury is issuing IOUs and the fed is pushing the dollars to the banks so that they don’t go under. That was the conservative plan followed under Bush. Congress now wants to step it up by handing out money directly into the economy.

If the govt borrows money from Chinese – how is this deflationary?

It’s deflationary because if the Chinese are gorging on US treasuries they are NOT buying US stocks, real-estate, or goods. Neither are they investing that money at home in China, or any manner of genuine income generating activities. Remember that a huge portion of revenue from exports to the US is plowed right back into US assets, and the smaller the portion of this US bound investment that winds up in t-bills the better.

Even money the Chinese spend at home is good for the US, by boosting their desire for imports, and over-all global wealth.

If the govt borrows money from Chinese – how is this deflationary? The Chinese would be sitting on the money anyways.

Or do they have all the money parked in treasuries? I think it is all liquid for the most part.

If they do not spend it and just keep it – then that is deflationary. The Feds take the money from there and start spending it in the system. Am I wrong about this?

Still the point is that it does not matter if we call it money creation, printing or whatever term we come up with

It matters a lot. If the government is only borrowing to get money for bail-outs and stimulus, then the impacts are ultimately deflationary (i.e. because they are sucking existing money from somewhere else). If the government decides to actually PRINT new money to fund spending, then it’s game over and the currency is worthless overnight.

I spelled all this out in my podcast.

http://msurkan.podbean.com/2009/01/19/deflation-101/

For now the supply of money will get into high gear. Obama will likely try to ramp up the spending and money creation. It will be good times.

What i found interesting in the inflation article was the point that massive governmental investment in infrastructure projects would bypass banks and put money into peoples hands, and enough of that could be inflationary.

right now i am positioned for deflation (all cash no debt except for a 2002 vintage mortgage), but i am understandably nervous about the future.

Maybe just a knee-jerk reaction because I have read all of these accounts that “the fed is printing money, we’re going to have hyperinflation!” which totally miss the point that there needs to be a way to get that money in people’s hands. when no one can/will borrow and instead want to save then monetary policy is just pushing on a string. If people want to believe this will be addressed by getting checks from O then I urge them to continue checking their mailboxes!

Fed lends the bank $9 and takes the Starbucks receipt as collateral. It got the money buy having the Treasury printing up a $9 bond and selling it. That selling of the bond sterilized it, but still the Fed is creating money treating a latte receipt (in reality a deed on a depressed property) as collateral for bank reserve. The bank is no longer insolvent because it is still reporting the latter receipt at its nominal value, because it says it is holding the receipt to maturity, and why not since it has a loan from the Fed based on it.

but the fed hasn’t created any money – they have just moved the bad debt from the holder’s balance sheet to the government’s. The money to buy the asset did not come from thin air. The government issued t-bills which must be paid back. Perhaps at some later date we will start paying back those t-bills by printing money – but as of today this is not happening AFAIK.

That is good, since contract workers don’t own or rent homes, buy durable goods, or spend money in local stores. They simply get put away in lockers at the end of the day until the next workday commences.

Fed lends the bank $9 and takes the Starbucks receipt as collateral. It got the money buy having the Treasury printing up a $9 bond and selling it. That selling of the bond sterilized it, but still the Fed is creating money treating a latte receipt (in reality a deed on a depressed property) as collateral for bank reserve. The bank is no longer insolvent because it is still reporting the latter receipt at its nominal value, because it says it is holding the receipt to maturity, and why not since it has a loan from the Fed based on it.

The argument that creating inflation is a bad idea is totally separate from the issue of will the government do it. I submitted an earlier comment on that, which hasn’t appeared for some reason.

Givens
One of the “givens” in the article you cite is that the Fed slashed rates to 0%. Flight to treasuries slashed treasuries to 0%, so the Fed can now slash rates to 0% + tiny sliver of profit. If the US’s creditors think they are going to get paid back for 100 trillion barrels of oil with the equivalent of 50 trillion barrells, they are going to stop being our creditors.

Brainless Strawmen
Then there’s their example where Anne lends Bob $10, then Bob spends $10 on a latte and defaults. Anne forgives the debt (deflation), but this doesn’t destroy money. Nice strawman, but let’s try something a bit more representative of the current crisis.

Anne puts $10 in the bank (basically lends it to the bank, who promises to pay her 10.05 next year). The bank lends $9 to Bob who promises to pay the bank $10 next year. Now you have:

Bank owes Anne $10.05
Bank is owed $10 from Bob
Bank still has $1 in reserve

Bank has a value of $0.95

defaults because he spent it on a latte at Starbucks (who in turn lends the money back to the bank expecting to get 9.045 at the end of the next year). Let’s say the bank forgives Bob, then you have:

Bank owes Anne $10.05
Bank owes Starbucks $9.045
Bank has $10 (the 1 they have in reserve, plus the 9 they just got back from Starbucks)

The Bank now owes 9.095 – Money destroyed.

I could go on, but…
Inflation is what put us here. It can’t get us out because, simply put, it would take too much of it to work anymore. To inflate large enough to save the banks and speculators who are about to go bust would be so obvious that the US’s creditors would probably stop buying our debt. If that happens, then the US will have to continue to inflate to get out of debt, etc, until you end up with Zimbabwe or the Weimar republic.

Any comments on logical flaws in the inflation camp article?

My podcast on deflation outlines why I think inflation is unlikely in the next 3 to 5 years.

http://msurkan.podbean.com/2009/01/19/deflation-101/

Also one thing you could do is start a auto company – get some reloads and create debt – maybe employ some people. And then ask Obama to quickly send in the cash.

Basically people should unite to ask Obama for cash. It can be in $20, $50 an $100 bills. Wire transfer and check will be accepted.

Ive been trying to make good financial decisions, and to do so really need to understand whether the next 2-5 years will be deflationary or inflationary. ive read several articles (Mish and KD/Market Ticker) that are in the deflation camp. This is the best inflation camp article Ive seen. Any comments on logical flaws in the inflation camp article?

http://www.pcasd.com/the_us_government_will_not_choose_deflation

And we could then say that about mid-morning that the shooting would begin, because every company would have lost all their money to pay bills and employees, because the banks had hit the delete key on all the money they owe their depositors. Considering no one would be paying their mortgage, what choice would they have anyway?

Then everyone finds out they are out of a job and no one has any money to buy food, including the grocery stores once the shelves are wiped clean by hording.

Beautiful. What would that do to the $$?

And would that start an another spening bubble?

I said before in this forum that Barrack will likely consider some type of bailout for foreclosure victims and victims who just spend out of control.

The key is to sniff when this could happen. Then you could simply buy houses in a spending spree and then ask the govt for a bailout. Or just start spending like crazy on credit cards and then you would get a bailout.

This would be great. It would punish people who try to save and act responsibly while bailing out others. Great policy. Way to go!

They wish they could sell for 2006-2007 prices; but that pipe dream was washed out with the economic crisis….so if they can afford to, they pull it off the listings and hunker down again….if they can’t afford not to sell, I imagine that’s when the keys get handed back to the bank.

Your Listings Chart says it all.

Maybe all of us in that case should start reckless spending and then tell the govt we need a bailout or we will stop buying those plazma TVs!

Same is with GM. If taxpayers do not pitch in – they will stop producing those unprofitable cars!

I was just wondering how “getting realistic” is defined. Is it a percentage drop? Or a return to a reasonable relationship between the cost of renting and cost of buying?

And what resources do we have that can help us determine if a home price is realistic? Zillow, epraisal and cyberhomes all seem to be a bit high.

Thanks — LONG time reader, first comment.

“Honestly, I think it’s going to take longer than that. I’m thinking 2017. We all know that housing prices were inflated well beyond what people could ordinarily afford. Most people also agree that prices will now have to sink to a level that matches what people can afford using traditional financing.”

Disbelief understands what others seem to forget. That for housing to be affordable the cost of housing as multiple of income must be in a range where households can still create savings while maintaining life style. The creation of saving is a necessary condition for stability through economic down turns. This is as true or renters as it is for home owners. Until we see wages raise enough to de-leverage households and create saving the downturn will continue.

Today The Tim said:

“I think we’ll start to see sales pick up this year, if we start to see sellers get realistic with their pricing. If not, we’ll probably stay here in the gutter throughout 2009.”

In December I was laid off. I wrote my landlord a letter asking him to lower the rent temporarily from 1150 to the original rate of 945. I didn’t expect him to drop it all the way, but I thought he meant drop it some. He freaked out on me. He actually told me (I believe he was genuine) that he was planning to raise my rent in the next couple of months. Then he started in on a tangent asking, “Why should he take the hit?” There really wasn’t much of conversation just him ranting about how unfair it would be for him to lose money while he quoted the local MSM crap about Seattle exceptionalism.

The point is that The Tim’s statement implies some sort of rationality that just isn’t there. I think it’s analogous to a death in the family. There is period of time that people still use the present tense when speaking of someone that has been dead for a long time. There are simply no rational actors.

I agree that debt isn’t inherently “evil”. However, the point I was trying to make in the podcast was that global debt loads had exceeded the capacity of income streams to support it. There does need to be solid ratio of savings to debt in order to sustain economic growth.

You are also correct that there are differences between Japan and the US, but as I pointed out, there are eerie parallels with how the depression is manifesting itself in America over the last couple years, and how deflation evolved in Japan in the ’90s. If the two economies really are completely dissimilar then there shouldn’t be so many similar patterns.

By the way, thanks for the kind words about my podcast!

Here in the United States we can declare bankruptcy, but in my opinion it would be better for banks, lenders, and investors to just walk away from the risky loans they made. It is the cost of doing business. Why are we rewarding bad business decisions? Communism I know, but if you kill the consumer they will be reluctant to consume again. Long story short we, in the United States, need to get rid of personal and business debt.

Japan is an economy truly built on the backs of thier work force. In Japan it is no joke that the company comes first and it is your duty to make the company profitable. Wasn’t the Emperor the conduit to God? A global economy needs cooperation.

To tie the two together the United States has a system of laws and government that allows for anything. Other countries can try to duplicate, but we are a relatively New World that so far has great resources. We encourage risk. We respect pirates. Any individual, no matter what cultural back ground, can acheive great wealth.

Financial melt-down….it’s just crazy…

BTW, where are my always smiling, always a great time to buy pawn broker friends? Hello – National Association of Realtors??? Where are you???

Care to weigh in?????

I think The Tim was saying that he thinks that sales can’t realistically drop much more. Sure, they could go all the way to zero, but there’s always some knife-catcher out there trying to snap up a “gem”, so you’re not likely to see sales in King County drop to exactly zero.

Personally, I wouldn’t be surprised if we continued the downward spiral in earnest for a little while longer, and sales head down another 20% YOY. The banks are getting more and more desperate, and the fundamentals (jobs, wages, interest rates) aren’t getting any better any time soon.

Spain’s AAA rating is gone; Ireland’s and the UK’s are hanging by a thread. If they stop buying US Treasuries, expect interest rates to spike quickly and for the real pain to start. That’s what’s been causing the panic on Wall Street over the past couple of weeks.

sniglet, is it my connection or do you huff helium before and during these presentations?

That isn’t all I was huffing…

This “Brian” is most definitely NOT my brother.

Actually, I suppose this depends on how expansive one defines the word “brother”. We are all “brothers”, aren’t we? I may not have grown up in the same house with this chap (or ever seen him before in my life), but I share the same warm feeling of love and solidarity with him as I do with all my fellow man…

Hey, I am sure that if we start really drilling into our family histories we both are sons of the same lady who came out of Africa some 100,000 years ago.

Are Brian and Sniglet brothers?

Nope. This “Brian” is most definitely NOT my brother. I have no idea why he is using my blog URL.

“At this point, I really don’t think sales have much further to drop. They’re practically as low as they can go.”

I’m not saying that you are neccessarily wrong I’m just curious to what background you base this on? It’s kind of unusual for you to claim absolutes like “as low as they can go”.

I have seen some describe the Keynsian theory as save in good times, deficit spend in bad times. The debt was paid down somewhat in the late 90’s, but the deficit spending returned too soon (and pile on a war). Greenspan’s policy was much more “let the market sort it out”, so when Bush and Co. decided to cut taxes on the rich (Capital Gains), there was no one to stop them.

In the 1800’s, wealth was much more highly concentrated, and the loosely regulated dream was in full effect, to continual boom and bust cycles. I much prefer post 1930’s economics to pre 1930’s economics. Whether enough graft and corruption is removed under Obama to make things better remains to be seen, but I’m hopeful.