Why the Statistical "Recovery" Feels Bad

Why the Statistical "Recovery" Feels Bad: "Inquiring minds might be interested in charts of GDP minus the effect of increased government spending. The charts are from reader Tim Wallace who writes ...

Dear Mish -

Take a look at the following spreadsheets of GDP from 2001 to 2010, in chained 2005 dollars to account for [price] inflation.

U.S. GDP and Net GDP (subtracting government spending)



click on chart for sharper image

The above chart clearly demonstrates that there really is no recovery, just increased federal spending and debt.

Here are the GDP numbers chained to 2005 dollars (Millions):

Year	GDP	Gov't Spending	Net GDP
2001	11,371.3	2,056.4	9,314.9
2002	11,538.8	2,188.6	9,350.2
2003	11,738.7	2,303.3	9,435.4
2004	12,213.8	2,377.7	9,836.1
2005	12,587.5	2,486.0	10,101.5
2006	12,962.5	2,578.5	10,384.0
2007	13,194.1	2,570.1	10,624.0
2008	13,359.0	2,753.3	10,605.7
2009	12,810.0	3,210.8	9,599.2
2010	13,191.5	3,470.0	9,721.5

Note that the chained GDP number less the federal spending nets out to a number less than the GDP of 2004. So basically, our economy is back where it was seven years ago.

Private Sector GDP



click on chart for sharper image

Private sector GDP continues to shrink as the above chart and following table shows.

Year	Private GDP%
2001	81.9%
2002	81.0%
2003	80.4%
2004	80.5%
2005	80.3%
2006	80.1%
2007	80.5%
2008	79.4%
2009	74.9%
2010	73.7%

Moreover, over 40% of government spending is deficit spending. That increase in deficit spending accounts for the alleged rebound in GDP. Clearly that deficit spending is unsustainable.

How much of that increased government spending made it into your pocket or benefited you in any way? While your are pondering that, remember that all government spending adds to GDP whether or not anything is actually produced.

The 'Feels Bad' Recovery

These charts help explain Good News: The Great Recession is Over; Bad News: It Doesn't Feel Like It.

So far, we do not even have an admission by the President, by Congress, or by most economists as to what the problems are. Instead everyone wants to 'stimulate' something, typically by throwing money at problems.

This is why the problems are unlikely to be fixed, and this is why we are likely to remain in a stagnant economy that produces few jobs for the remainder of the decade.

While the recession is over, it certainly does not feel like it. Moreover, because we fail to address the structural issues, the odds of slipping back into another recession are exceptionally high.

Keynesian and Monetarist Stimulus Both Failures

Neither Keynesian stimulus (deficit spending) nor monetary stimulus (Quantitative Easing) have done anything to speed up the recovery. In regards to the latter, the QE Engine Revs, but the Car Goes Nowhere.

Just as happened in Japan, all we have to show for our stimulus is bigger and bigger deficits with a corresponding increase in the percentage of revenues needed to finance that debt.

All this talk of a 'recovery' is nonsensical. Careful analysis shows the alleged recovery is nothing more than an illusion caused by unsustainable deficit spending. Meanwhile, the real economy is mired at the 2004 level. Simply put, the recovery 'feels bad' because there is no recovery in the first place, only a statistical illusion of one.

Mike 'Mish' Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Mike 'Mish' Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.
Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

"

Meredith Whitney: Next Shoe to Drop Is Municipal Bonds

Meredith Whitney: Next Shoe to Drop Is Municipal Bonds: "

Meredith Whitney has a new report out that she has been working on for two years called "Tragedy of the Commons" in which she rates several U.S. states. Based on Whitney’s analysis, problems in municipal finance could be the next systemic risk down the pike (video of Whitney speaking to CNBC’s Maria Bartiromo below runs 10 minutes)

The states are highly leveraged to the housing market via tax revenue, meaning that they have been crushed by the housing downturn. Whitney is on record as saying housing will double dip, which obviously implies additional tax revenue shortfalls. Whitney says that the banks are much better positioned for a housing double dip than the states. Today’s data from Case-Shiller does imply a weakening in the housing prices which will become apparent in the next month’s data.

According to Fortune, the rankings include 15 states rated on four dimensions: their economy, fiscal health, housing, and taxes. Whitney’s rankings are as follows:

Worst states

1. California

2. New Jersey, Illinois, Ohio (tie)

3. Michigan

4. Georgia

5. New York

6. Florida

Best states

1. Texas

2. Virginia

3. Washington

4. North Carolina

Neutral states: Pennsylvania, Maryland, Massachusetts

At Credit Writedowns, we have been talking a lot about states and municipalities as a weak link in the economy. See some of Fred Sheehan’s posts on this topic. We highlighted an analysis by Rick Bookstaber in which Rick also says he thinks that municipals and states are the weakest link. The key passages in his analysis read:

I don’t think we will see a big crisis emerging for some time in banks, hedge funds or derivatives, mostly because, like with a knockout punch, the risks that matter don’t come from where you are looking. Unless the current push for legislation is a failure, which, of course, still remains to be seen, we will have steely eyes hovering over these sources of crisis. It will be awhile before the guards start dozing off at their posts.

So, where to look next. To see other potential sources of crisis, let’s first recount the lessons learned from this crisis:

1. Problems occur when things get leveraged and complex (and thus opaque).


2. If the problems occur in a very big market, especially in a very big market like housing that is tied to the credit markets, things can go systemic.


3. The notion that you can diversify by holding a geographically broad-based portfolio, (“there has never been a nation-wide housing recession”), works fine – until it doesn’t.


4. A portfolio that is apparently hedged can blow apart. So we have to look at the gross value of positions, even if they are thought to be hedged.


5. Don’t bet on ratings, because rating agencies are conflicted and might not be all too dependable at their job.


6. Defaults are never easy to manage, but it gets worse when there are a lot of them happening at the same time. It is harder to manage the mess, and there is less of a stigma in defaulting. And it is all the worse when, as is the case in the housing markets, those defaulting are not businessmen. As an added complication, with housing the revenue that we thought was there really wasn’t. Income that was supposed to be there to finance the mortgages – even when that income was fairly stated – became committed to other areas (like second mortgages).

My view is that states, like banks, are very much dependent on an improved economy because of their leverage to the housing market. There are numerous chinks in the armour which could spell disaster for the most indebted states. I mentioned the leverage to the housing market, but there are the underfunded pension problems, unemployment insurance borrowing, and the inability to just print money to meet debts and other problems as well. For investors, the message is buyer beware because, while CDS are soaring for the weaker debtors, clearly municipal bond prices do not reflect the financial stress. And while I broached the idea of the Fed stepping in to the situation with municipal bond purchases as the ECB had done (and continues to do) with euro zone states, this is unlikely.

Source: States Are Poised to Be Next Credit Crisis for US: Whitney – CNBC

Related posts

• Are munis the next shoe to drop?


• Buyers Beware: Municipal Bond Prices Don’t Reflect Financial Stress


• Meredith Whitney: First quarter bank earnings are due to marking up assets, not fundamentals


• Municipal Pathologies Come to a Head


• Possible Misunderstandings about Municipalities and their Bonds

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Author: Edward Harrison; Category: Markets; Tags: bonds, government, Housing, local, Meredith Whitney;

"

Hugh Hendry Interview With King World News: "If Inflation Is A Monetary Phenomenon, Hyperinflation Is A Political Phenomenon"

Hugh Hendry Interview With King World News: "If Inflation Is A Monetary Phenomenon, Hyperinflation Is A Political Phenomenon": "

In which we learn that that outspoken iconoclast has now taken on a $2 billion short position in Japanese credit, although presumably not cash-based as Ecclectica is well under that in AUM. For those who wish to recreate this position synthetically, we refer you to Dylan Grice's ATM swaption in the 10Y10Y forward which is the cheapest way to follow in Hugh's footsteps, and, ahem, may we remind you of Takefuji's recent bankruptcy...). His bet is in essence a gamble against the 'China will never fail' bandwagon: 'I am just intrigued as to the optionality, as to the profits that could be made, should that revert. And because it's deemed to be impossible, the trade is actually asymmetric. By golly if I am right, I can make a lot of money.' Another topic is the already much discussed malinvestment in China, which was the centerpiece of the argument between Hendry and Faber from some time ago (link for clip). But back to what actual things Hugh is doing, he gives the following specifics: 'I am shorting 10 year industrial corporate debt with 1% yield. Should this ricochet, which began in America, should the west be grappling with fears of recession, it goes to Asia, it goes to China, and I do not believe they have the vitality and consumption to pull the global economy out.' And just in case there is any doubt how Hendry view the endgame, here it is:'At these immense levels of yen strength, Japan is bankrupt. And when it's bankrupt it has given up hope, and there is huge political legitimacy to then do quantitative easing, which leads to the debauchery of the system.' In other words: the nuclear response of monetary debasement is certainly coming. We won't spoil what Hendry says on gold (suffice to add the following quote: 'We will see a joint meltup in US Treasrys and gold') - for his insights on where the metal will go, for a shoutout to all Zero Hedge Hugh Hendry fans, and for much more, listen to the whole interview.

Full King World News interview.

And for those who may have missed it the first time around, here is arguably the most succinct and comprehensive interview with Hugh from earlier this year, titled 'I would recommend you panic.' Slowly, his advice is being taken by every central banker in the world.

"

Debunking The Great Myth Of US Consumer Deleveraging, Or Why The US Economy Will End Not With A Whimper But A Bang

Debunking The Great Myth Of US Consumer Deleveraging, Or Why The US Economy Will End Not With A Whimper But A Bang: "

By now everyone 'knows' that the US consumer is hunkering down, paying down debt and performing other mythological tasks. Alas, as the WSJ points out today, this is not exactly true... In fact not true one bit. The reality is that over the past two years, US consumers have not been deleveraging as a voluntary act of eliminating debt, but have been actually aggressively leveraging more and more until the bank providing them credit puts them into involuntary bankruptcy, cutting off the money spigot. This is a startling realization, confirming that the average American is actually hyperleveraging to the point where all available credit is forcefully eliminated by a lender institution!

Here are the facts: as the Flow of Funds report demonstrates, total household credit, consisting of Home Mortgages and Consumer Credit, has indeed declined by $610 billion from $13.2 trillion to $12.6 trillion since the credit bubble peak in June 2008. Yet, as Mark Whitehose points out, there are two ways in which this 'deleveraging' can occur. Voluntarily, in the form of actual financial discipline, whereby the end consumer makes a conscious effort to pay down their debt, and Involuntarily, which is really not deleveraging, but aggressive leveraging to the hilt, up until the point where banks eliminate all credit access to the end consumer.

Luckily there is a way to quantify which road has been more travelled by. As the WSJ points out, in the period in which consumer credit has declined by $610 billion, banks and other institutions have charged off $588 billion in mortgage and consumer loans. (Our attempts at recreating these numbers using Fed H.8 and charge off data were slightly off, in fact demonstrating that based on charge off data as calculated, forced deleveraging will only accelerate as it catches up to bank charge off runrates). Nonetheless, a good way to visualize this phenomenon can be seen in the chart below:

Putting numbers to the data confirms that of the over $600 billion in deleveraging, only $20 billion or so of it was voluntary, with the balance occurring due to continuously irresponsible borrowing practices, in which US consumers spend, spend, spend themselves into oblivion only to be cut off cold turkey, instead of entering a slow deleveraging rehabilitation which would allow them to shift into the transition to a new creditless normal far easier.

The last observation is key as it has rather startling implications to David Rosenberg's theme of the New Frugal Normal. It would appear consumers do not, in fact, moderate their spending while still in possession of credit (regardless of its cost) - quite the contrary: they accelerate spending until the charge off threshold at the lender is breached, and all credit is cut off, also resulting in a collapse in a creditor's FICO score, cutting him or her off completely from future (at least near term) credit access. Thus what is occurring at the end of a typical consumer credit lifespan, is not a whimper but a massive bang. What happens after may require Stephen Hawking's explanation rather than David Rosenberg. The conclusion is that consumers do not pass a moderate 'go' on their way to insolvency, they go from hyperleverage straight into bankruptcy.

What this means for consumption as observed on the supply-side, i.e., sales at stores like Nordtstroms and Barneys, is that instead of trendlines being indicative of what is truly happening behind the scenes, we have now entered a phase where sales will spike only to drop off in a quantized, step-wise fashion, rather than a linear drop off. This would make all the sense in the world, when one considers that side by side with the observed 'deleveraging' of consumers, sales at aspirational store concepts are in fact surging, as the broke middle class performs one last 'swan song' rampage of purchasing every Gucci and Chanel bag available, before saying goodbye to credit for a long, long time.

And with unemployment still at record highs, and soon to take another leg higher, paychecks continuing to decline, excess capacity at record highs, 99 week EUC and Extended Claims reaching their ceiling 2 year anniversary from the Lehman collapse, and the general economy double dipping, the implications of this will be dire, as there will be no gradual decline. Instead, to borrow another cosmological term, instead of the US economy decelerating at a rate proportional to the removal of credit from the system, it will grow and grow until it hits supergiant status, only to collapse into a neutron star (or worse) singularity, in which only the Fed will be left beyond the event horizon, only to suffer a similar fate in its last ditch failed attempt to stimulate hyperinflation and rescue the US consumer and banking classes from the infinite gravitational pull of a failed Keynesian experiment.

"

Was Stagflation in ‘79 Really Hyperinflation?

Was Stagflation in ‘79 Really Hyperinflation?: "If my best friend is the truth, then my next best friend is history.

I’ve been writing about the possibility of hyperinflation, if there is ever a run on Treasury bonds. My argument has been, Treasuries are the New & Improved Toxic Assets, a termite-riddled house waiting to collapse. If and when there is a run on them, money will flow to a safe haven, which I am predicting will be commodities. As a byproduct of this sell off in Treasuries and buy up of commodities, consumer prices will rise catastrophically in a hyperinflationary event—and the dollar will be left dead on the highway like roadkill.

This scenario got me thinking about the last time there was a panicked run-up in commodities: The stagflation of the 1970’s in the United States, specifically the period 1979–1983. Oil nearly doubled in price, gold and silver went hyperbolic. Gas shortages were rampant—the situation almost got to the point where the government considered rationing gasoline. In fact, ration cards were printed—that’s how bad things got.

Because of the Oil Shock, the inflation index rose to a peak of 15%—yet unemployment also exploded, reaching almost 11%. This combination of unemployment and inflation was what gave the period its name—stagflation: “Stagnant inflation”.

Thinking about this period, I asked myself a simple question: Could the ‘79 Oil Shock, and subsequent bout of stagflation, be better understood as a period of incipient hyperinflation? And if so, what lessons could it teach us about today?

First, a bit of history:

Starting in late 1977, protests against the regime of the Shah of Iran culminated in his overthrow in January, 1979, and the subsequent disruption of Iranian oil production. From an average of 5.75 million barrels of oil a day, Iranian production dropped catastrophically—at one point to zero—to a new average of about 2.25 million barrels per day.

This event naturally led to oil prices ballooning, from a nominal average of $15 per barrel in 1978, to $25 per barrel in 1979 (data is here). This had a profound impact on inflation throughout the American and world economies.

Chart by GL, from cited data.

Up to the overthrow of the Shah, the U.S. inflation index had been at a moderate-to-high plateau. The Consumer Price Index (CPI) averaged 6.5% during all of 1977 and for the first third of 1978.

But in the lead-up to the Revolution and the subsequent overthrow of the Shah, inflation got in high gear: For the rest of 1978, inflation averaged 8.13%, and by March of ‘79—two months after the Iranian oil supply was disrupted—inflation was tracking at over 10% annually. By the end of 1979, average inflation for the year was 11.22%, and by March of 1980, inflation was peaking just shy of 15% (data is here.)

That was also the winter when gold and silver took off in parallel speculative jags that reached all-time highs—that winter was retrospectively the peak of inflation in the United States.

Keep that date in mind: March of 1980. Annualized inflation: 15%.

Though the inflation index was rising, unemployment hardly budged for a full year after the Oil Shock. Unemployment was at 5.9% when the Shah was overthrown in January of ‘79. And during the rest of ‘79—even though oil prices skyrocketed and the attendant inflation swept the economy—U.S. unemployment was more or less steady at or below 6%—

—until 1980: Starting that winter, unemployment bumped up to 6.9%, and it didn't look back. Unemployment would eventually reach a plateau of 10%, and stay at that plateau for a whole year (July 1982 to June 1983), peaking at 10.8% in November of ‘82.

Though unemployment would slowly fall, it wouldn’t be until September of 1987—almost nine years after the start of the crisis—before it reached its pre-Oil Shock level of 5.9% (unemployment data is here).

But during those years—nearly a decade, really—of staggering unemployment, what happened to inflation?

Well, in a word, it got a stake driven through its black heart—but like all scary movies, it was a close call.

Inflation got killed as dead as Dillinger because of the measures taken by Paul Volcker, the Chairman of the Federal Reserve.

As can be seen by the chart, up until Volcker was named Fed Chairman in August of ‘79, Federal Reserve interest rate policy was playing a game of catch-up with inflation—and inflation was winning.

But in October of ‘79, Volcker raised the Fed funds rate to 12% in the so-called “Saturday Night Special”—and then kept on raising them. Volcker kept the Fed funds rate up above 15% for most of 1980 and ‘81, peaking at 19.1%.

That’s right: 19.1%. It shocks the senses to look at that number, and then compare it to the current Fed funds rate of 0.25%.

From the graphic, it’s crystal clear that unemployment jumped up as a result of the first harsh taste of Volcker rates—in January, three months after the first interest rate hit, unemployment jumped to 6.3%, held steady there through the winter, then jumped to 6.9% in April and 7.5% in May. Then it just kept on climbing after that.

Essentially, Volcker induced a severe recession, in order to beat back inflation. There’s really no other way to look at it. Like a doctor administering chemotherapy, Volcker hiked interest rates high enough to kill the cancerous inflation—but he also killed business investment as well, during his reign of double-digit interest rates.

But all’s well that ends well—eventually, when inflation was safely taken care of, the Fed lowered its funds rate: Investment returned, the economy picked up, unemployment went down.

And inflation? It went into remission, after Dr. Paul’s tough medicine. Since the stagflation period and its successful treatment, inflation as measured by the CPI numbers has been basically a non-issue.

Now, let’s double-back to take a closer look at what happened back in 1979, and how it might compare to our situation today in 2010:

(A quick note on terms—by the word “inflation”, I mean two distinct things: One is the macro-economic event whereby prices rise, due to the expansion of both the economy and the credit environment, which bids up the prices of consumables. This sense is used in opposition to the other three macro-economic events, deflation, disinflation, and hyperinflation. The other meaning of the word “inflation”—or what I sometimes call the inflation index or sometimes the CPI number—is simply the actual percentage rise in prices in an economy, regardless of whether the cause is inflationary or hyperinflationary.)

The cause of the rampant inflation of ‘79–‘81 was an oil shock. It wasn’t that the economy was overheating, and consumables (labor and commodities) were being bid up in a growing economy coupled with an expansionary credit environment. Rather, commodities were rising against the dollar—the market was turning on the dollar, and determining that every day, it was worth less vis-à-vis commodities.

What was happening was that, in a very real sense, the dollar was going into a death spiral, when Paul Volcker implemented his psychotically aggressive interest rates.

Note how money supply played no role whatsoever in the inflationary period 1978–1983. Consider the following table:

Not seasonally adjusted figures, in $billions. Source: Federal Reserve, data is here.

Increase in the money supply was both inverse to high inflation levels some years (like Jan. ‘75) and inverse to relatively low inflation levels in other years (like Jan. ‘77). But it also tracked high inflation levels other years (Jan. ‘82) as well as low inflation levels in still other years (Jan. ‘86).

Therefore, one cannot make any type of meaningful correlation between money supply and inflation levels, at least not insofar as the period 1974 to 1986.

I would further argue that, if money supply is expanding within mundane historical bounds, then to claim it is either a necessary or (much less) a sufficient condition to affect the inflation index at some indeterminate point in the future is just not accurate.

When inflation was indisputably on the rampage—1980—money supply had increased by a mere 8.34%: The low end of the curve. Yet inflation that year was over 13%—even in the teeth of Volcker’s medicine.

This is significant: Even with those psycho interest rate levels, inflation didn’t instantly roll over and die: Inflation took a long time to draw down—over three years, from peak to trough.

From the March 1980 peak of 14.78% annualized, inflation remained over 14% during that spring of ‘80, before beginning its slow decline. It averaged 13.58% for 1980, and 10.35% in 1981—but in 1982 it was just 6.16%, and by 1983 a mere 3.22% (data as per above).

This decline in the inflation index happened over a 39 month period, even as Volcker kept the Fed funds rate, on average, 464 basis points higher than CPI levels. To repeat: Volcker kept the Fed funds rate 4.64% higher than inflation, and it still took over three years to kill the disease.

During all that time, Volcker was under enormous pressure to ease off on interest rates—the cover of Time magazine pretty much says it all, about the mainstream’s perception of Paul Volcker: An evil Darth Vader-like figure, smoking a glowing red cigar.

Yet Paul Volcker did what had to be done.

Let’s consider a counterfactual: Suppose Volcker had not been the psycho-killer inflation warrior that he was. Suppose he had been timid or slow to act. What would have happened to the dollar?

Easy: The markets in 1980 would have bid up commodities higher even than they did. The Federal Reserve would have continued its ineffective game of catch-up to inflation, as it had done in ‘78 and most of ‘79. Gold and silver would not have shot up in price and then come back down—they would have shot up and stayed up at those exorbitant levels, probably to $1,000 and $100 per ounce, respectively. Oil probably would have crossed the $100 a barrel mark as well. Other commodities and foodstuffs would have followed suit.

All this would have meant that inflation would have continued up, unabated. This is because the only thing that stopped inflation’s moonshot in the spring of 1980 was Paul Volcker’s psycho Fed funds rate.

Had Volcker not applied his medicine, ever-spiraling commodity prices would have sent inflationary tsunamis throughout the U.S. economy—until eventually, there would have been a run on the dollar. If CPI numbers had ever crossed 20% or 25% or some other psychologically important (and so far unknown) number, then it would have been Game Over for the dollar—Zimbabwe/Weimar absurdities would not have been far behind, because there would have been a complete loss of faith in the dollar: After all, a fiat currency is only as strong as the belief it inspires in its holders.

The conclusion is therefore obvious: Paul Volcker prevented hyperinflation from happening in the United States. Had inflation continued rising unabated, the dollar would have collapsed—which would have meant the collapse of the U.S. economy, much as the Soviet Union collapsed in 1991.

If Paul Volcker were a rock star, then I'd be a screaming 15 year-old girl—Tall Paul is my hero. One cannot overstate the political will and strength of character it must have taken for Paul Volcker to resist all the calls to cut interest rates—which were a hysterical clamor, at the time. Had he caved, the Cold War would not have been won, and so our world would be much, much different—for the worse. Those like myself who know this, know how much we owe him—which is why we respect him. As far as I am concerned, he ought to have a white marble statue thirty feet high, placed prominently on the Mall in Washington, D.C., eye to eye with the other great heroes of the Republic. He earned it.

Now, let’s ask ourselves: Was this near-catastrophe Paul Volcker saved us from back in 1979 really a case of incipient hyperinflation?

Many people have been using a throwaway line I wrote as a definition of hyperinflation: “Hyperinflation is the loss of faith in the currency.” If I do say so myself, it’s a nice line—but it’s inaccurate.

Hyperinflation is a severe price distortion, that eventually leads to a loss of faith in the currency. In every hyperinflationary event, CPI numbers rise as the prices of consumer necessities rise. Their prices rise for different reasons—which for this discussion are myriad and irrelevant. But what is relevant is, eventually, such price rises skewer the overall economy.

One of the key distortions that hyperinflation inflicts is price distortions on assets, be they equities, bonds or real-estate. By creating a run-up in consumer prices, hyperinflation imbalances the whole of the economy, making bonds, equities and real assets less valuable. This effect has been observed in every undisputed hyperinflationary episode.

So apart from the severe rise in CPI numbers between ‘79 and ‘82, was there such a hyperinflationary fall in asset prices in the United States?

Yes—without question.

In nominal terms, the New York Stock Exchange was essentially flat—the index was 839 on Jan. 1, 1979, and 875 on Jan. 1, 1982—which means that in inflation adjusted terms, equities fell (nominal data is here). Recall that CPI rose 11.22% in 1979, 13.58% in 1980, and 10.35% in 1981—in other words, 39.39% in those three years.

Average real estate prices, on the other hand, rose nominally though fell in inflation adjusted terms. Average and median home prices in January ‘79 were $67,700 and $60,300 respectively, whereas those same numbers in January of ‘82 were $78,000 and $66,200 (raw data for nominal average price here, and nominal median price here). That represents a 15.2% rise and a 9.8% rise in the average and the median home price. Again, contrasted with a 39.39% rise in CPI during that period, home prices fell during the period of stagflation.

So any way you look at the situation of ‘79 through ’82, it is reasonable to describe it as an incipient hyperinflationary environment. Therefore, the title of our movie ought to be “Stagflation ‘79: Almost Hyperinflation”.

(By the way, this gives lie to the notion common among money supply fetishists that “there aren’t enough dollars in the economy to ever start hyperinflation”—of course there are enough dollars: We saw it in ‘79. Money supply has got nothing to do with hyperinflation. Where there is a shortage or need for a good or commodity, the economy will rebalance itself to meet this new demand. In simple terms, people will somehow always find the cash to purchase their necessities, whatsoever price those necessities might reach. And if the market—for whatever reason—determines that a currency is worth consistently less against the same amount of commodities, then that currency is circling the hyperinflationary drain. The central bank need not inject more money to bring about this end—it can happen without recourse to money printing, or any other central bank or governmental measure.)

Now all of this history is well and good—but how does it apply to the situation we find ourselves in today, in 2010?

Very simple: I have been arguing that Treasury bonds are in a bubble, as they have become the New & Improved Toxic Assets. I have further argued that, at some point in the future, the markets will realize that Treasuries will never be repayed, and if they are, they will be repaid in debased dollars. Therefore, I have argued that when such a realization occurred, the markets would begin exiting Treasuries, and go to commodities as a safe haven.

Contrast this with 1979: At the start of the ’79 Oil Shock, commodity prices rose because dollars were chasing commodities. These dollars weren’t fleeing from Treasury bonds—if they left Treasuries, it was simply as a byproduct of going towards commodities. As more and more dollars went towards commodities, those commodities bid themselves up, creating inflation.

So in a practical sense, the period we are living in now and the period just before the Oil Shock are identical: In both cases, dollars were poised to chase after commodities, following a triggering event. In ‘79, it was the fall of the Shah. In 2010, we are waiting for our moment to exit Treasuries.

Therefore, one can look at the events of ’79–’82 as a dress rehearsal for what I think will happen today, and in the immediate future, if and when the Treasury bond bubble pops:

Like in ‘79, there will be a crisis that will trigger a run on commodities. Like ’79, the inflation index will start to pick up. Like ‘79, this will create hyperinflationary distortions in the American economy, which will be seen at least initially as “stagflation”.

In my previous writings, I had originally thought that, when the moment arrived when markets lost faith in Treasury bonds, commodities would go hyperbolic immediately, or within a very short time frame.

However, studying the events of ‘79 more closely, I realize I was wrong: I now no longer think commodity prices will spike hyperbolically and in a reduced time frame. I now think commodity prices—and CPI numbers—will rise initially at an accelerated clip, say at an annualized rate of 5–6% in the first month.

But here is the tragedy: Increased inflation will not be perceived—at least not at first—as anything to get into a twist over. Each subsequent month will see an inflationary rise at a slightly faster pace, adding a percent or two a month to the annualized rate—but at least at first, not only will this not be perceived as anything worrisome, it will be considered a good thing: Because of the current deflationary recession we are in, any pick up in the inflation index will be interpreted as a pick up in the overall economy.

Eventually, however, as inflation continues to rise but the jobs market doesn’t really improve, the current American economy will wake up and find it has reached the exact same point that was reached back in March of 1980—a 15% annual inflation rate.

But here is the key difference: Ben Bernanke and the Federal Reserve cannot raise rates to reign in incipient hyperinflation, like Volcker did in ‘79.

Apart from the obvious fact that Bernanke is not half the man Paul Volcker is (both literally and figuratively), and therefore lacks the balls and the backbone to do what needs to be done, Bernanke simply does not have the room to maneuver, insofar as the Fed funds rate is concerned.

If there was a run on Treasuries, Bernanke today cannot raise interest rates to retain Treasury holders—if he did, he would wipe out all the Too Big To Fail banks, and break the Treasury of the U.S. Federal government, both of which depend on the Fed’s cheap money as completely as if it were oxygen.

Back in 1979, Volcker didn’t have this constraint. He could raise rates—but even so, he paid for it with 400 basis points of unemployment.

However, unemployment today is already at 10%, in a soft credit environment. So even if he didn’t have the TBTF banks and the Federal government on the cheap money life support, Bernanke cannot raise rates in order to stop a run on Treasuries, stop a run up on commodities, and stop incipient hyperinflation: The economy is too weak. Adding 400 basis points to the current employment situation—that is, driving U-3 unemployment to 14% or more—would cause political pandemonium, not to mention riots.

Finally, Bernanke won’t raise rates—can’t raise rates—because of a disease of the mind that he has: Due to Alan Greenspan’s pernicious, destructive influence, which I have discussed at some length, Bernanke thoroughly believes that only liquidity injections and cheap money can save the economy—he is looking for inflation. He is so terrified of the American economy circling the deflationary drain, that he is deliberately going in the other direction: He is trying to cause inflation.

Bernanke doesn’t realize that inflation is a symptom that can augur many things. He is convinced that inflation means growth—the opposite of deflation. So all his liquidity windows, all his cash infusions to prop up the Too Big To Fail banks and their bankster operators, QE, QE-lite, the forthcoming QE2—all of it is being carried out by Bernanke so as to cause inflation. He is convinced that inflation will signal that the economy is recovering, and that the Federal Debt will be inflated away, and therefore not break the Federal government finances.

He believes that rising prices will mean that the U.S. economy is about to be saved.

This is why Bernanke is set up to take a hit from hyperinflation: If and when there is a run on Treasuries, and a subsequent run up of commodities, at least initially, the Federal Reserve under Ben Bernanke will not only do nothing, they will encourage this situation. The Fed and its current leadership will interpret this rise in the CPI number as an indication that “We are on the road to recovery!”

We are not: The first hint of commodity prices rising as the Treasury markets begin to fade will be an indication that hyperinflation is on its way. And by the time we get to our March 1980 moment—by the time we get to 15% annualized inflation index—it will be over.

The next stop will be Zimbabwe.

"

The Market Ticker - In One Short Ticker, The Light Should Come On

The Market Ticker - In One Short Ticker, The Light Should Come On: "

I haven't read this guy before, but he's spot on:

Credit growth: The most important indicator is credit growth or lack thereof. Everything else follows. Actually, you could stop right there. However, there are two other factors to assist you, although they depend on credit growth.

Yep.

Or, as I have put it in my signature on the forum for quite some time now:

"The monetary base in ALL modern monetary systems is the sum of unencumbered assets against which one is both WILLING AND ABLE to borrow." - Me

When it grows, so does the actual monetary base and so does the economy.

Fundamental Principle #1:

The asset base (otherwise known as the monetary base, or the base against which all "money" in said nation is valued) of a nation only grows as a consequence of mining, manufacturing, or growing things. That is, through the expression of labor either with mind or body, frequently with the assist of The Sun.

Therefore:

To grow the monetary base in real terms you must mine, manufacture or grow something. You cannot increase it by the pressing of buttons on a computer or by making entries in a ledger.

The latter is the expansion of leverage against the monetary base, not expansion of the monetary base itself. Those who claim otherwise are lying; this is trivially discerned by the fact that if the entirety of "things of value" in a nation is one bushel of corn, if you emit ten "dollars" you have declared the value of a "dollar" as 1/10th of a bushel. If you emit one hundred "dollars" then you have declared the value as 1/100th of a bushel. All you have done by emitting currency - digitally or otherwise - is change the leverage ratio.

Economic Stability is likewise easily defined, although it cannot be conclusively proved since measuring the true purpose of leverage is difficult. However, the following general principle applies:

When the leverage applied to the monetary base is constant and, at its present level, has the vast majority of its exercise applied toward productive investment (that is, the expansion of the monetary base, such as the use of leverage to purchase a machine that will produce more output than its financed cost, operational expense, and a profit) the economy is generally stable.

When the leverage applied to the monetary base is either expanding or the majority of its exercise is applied to speculative or consumptive purpose, the economy is generally unstable.

Thus, in the general case, when credit is growing faster than output the economy is generally unstable and a bubble either exists or is attempting to form.

Again, this is trivially discerned, in that if output of an economy is 1,000 bushels of corn and you permit said corn to be "hocked" five times for each ear where previously you could only do so once, you have effectively naked-shorted the "value" of that ear of corn. It is a naked short because there are an insufficient number of ears to cover the entirety of the short position; ergo, by definition you are blowing a bubble since you are "factoring" tomorrow's production at an increasing rate.

Finally, whenever such a bubble exists and is not arrested by the monetary authorities it will ultimately burst and some who shorted naked will not be able to cover their bets in each and every case.

This is also trivially provable: the planet we live on is of finite size and mass. It is therefore physically impossible to have an exponential growth function operate on an indefinite basis as such will eventually consume all of the physical resource of the planet down to the last atom, and the rate of acceleration, due to exponential growth being a compound function, will always be increasing over time.

Finally, my last principle, which WE THE PEOPLE must insist be applied:

Any monetary "authority" willfully and intentionally violating the above has committed a Federal Offense, in that they have willingly and intentionally put in motion a set of events that is mathematically guaranteed to result in the destruction of the wealth and property of a large segment of the population.

Title 18, USC Section 242 says:

This statute makes it a crime for any person acting under color of law, statute, ordinance, regulation, or custom to willfully deprive or cause to be deprived from any person those rights, privileges, or immunities secured or protected by the Constitution and laws of the U.S.

....

Acts under "color of any law" include acts not only done by federal, state, or local officials within the bounds or limits of their lawful authority, but also acts done without and beyond the bounds of their lawful authority; provided that, in order for unlawful acts of any official to be done under "color of any law," the unlawful acts must be done while such official is purporting or pretending to act in the performance of his/her official duties. This definition includes, in addition to law enforcement officials, individuals such as Mayors, Council persons, Judges, Nursing Home Proprietors, Security Guards, etc., persons who are bound by laws, statutes ordinances, or customs.

Therefore, all such persons who use their official government powers to create and promulgate such an economic instability are liable for arrest, prosecution, fine and imprisonment under EXISTING Federal Statute.

Where's the handcuffs?

"

Market Still Deluding Itself That It Can Escape The Inevitable Dénouement

Market Still Deluding Itself That It Can Escape The Inevitable Dénouement: "

One of my favorite analysts is Albert Edwards of Societe Generale in London. Acerbic, witty and brilliant. Emphasis on brilliant. The fact that he is a Doppelganger for James Montier (who long time readers are well acquainted with) is a coincidence (or he would say vice versa). I only kind of have permission to forward this note to you, but better to ask forgiveness… So, this week he is our Outside the Box. And a short but good one he is.

I am in Amsterdam and it is late, but deadlines have no time line. Tomorrow more work on the book. It is getting close to the end. Most books are finished when the authors quit in disgust. How many edits can you do? I am close.

I wonder late at night, with maybe a few too many glasses of wine, why I feel like a book is so much more than an e-letter. Really? The last ten years of what I have written are on the archives. Good (ok, sometimes really good) is there. But some are an embarrassment. What was I thinking?

But somehow in my Old World brain, a book is more than a weekly letter. It is somehow more permanent than an “online” letter. Which may be archived forever. The book is “paper” and may be around for a few years. But the online version is here for a long time.

I know that is stupid. Really I do. But what is a 61 year old mind to do? A strange world we live in.

It is really time to hit the send button. More than you know! The conversation tonight has been too deep!

Your trying to figure out the purpose of life analyst,

John Mauldin

---

Market still deluding itself that it can escape the inevitable dénouement

By Albert Edwards

The current situation reminds me of mid 2007. Investors then were content to stick their heads into very deep sand and ignore the fact that The Great Unwind had clearly begun. But in August and September 2007, even though the wheels were clearly falling off the global economy, the S&P still managed to rally 15%! The recent reaction to data suggests the market is in a similar deluded state of mind. Yet again, equity investors refuse to accept they are now locked in a Vulcan death grip and are about to fall unconscious.

The notion that the equity market predicts anything has always struck me as ludicrous. In the 25 years I have been following the markets it seems clear to me that the equity market reacts to events rather than pre-empting them. We know from the Japanese Ice Age and indeed from the US 1930′s experience, that in a post-bubble world the equity market merely follows the economic cycle. So to steal a march on the market, one should follow the leading indicators closely. These are variously pointing either to a hard landing or, at best, a decisive slowdown. In my view we are poised to slide back into another global recession: the data is slowing sharply but, just like Japan in its Ice Age, most still touchingly believe we are soft-landing. But before driving off a cliff to a hard (crash?) landing we might feel reassured when we pass a sign that reads Soft Landing and we can kid ourselves all is well.

I read an interesting article recently noting the equity market typically does not begin to slump until just AFTER analysts begin to cut their 12m forward EPS estimates (for the life of me I can’t remember where I read this, otherwise I would reference it). We have not quite reached this point. But with margins so high, any cyclical slowdown will crush productivity growth. Already in Q2, US productivity growth fell 1.8% – the steepest fall since Q3 2006.Hence, inevitably, unit labour costs have begun to rise QoQ. This trend will be exacerbated by recent more buoyant average hourly earnings seen in the last employment report. Whole economy profits are set for a 2007-like squeeze. And a sharp slide in analysts’ optimism confirms we are right on the cusp of falling forward earnings (see chart below).

I love the delusion of the markets at this point in the cycle. It bemuses me why investors cannot see what is clear as the rather large nose on my face. Last Friday saw the equity market rally as August’s 67k rise in private payrolls and an upwardly revised July rise of 107kbeat expectations. But did I miss something? When did we switch from looking at headline payrolls to private jobs? Does the fact that government is shedding jobs not matter? Admittedly temporary census workers do mess up the data, but hey, why not look at nonfarm payroll data ex census? Why not indeed? Because the last 4 months run of data looks notably weaker on payrolls ex census basis than looking only at the private payroll data (ie Aug 60k vs 67k, July 89k vs 107k, June 50k vs 61k and May 21k vs 51k). But these data, on either definition, look dreadful compared to the 265k rise in April and 160k in March (ex census definition). If someone as pathologically lazy as me can find the relevant BLS webpage after a quick call to the BLS (link), why can’t the market? Because it is bad news, that’s why.

August’s rebound in the US manufacturing ISM was an even bigger surprise. This is a truly nonsensical piece of datum as it was totally at variance with the regional ISMs that come out in the weeks before. The ISM is made up of leading, coincident and lagging indicators. The leading indicators – new orders, unfilled orders and vender deliveries – all fell and point to further severe weakness in the headline measure ahead (see chart above). It was the coincident and lagging indicators such as production, inventories and employment that drove up the headline number. Some of the regional subcomponents (eg Philadelphia Fed workweek) are SCREAMING that recession is imminent (see left hand chart below).

The real reason why markets reversed last week was that they got ahead of themselves. Aside from the end of 2008, government bonds were the most over-bought they had been over the last decade. And in equity-land the AAII two weeks ago recorded a historically low 20% of respondents as bullish (see chart above). These technical extremes will now be quickly worked off before the plunge in equity prices and bond yields resumes.

I am often asked by investors with a similar view of the world to my own (yes, there are some),whether the equity market will ever reach my 450 S&P target because of the likelihood that further Quantitative Easing will prevent asset prices from falling back to cheap levels.

Indeed we know that a central plank of the unhinged policies being pursued by the Fed and other central banks is to use QE to deliberately target higher asset prices. Ben Bernanke in a recent Jackson Hole speech dressed this up as a “portfolio balance channel”, but in reality we know from current and previous Fed Governors (most notably Alan Greenspan), that they view boosting equity and property prices as essential for boosting economic activity. Same old Fed with the same old ruinous policies. And by keeping equity and property prices higher, the US and UK Central Banks are still trying to cover up their contribution towards the ruination of American and British middle classes – (see GSW 21 January 2010, Theft! Were the US and UK central banks complicit in robbing the middle classes? – link).

The Fed may indeed prevent equity prices from slumping with any QE2 announcement. But this sounds a familiar refrain at this point in the cycle. For is monetary easing in the form of QE that different from interest rate cuts in its ability to boost equity prices? Indeed announced rate cuts in previous downturns often did generate decent technical rallies. But in the absence of any imminent cyclical recovery, equity prices continue to slide lower (see chart below). The key for me is whether QE2 can revive the economic cycle, not equity prices temporarily.

In the absence of a cyclical recovery I cannot see how QE is any different in its ability to revive asset prices than lower rates in anything other than a temporary fashion. (Interestingly many of our clients think QE2 might give a temporary fillip to the risk assets but that the subsequent failure to produce any cyclical impact will cause an extremely violent reaction as investors lose faith in QE as a policy tool and Central Banks in general.)

If we plunge back into recession, do not place too much confidence in the Central Banks having control of events. As my colleague, Dylan Grice, said last week “let them keep pressing their buttons.” Ultimately they cannot fool all of the investors, all of the time.

"

Guest Post: Harvard Lobotomies And The Disgrace Of The Economics Profession

Guest Post: Harvard Lobotomies And The Disgrace Of The Economics Profession: "

Submitted by Damon Vrabel

Harvard Lobotomies And The Disgrace Of The Economics Profession

It's worth stepping back on occasion to consider the progress that has been witnessed in particular academic fields. Astronomy took a giant step forward centuries ago when it finally realized the sun was at the center of the solar system. Geology adapted to the fact of a round earth. The continuous evolution of Physics boggles the mind. Engineering perpetually pushes into new frontiers.

And how does Economics compare?

Well let me take a moment to congratulate the few Harvard, LSE, Princeton, Chicago, MIT grads serving Wall Street, the Fed primary dealer cartel, the IMF, and the World Bank (Larry Summers deserves extra credit). These economists drive the field, and they've brought it to a point that has taken us back to the days of medieval feudalism. The field is now more primitive than flat-earth Geology and Ptolemaic Astronomy. Congratulations economists!

Of course it's not entirely the economists' fault. They were taught from day one in Economics 101 that they will undergo a moral lobotomy. Economics goes to great lengths to indoctrinate new recruits that it's a positive vs. normative "science." Other sciences don't bother to do that because the fact is there should be no conflict between the positive and the normative. Why is Economics the only field that does this? Because it wants to avoid the questions that good students interested in true progress would otherwise ask. It knows it's hiding something in its content that conflicts with the normative and it doesn't want students to search for and find the truth. Just remember this helpful indicator in your next life--anything that goes to such lengths to admit upfront that it's morally bankrupt might be something around which you should NOT build your life!

The truth is that Economics has been designed to completely hide the monetary system that hovers above the economy. Economics assumes money is just a medium of exchange floating through the economy to facilitate a free market and generate wealth. At times that has been true, but today it's probably the biggest lie of modern history. The current system does not generate wealth and freedom for most people. It generates debt and servitude. And it is not a free market. Today's money flows from a top-down imperial power system expanding globally. It creates a master-servant relationship because all money comes from privately held debt.

Let me say that again. ALL MONEY COMES FROM DEBT (for those of us who suffered the most indoctrination by attending schools like Harvard, let's pause here for a moment so we can catch up to the rest of the class). This means in order for governments, businesses, and people to have the liquidity necessary to live, they must agree to sign over a claim on their assets to banks. As the banking system inflates over time passing out credit, which makes everyone feel good with more digits in their accounts, it gathers claims on all the assets in the system for its private capital holders. Admittedly, this is one way of facilitating development (good students would've figured out a better way had they not been stifled). But it's also the method for transferring everyone else's assets to the balance sheets of the capital holders behind the banks once deflation sets in.

This is what we're facing today. The global banking system has a claim on most assets in the world (except those in places like Iran, so it's no surprise we're fanning the flames of war so the military can eventually conquer the region for JP Morgan Chase and its Harvard employees...of course Chase was one of the first corporations to move in on the mineral assets seized in Afghanistan because it's the primary bank that pays the military-industrial complex to conquer territory for it...they're giving us an obvious lesson in how the world really works today).

Once the system has gathered all the claims it wants, senior capital will be removed, kicking off the next phase of deflation and a transfer of assets from the people to the banks. At that point we'll probably see JPM Chase CEO Jamie Dimon, another Harvard lobotomy victim (there's a high correlation between Ivy League lobotomies and billionaires), on CNBC threatening Americans to pay up as his firm jacks up their rates and takes their homes like he did in early 2009.

In this transfer process, the people's equity will be eliminated. And this means, they will be returned to the life of a feudal servant to the capital holders behind the banks. This is not rhetoric, but the unarguable math and accounting of the banking system. It's very simply a mechanism to transfer assets/equity from the balance sheets of the many to the balance sheets of the few.

So a final word for all the top economists out there:

Congrats again! It didn't take much to buy you off. Today's financial elite, those who control the global debt machine, have rewarded you with some meager paychecks and the status of the high priests of old. Sad. Do you have any pride, or is it really that easy to co-opt you with retreats in Jackson Hole, hobnobbing in Davos, and membership in the CFR?

Come on. Rise above it. You are obligated to fix this immediately:

1) Develop an interim solution in concert with the old time-tested bondage/jubilee, growth/rest cycles which gave the people, communities, land a breath of fresh air in the midst of empire growth. (if you're writing that off as religious romanticism, ask yourself what top athlete doesn't live by training/rest cycles...over-training results in deterioration, not progress)

2) Then develop and advocate a humane money system that facilitates the rebuilding of real community as opposed to one based on debt servitude that parasitically sucks the life OUT of communities.

We know the debt holders have a lock on Harvard and LSE (my days at Harvard were marked by professors preaching the benevolence of Enron finance and Wall Street derivatives, so most Harvard grads are probably beyond recovery). But what about the rest of you? It's time to step up and work toward progress like your colleagues in other fields. It's time to move beyond the dark ages.

"

Guest Post: “Shut-up And Eat Your Paint Chips, Kid” – Miseducating America

Guest Post: “Shut-up And Eat Your Paint Chips, Kid” – Miseducating America: "

Submitted by Mark McHugh of Across the Street

“Shut-up and Eat Your Paint Chips, Kid” – Miseducating America

Without question, the best way to
make people love you politically is to throw Tootsie rolls into the
crowd. In lieu of sugary treats, making an impassioned plea for education is a close second. No one wants to see their kid grow up to be a potato head, right?

Today we’ll be exploring the mathematics behind the US housing market
over the last thirty years to determine how smart we really want our
kids to be. If you can successfully complete (or at least understand)
the accompanying quiz you’ll have a more thorough understanding of
economic realities than every Ivy League professor (including Nobel
Laureates) active in government and mainstream media.

Question #1 – Joe and Mary Twelvepack, an average
American couple, buy the average American home in 1980. They pay the
average American price ($76,400) and take out the
average American mortgage. 29 years later, they sell the home to another
couple for the 2009 average American price of $270,900. How much did they profit from the sale (assume the mortgage has been paid in full)?

A: If you said $194,500 ride the pony, big guy.

Author’s note: If you only aspire to be as intelligent as Uncle Sam wants you to be, STOP HERE.

Question #2 – According to the BLS, cumulative inflation from 1980 to 2009 was 160.36%. a)What is the simple inflation adjusted value of the house? b)How much of the Twelvepack’s profit was the result of inflation and c)how much was their profit after inflation?

a) $198,915.04 ($76,400 * 2.6036)

b) $122,515.04 ($198,915.04 – 76,400)

c) $ 71,984.96 ($270,900 – $198,915.04)

C’mon, chin-up buckaroo. The Twelvepacks still made money. Beating inflation is the name of the game, right?

Well, there is one other factor we should probably consider: The
effect interest rates had on the value of the Twelvepack’s “investment”.
After all, re-fiing the house at ever lower interest rates is how they
paid for Mary’s boob job, Joe’s rehab, that boat in the driveway, and
the kids’ braces. God knows it wasn’t their ability to earn more.

Question #3 –The average 1980 mortgage was 14.005%
APR (13.74% w/ 1.8 pts.) and the couple that bought it, the Fourpacks,
got 5.1015% APR (5.04% w/ 0.7 pts plus cool cash from Uncle Sam) Their 30-year fixed mortgage payments are $1471.10. a)How big of a mortgage would that payment get if interest rates were the same as in 1980? b)How much of the Twelvepack’s “profit” can be directly attributed to the change in interest rates?

a) $124,206 (you’ll need Excel to calculate this if you’re not Korean)

b) $146,694 ($270,900 – $124,206)

Question #4 –So there you have it. 74% of the
Twelvepack’s gain can be attributed to the 9% drop in interest rate.
When you strip out the interest rate effect, the house underperformed inflation by more than 60% over 30 years (and
that’s excluding all other costs associated with the American dream),
which of course means this wasn’t actually an investment at all. How
many Americans understand this?

A: Not many.

Somehow the mathematical realities of the US housing market have
completely escaped the education-loving American public as they continue
to assume that the next thirty years will yield results similar to the
last thirty. Utterly freaking impossible. We can’t drop
mortgage interest rates 9% again (currently 4.4%), but we should expect
houses to continue to underperform inflation.

Despite our perception, the earth turns. That’s what makes day and
night, and that’s why it seems like the sun travels through our sky. It
took human beings more than 2,000 years to fully embrace that truth.
Teaching your children that houses are good investments (‘cuz look how
it worked out for you) and they’re lucky to have such low mortgage
interest rates is about as enlightened as sacrificing them to Moloch so
the Sun will continue to rise.

Right now, the powers that be are bazooka-ing tootsie rolls into the
crowd at an unprecedented rate. So if your child asks you, “Who’s gonna
pay for all this?” maybe you should just say, “Shut-up and eat your
paint chips, kid.”

***

“The more deflation [sic] the elite, champagne economists throw out there to convince people “your tax dollars really can keep that anvil up in the air,” the more we’re gonna be stuck in the mud for years and years and years….”

~ Rick Santelli (more top-shelf Rick)

“The ultimate result of shielding men from the effects of folly, is to fill the world with fools”

~ Herbert Spencer

***

Sources:

U.S. Home Prices:

http://www.census.gov/const/uspriceann.pdf

30 year fixed mortgage interest rates:

http://www.freddiemac.com/pmms/pmms30.htm

Inflation:

http://data.bls.gov/cgi-bin/cpicalc.pl

"