San Diego Housing Bubble News and Analysis

Money and credit are either increasing in availability or decreasing in availability relative to goods and services. We are doing one or the other at all times. The system is normally inflationary, we have been doing it for decades. You can't just turn a credit market collapse, which is a massively deflationary force, into inflation overnight without serious consequences. IMO, the serious consequences are quickly approaching.

We are deflating now. Mish is mostly correct. Public debt did not offset private credit destruction, we have had a net contraction. Which is DEFLATION.

Chris Martenson quantifies this here in this article:

http://www.chrismartenson.com/blog/flow-...
Since it is not possible for the government to become the perpetual source of all new borrowing, for the old economic paradigm to work it is imperative that consumers and businesses pick up the borrowing baton and race off with it.

I have resolved myself to a new normal, a much lower normal, and my main concern centers on whether the government will arrive at the same conclusion before the dollar is ruined, or after.

Devaluation comes in when the world loses confidence in the dollar and it devalues from lack of demand for dollars. I'm not sure if it is technically inflation when that happens because it does not matter how much or little money is being created.

Henry C Lu explains the dollar as reserve currency here. He also claims to be the one that convinced china to stop using the dollar.

http://www.atimes.com/atimes/China_Busin...
Dollar hegemony is a geopolitically constructed peculiarity through which critical commodities, the most notable being oil, are denominated in fiat dollars, not backed by gold or other species since then president Richard Nixon took the US dollar off gold in 1971. The recycling of petro-dollars into other dollar assets is the price the US has extracted from oil-producing countries for US tolerance of the oil-exporting cartel since 1973. After that, everyone accepts dollars because dollars can buy oil, and every

economy needs oil. Dollar hegemony separates the trade value of every currency from direct connection to the productivity of the issuing economy to link it directly to the size of dollar reserves held by the issuing central bank. Dollar hegemony enables the US to own indirectly but essentially the entire global economy by requiring its wealth to be denominated in fiat dollars that the US can print at will with little in the way of monetary penalties

Constantly battling deflation with pilling debt on the public has an end point somewhere and that point is probably losing our reserve currency status as the world loses confidence in the US financial system.

Well, that would be a good analogy for true debt (the type you have to pay back). But the govt has learned to use more and more debt that doesn't have to be paid back. Non-recourse loans with little or no money down allow a borrower to capture the upside, while walking away from the downside. This kind of loan is the FHA's specialty. With this kind of loan, the borrower is best off buying the biggest home they will qualify for. Using lots of loans like this, it is possible to reflate, and eventually inflate.

But with nothing to lose, they can walk. I just read about strategic walkers. With the way it's set up, seems like a neverending problem.

It's only a problem for future taxpayers. They haven't gotten the bill yet, so they haven't said much.

But the system of non-recourse loans with little money down does achieve one goal: it puts paid to any concerns about unstoppable deflation. It also enables existing homeowners to get out at a higher price than they would otherwise. Homeowner A sells a home to Buyer B, receiving $500,000 that A gets to keep. Buyer B gets to default/mod, ultimately paying $300,000 for the home. How can Homeowner A walk away with $500,000 when Borrower B only pays $300,000? Because Future Taxpayer C is made to pay the extra $200,000. Great system, for A! Not so good for C.

We are deflating and they have not stopped it. The Fed anti-deflation policy has failed. Now, I suppose they can start giving high school kids government CCs and commercial loans. That might do the trick.

However, they may succeed at hyper-inflation if the world pulls away from the dollar as it has made steps to do.

A related chart from Mish:

http://globaleconomicanalysis.blogspot.c...

The flip side:

http://www.pcasd.com/the_us_government_w...

http://www.pcasd.com/us_not_going_down_j...

Actually sdduuuude I think that Mish's chart is completely compatible with the arguments made in my two articles you linked to. His is a chart of REAL GDP, adjusted for changes to the purchasing power of the currency. I am on board with the idea that our real GDP growth over the next decade or whatever will be weak. Nominal GDP in comparison with Japan is a different story due to our vastly different monetary policy and the fact that our debt is not financed internally as it is in Japan.

Rich

Just so I understand, you are saying if inflation is 10% and nominal GDP is 5%, that is a real GDP of -5%? If not, please help w/ real GDP definition. Thanks.

http://www.telegraph.co.uk/finance/finan...
Both bank credit and the M3 money supply in the United States have been contracting at rates comparable to the onset of the Great Depression since early summer, raising fears of a double-dip recession in 2010 and a slide into debt-deflation.

Yes.

Rich

Check out Chris Martinsens vid on the way the US GDP is calculated. It's very misleading and inaccurate. As is the BLS calculation for unemployment. Might as well throw the CPI in there as well.
The discussion about money should center around wages and credit. These are how people have the ability to purchase things. If there's downward pressure on wages and a contraction of credit, then you can bet that assets that require wages and credit will be experiencing downward pressure on their prices. In order to satisfy the demand part of the equation, buyers have to have the desire and the "ability" to purchase.