zk, I love a good debate, and I thank you for raising these counterpoints.
With some of your logic I cannot argue. You’re right that I cannot predict the future. I have a 95% confidence that prices will drop, and 80% that they will drop by at least 35%. Time will tell if I was right.
The question of whether wages will rise is also valid. In the 1970’s, inflation caused everything to rise: wages, interest rates, housing. Could this happen again? I think not. Now we are a global economy. Goods made by worders earning US$4/day in the export-oriented Asian economies are what sustains the US consumer. If our wages went up, we would lose even more manufacturing jobs. The global economy cannot support higher wages in the US. The only room for wage increase would be in the Asian countries, to bring the $4/day to $6/day. If Nokia started paying their engineers $100K instead of $80K (or whatever they make), then Nokia would instead go to China to hire cheaper labor. So higher wages are unlikely.
If housing prices stay flat, wages would have to double to bring the ratio in half. Do you think it is even remotely possible for everyone’s wages to double in the next 6 years? I don’t know about you, but statistics show that wages have been growing at a nominal 3-4% rate. What would make them grow at an annual rate of 10-15%?
If wages doubled, then the prices of goods and services would double also, so you still have the basic problem of ARMs resetting.
I think doubling wages cannot save this bubble.
The only hope for prolonging it is another liquidity bubble, something that forestalls the ARM resets. The exotic loan resets are the most ominous feature, and what gives me the confidence this will all fall apart.
In the end, all bubbles correct, in nominal prices. Have you ever heard of any bubble which corrected itself by prices staying flat? I’m thinking of past housing bubbles, stock market bubbles,the tulip craze, railroad stocks…they each burst with nominal prices dropping like mad.
I am fascinated by the arguments that people make to try to see if this time really is different. It isn’t. All excesses correct on the nominal side. It’s a law of nature.
Just look at a pendulum. As it swings so close to the right, you can almost convince yourself that if the wind blows hard enough, the pendulum will remain suspended in that position, on the right side. Perhaps a gust comes along and does just that. But no gust last forever. The pendulum follows the laws of nature and reverses course. Regardless of all the observers who questioned the move…
