Trillions to go, and buyers
wanted By The Mogambo Guru
Junior Mogambo Ranger (JMR) Azvitt sent a
piece by John Browne of Euro Pacific Capital, who
writes that professor Robert Shiller "has
determined that US house prices rose in line with
inflation, between 1900 and 1995, at 3.3% per
annum. Beginning in 1996, the [US Federal Reserve
chairman Alan] Greenspan property bubble drove
average house prices to a position where, by 2007,
they were some 40% above their aggregate
century-long 'trend' value."
By this time
I thought I was in a timewarp, as this
overvaluation thing is old news. But Mr Browne
looks at me disapprovingly, as it is painfully
obvious that I am "slow" and I did not understand
the significance of housing values that revert to
the historical mean, as "To 'de-leverage', as US
Treasury Secretary Henry Paulson so soothingly
describes it, will require the squeezing out of
this 40%
of
price inflation; or some US$12 trillion! This
figure, which excludes the de-leveraging of other
debt-ridden areas such as commercial real estate,
credit cards and auto loans, is just $2 trillion
short of our entire annual GDP! It is a gigantic
figure, of which there is understandably little or
no mention."
Well, to be fair, the
standard answer from those of us in the Outraged
Lunatic Gold-Bug Fringe Element (OLGBFE) is that
the loathsome, corrupt Fed will create the money
and the loathsome, corrupt Congress will spend it,
bailing everyone out, creating an inflation in
consumer prices that will destroy the country, and
thus we dismiss the whole thing with a casual wave
of our hands as a fait accompli.
But
perhaps it doesn't matter anyway, as he says that
when you notice that "the $436 billion the Fed has
recently injected into our economy and the fact
that it represents some 50% of the Fed's balance
sheet, a massive problem of relative size is
manifest. It begs the question of whether the Fed
has the resources to do anything but make a dent
in the crisis."
Half of the Fed's stash of
government debt has been used up already! Yikes!
And how big is the entire rest of the Fed's stash
of government securities? A piddly $629 billion!
Hahaha! This is what they have as a bulwark
against a couple trillion dollars in housing
losses alone, not to mention the losses on some of
the other $700 trillion in global derivatives!
Hahahaha!
Just as I was going to raise my
hand to add this interesting little factoid to the
mix, he cuts me off with the gloomy assessment,
"Faced with these realities, it is unlikely that
the Fed has much chance of averting a serious
recession. If Congress fails to act soon,
depression will threaten."
By this time I
am getting a little peevish that he, too, is
worried about some stupid recession, when it is
the inflationary impact of all of this
dollar-and-debt creation that is the real killer!
So I was just getting ready to give this Browne
guy a lesson in economics, when he again
anticipates me by saying, "In short, if we are to
stall a depression, we must necessarily experience
both far greater inflation and lower interest
rates. The result will be renewed downward
pressure on the US dollar and the unseen erosion
of US dollar-based wealth."
And it is not
just the American housing bubble that is giving us
trouble and forcing us to endure higher inflation,
or the British housing bubble, or the Australian
housing bubble, or the Spanish housing bubble, or
the Irish housing bubble, but if you want to read
something really spooky, as a reader writes to
Agora Financial's 5-Minute Forecast: "I have seen
no comments anywhere on the coming mother of all
real estate bubbles: urban China. I live in
Guangzhou, where a shoddily constructed
three-bedroom apartment in a desirable locale is
now costing 3-4 million yuan (approx
$430,000-$570,000)."
To show the degree of
speculation, he adds, "I sold my apartment last
month for 30% more than I bought it six months
earlier."
And there is plenty of supply,
too, as "Vacant apartments are ubiquitous. So is
new building, however, driven on by a consortium
of banks, municipalities and developers. Growth is
fueled by speculators using funds borrowed from
cash-flush government companies to buy and resell
blocks of apartments."
Well, speaking of
"cash-flush government companies", Doug Noland in
his Credit Bubble Bulletin notes that the banks,
now just another slimy part of a corrupt
government, are still able to shovel money out of
the doors, as "Bank Credit surged another $41.7
billion [week of March 19] to a record $9.490
trillion. Notably, Bank Credit has now increased
$277 billion year-to-date, or 13.0% annualized.
Bank Credit posted a 35-week surge of $847 billion
(14.6% annualized) and a 52-week rise of $1.154
trillion, or 13.8%."
This reminds me, with
a shudder, that John Williams at his
ShadowStats.com recently reported that his latest
estimate of the broadest money supply, M3, is
running at 20% annualized.
With all the
losses and slow business conditions, it is easy to
predict that tax revenues are down, and the
increase in the federal government's usual
appetite for issuing new government debt is also
easy to predict.
And so it is perhaps not
too surprising that Junior Mogambo Ranger (JMR)
Len S picked up this interesting bit of news,
"Beginning with the 13- and 26-week bill auctions
of Monday, April 7, 2008, all Treasury marketable
bills, notes, bonds and Treasury
Inflation-Protected Securities (TIPS) will be
available to the public in minimum and multiple
amounts of $100. Marketable Treasury securities
have been available in $1,000 minimums and
multiples since August 1998."
JMR Len
figures that "the Treasury is NOT doing this out
of the kindness of their hearts. By lowering the
amount to $100, it opens up Treasuries to the
smaller investors thinking this is a good deal".
To this, he adds True Mogambo Cynicism (TMC) when
he says, "but if it was such a good deal, the big
boys would have fought tooth and nail to keep it
at $1,000 per Treasury to keep the 'good deal' for
themselves."
He asks, "Could it be that
the foreign investors have become so fed up with
Treasury's low interest rates after inflation is
factored in, that foreigners are avoiding future
sales of Treasuries in the near-to-long-term
future?" Since I have no idea, I say, "Well, the
money has to come from somewhere!"
If just
won't be enough. It can never be enough. And that
is why we are doomed. Ugh.
Richard Daughty
is general partner and COO for Smith Consultant
Group, serving the financial and medical
communities, and the editor of The Mogambo Guru
economic newsletter - an avocational exercise to
heap disrespect on those who desperately deserve
it.
(Republished with permission from
The Daily
Reckoning .
Copyright 2008, The Daily Reckoning.)
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
