Sunday, April 11, 2010

Bet the Farm on a Housing "Recovery".

Pundits like Robert Schiller keep diligently explaining to the American people why the price of things may drop. Deflationists like Mike Shedlock post day after day on the parallels to the great depression. Too much debt, they say, will eventually cause the value of the US dollar to rise. Consumers are tapped out, jobless, bad sentiment, etc., etc. Ben Bernanke is the leader of the choir, reminding us at every photo op that our demise is imminent if the fed hesitates for even a moment in their valiant dollar printing defense against evil deflation. And year after year, decade after decade, the US dollar merrily spirals lower and lower in value, accelerating as we approach the event horizon of US hyperinflation.

Folks like Shedlock and Shiller just don't get it. Anyone who thinks we'll have significantly declining future prices of houses, or oil, or stocks, or bonds, or gold, copper, anything...they just don't get it. Even when Ben Bernanke dumps another load of monetary diarrhea on their heads, they don't get it. When Obama and Congress announce repeated economic "stimulus", spending money we don't have and never will, they don't get it. The US dollar is dead. Our government will never allow the dollar to increase in value vs any item that sits on the left side of our national balance sheet. Because if they did, it would be immediately apparent that America is insolvent. Our people, our banks, our states, our federal government, they're all insolvent. The only way we can continue to roll over debt is to by inflating the value of our assets to keep up with our growing liabilities, and the liabilities are on the upsloping arm of a parabola. That's why the brief price declines of 2008 were addressed using such violent means, the assets had to re-inflate before the balance sheet was tallied up.

I suppose that one could posit, for the sake of exploring all possibilities, that we could admit our mistakes and reverse course. Bernanke could come out and say, "Well, the fed has erred over the last 20 years. Our easy money policy pulled too much consumption forward and now we have to allow the economy to deflate. To encourage savings and real capital investment (not market speculation) we must let interest rates rise again. We need sound money to repair America's loss of global competitiveness." In some alternative universe, Obama might say to the American people, "We are not going to default on our international debts, not via inflation or repudiation. Instead we're going to buckle down and honor our obligations. It will require a shared sacrifice from every American. We have to consume less, much less, in order to pay down our debts, starting right now or it will never happen."

Those are things that could theoretically happen, but they won't. There has never been any indication from any politician or the federal reserve that those options are on the table. Because they're not. That's not the way politics works. Nobody ever admits to a philosophical fallacy and this change would require a reversal of everything we've been told over the last 50 years. Instead, we are reassured that the fed is resolved to fight deflation and the president is resolved to fight depression and unemployment. The actions behind those words have been consistent and unwavering.

Eventually, much sooner than the public understands, the dollar will reach that event horizon. The forces of ballooning debt service, unfunded government obligations, declining natural resources in the face of growing global demand, global trade imbalances, demographic shifts and, finally, debt monetization, will spaghettify our fiat currency in an astonishingly rapid process. That's the downside of masking cancer pain with a narcotic, when the pain finally comes it will come hard and fast and the underlying disease will be beyond remediation. The fed and the US government will be swept aside in a flood of lost confidence. And then we try to pick up the pieces and start over.

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