What If They Gave A Debt Party And Nobody Came?
Readers suggested a topic on debt and housing. “A friend was asking my advice yesterday. He has enough money to pay the balance of the mortgage on his house off. He says he owes about $75,000 and I would guess his house would now appriase around $300,000 in a nice neighborhood, but one that ended up with crazy high prices at the bubble’s peak. Several houses in the neighborhood are in foreclosure where once high earners have reduced income and can’t pay bubble era mortgages any more.”
“He works in a job that relies on government contracts and is feeling that his employer may ask him to take a paycut if they can’t replace some of the current work. Did not indicate he thought he would lose his job, but the current income in the low 100’s would probably be cut pretty dramatically.
He can’t decide whether to pay the mortgage off and have no debt or hold onto all the cash he can. My first reaction is always to pay off debt if you can, but if I were worried about my future income, I might not want to part with any cash before I had to. What would you guys do in his situation?”
One asked, “Is the fiscal cliff going to translate into something that will continue the decline of average housing prices, or did we hit the bottom in the Summer of ‘11 or ‘12. Additionally, how should I change my stock purchases because of the fiscal cliff? I personally have been selling the majority of my stocks in anticipation that I can buy them back at a bargain after the gas in the bubble leaks out after the election. I also feel the next 6 months should push down stocks since Congress and the new president is going to have a tough job on their hands in the next six months no matter what.”
One had this, “I’ve been pondering the idea of a credit system wherein nobody participates. For those old enough the remember the Vietnam ‘war’ and the public restlessness with it, there was a slogan or saying that was going around, ‘What if the gave a war, and nobody came’?”
“The United States and most of the Western World has become entranced in a multi-decade long debt bing that started to unwind when leverage overcame the ability to pay in 2008. The solutions have been to Print, Print, Print money. Give it to the Banks. Take their bad loan papers and try to provide MORE credit to support more lending, to support more Buying to ’stimulate’ economic activity.
There are still countless Debts and promises that can’t be paid. We’ve all been watching this play out for the past 5 years and trying to figure out what’s behind the Fed’s ‘door number 3.’”
“So, I’ve been pondering the War question: What if they gave a Debt Party and nobody came? I thought I was beginning to see a new brand of Frugality amongst the working population, in the sense that they see that vast Debt isn’t really vast wealth. What does this mean for the economic future of the US if this is a trend? And is this a trend? IF so, then, we won’t see people ‘competing’ for housing with $30,000 over the asking price to ‘Get In.’”
“Is it possible? Or will the FED win again, and start a debt binge to push up prices? I don’t know. I mean, the money’s almost FREE now, and still the markets are suppressed, at least housing. The Stock market is tettering. Support is becoming a ceiling. People are pulling their money OUT of stocks. It bodes for a suspicion of no-confidence in the markets and a desire to deleverage.”
“I’m on the side of Stupidity being the winner. I think the debtor’s prison isn’t near full enough and American’s can’t wait to get in line. But the actions of the markets are similar to the polls of the elections, a draw. Are we going to buy a debt binge, or are we going for austerity and paying down debt as a national trend? I’m a tightwad. A saver. I want austerity. Will I get it?”
A reply, “If everyone chooses austerity, it will be a disaster for everyone.”
To which was said, “Not really. It will be a disaster for those without any real skills. I think the hype up in jobs relating to supply chain - a.k.a the middle men in anything and everything that do the talking and take a cut: from shipping, to finance need to be rebalanced. The heady 2005-2007 years contributed heavily to the REIT fields. We have still not re-balanced.”
“Next year there will be more pain in these professions and more - across the board. People will adjust - they have to. I really wonder about those sales types in all professions that are over 50 that are high income deadweights. The companies will shed these quickly.”
From The Hill. “Although the housing market has been on the mend for the past year, industry experts now say that the sector has finally turned the corner, reaching deeper into harder hit areas and creating the expectation that the pace of the recovery will accelerate over the next several years. One reason for the recent surge in housing activity may be due to the Federal Reserve. The central bank announced in September it was embarking on a third round of ‘quantitative easing,’ in which it will buy up $40 billion a month in bonds backed by mortgages to lower rates and borrowing costs.”
“Fed Chairman Ben Bernanke made clear that the aim is to get the housing market back on track and that it will continue the purchases until it is satisfied with the strength of the recovery and the improvement in the labor market — and then it will buy just a bit more to make sure. ‘Our mortgage-backed securities purchases ought to drive down mortgage rates, and put downward pressure on mortgage rates, and create more demand for homes and more refinancing,’ he said.”
“‘The recovery is only breaking out this year,’ said Lawrence Yun, chief economist at the National Association of Realtors, who also pointed out that while there may be some people feeling ’subconsciously’ better about the economy as housing turns around, there are plenty of others still grappling with foreclosures or with home loans that lost value when the bubble burst. ‘In some place, it may take 10 or 15 years to fully recover the value,’ he said.”
From Reuters. “The monetary and fiscal policies in the United States are creating enormous risks and the Federal Reserve’s actions in particular are now harming the economy, influential hedge fund manager David Einhorn said on Thursday. The founder of Greenlight Capital repeated his criticism of the Fed’s very easy monetary policy, arguing at a conference that it now has ‘negative returns.’ The Fed’s policy easing is ’slowing down our recovery’ by ‘denying individuals interest on savings,” which is driving down consumption and hurting the economy, Einhorn argued at a conference hosted by The Economist magazine.”
“We’ve actually passed the point where the incremental easing of the Federal Reserve policy actually acts as a headwind for the economy and it’s actually slowing down our recovery,’ Einhorn said. ‘I’m alarmed by what I consider to be the reflexive group-think of the leaders, which is, if we want a stronger economy we have to accommodate’ with lower rates and more QE.”
“Einhorn added that, if the U.S. wants ‘more jobs, more consumption and more growth, we are way better off doing the opposite of current monetary policy.’”
I would like to propose an “answer” to this “conundrum”.
Think in terms of Game Theory.
Who wins? Who loses?
The winners are the bond-holders (*). They get coupons each month sent to them by Mom & Pop Midwest Middle-Class.
The losers are the debt-pawners.
Does anyone in their real mind believe that the Fed is on the side of the debt-pawners?
Ergo, bet on the side of the winning class. It really is that simple.
(*) It’s a little more complex than that. The Fed doesn’t really pick winners because share-holders also accrue coupons in the form of retained earnings. However, the price of shares on the secondary market may or may not reflect value. But they do influence the price of ALL financial assets via your basic discounting logic.
The winner in a massive deflation may be he who loses the least. Bond holders only survive if nothing breaks. Timing the collapse of the Ponzi game could be hazardous, as could thinking you can time it better than everyone else.
The winner in ALL deflationary times is the one who loses the least!
And this is a deflationary time, make no mistake.
That pretty much sums up the advice one of the HBB’s long-ago posters offered (fellow who called himself Hoz…).
He died, you know.
Great bloke! Never got to have beers with him in Chicago. Bad timing and all that.
I miss him (along with Olygal.)
Yes, buy what China buys….[until they don't].
I suppose I did disagree with him on that.
However he was right (in a narrow technical sense.) It’s the trader’s mentality not that of an investor.
Quite correct in its own way.
“Yes, buy what China buys….[until they don't].”
I tried a variation on that: Buy what the Fed buys…[real estate sector assets].
I’m a third of his age (or less) but I did agree with him on the extreme desirability of Ann Margret in Bye Bye Birdie.
“And this is a deflationary time, make no mistake.”
+1 And that runway foam is going to cost my kids and their kids a bundle!
China’s going down, kiddos!
Hint: It’s always the debtee that gets gobsmacked (e.g. US in 1930’s) never ever the debtor. They always walk proud. Obvious why.
Obvious why.
Yeah… Cause they don’t pay. And their balance sheet improves.
Not to mention the improved cash flow…
“He can’t decide whether to pay the mortgage off and have no debt or hold onto all the cash he can. My first reaction is always to pay off debt if you can, but if I were worried about my future income, I might not want to part with any cash before I had to. What would you guys do in his situation?”
Hang on to your cash.
….and sell the house.
This guy likely also “needs” a good credit rating if he is earning six figures as a government contractor; a security clearance may also be at stake here too. That said, I would pay ahead about six months on that mortgage, and continue with the monthly payments keeping the six month buffer. Then I’d get that house sold, ASAP, to avoid being pulled-down by the neighbors.
“Einhorn added that, if the U.S. wants ‘more jobs, more consumption and more growth, we are way better off doing the opposite of current monetary policy.’”
I wonder what the Fed’s PR staff will cook up to refute this viewpoint?
More from Einhorn:
‘Lower rates drive up the cost of commodities: oil and food. And money that is spent on oil is sent out of the country to the Mideast and it doesn’t help, and takes out income from people’s pockets that could otherwise be spent on other goods. The second is that not being able to earn a safe return on savings, is causing people to hoard savings rather than consume. In other words if I know I am going to earn 3% in the bank I can spend that income and I can have visibility towards that, but if I know I’m going to earn zero in the bank, in order to figure out how much I need to save for retirement I need to save a much bigger number. Which means I can’t spend much now, I need to save more now, to build up those savings for retirement. If I am already retired and I am on fixed income, my income has now really gone down and I have to hoard money so I can spread it out thinner over a longer part of my life. So by denying individuals savings or interest on income on their savings, it is causing hoarding which is driving down consumption which is hurting the economy.’
‘In terms of the savings, I don’t think it’s a zero sum, because it’s a multiplier on the behavior. It’s not just the income I am not receiving now. It is the income I don’t expect to receive in the future as well. Now we are years years into [ZIRP] with a promise of at least three more, so that’s seven years, and you are getting a change in behavior on a multiplied basis.’
‘It seems as if nothing will stop the money printing, and Chairman Bernanke in fact assures us that it will continue even after the economic recovery strengthens. Specifically, he says, “Even after the economy starts to recover more quickly, even after the unemployment rate begins to move down more decisively, we’re not going to rush to begin to tighten policy.” Apparently, anything less than a $40 billion per month subscription order for MBS is now considered ‘tightening’. He’s letting us know that what once looked like a purchasing spree of unimaginable proportions is now just the monthly budget.’
‘Chairman Bernanke concedes that this policy hurts savers, then offers some verbal sleight-of-hand worthy of a three-card monte hustle: He says the savers are helped by low rates because low rates support higher asset values and promote a healthy and growing economy. He then goes on to say that because savers benefit from a healthy and growing economy, we must therefore have an accommodative policy. This in turn begs the question: Does an accommodative policy promote a healthy economy? Chairman Bernanke argues that higher asset values create a wealth effect, which he again describes, “if people feel that their financial situation is better because their 401(k) looks better or for whatever reason, their house is worth more, they are more willing to go out and spend.’
‘We have just spent 15 years learning that a policy of creating asset bubbles is a bad idea, so it is hard to imagine why the Fed wants to create another one. But perhaps the more basic question is: How fruitful is the wealth effect? Is the additional spending that these volatile paper profits are intended to induce overwhelmed by the lost consumption of the many savers who are deprived of steady, recurring interest income? We have asked several well-known economists who publicly support the Fed’s policy and found that they don’t have good answers.’
‘We have just spent 15 years learning that a policy of creating asset bubbles is a bad idea, so it is hard to imagine why the Fed wants to create another one.’
Desperation?
Lack of imagination?
Assumption that repeating the same failed policy yet again might work this time?
“It’s not just the income I am not receiving now, it’s the income I don’t expect to receive in the future as well.”
He’s talking about the dismal return on savings, the dismal return on the float. He’s talking about individuals but he could also be talking about others as well - say insurance companies, or those who manage pension funds.
If promises of pay-outs that were made in the high-return days cannot be kept because the returns are now low and are expected to remain low then just what should one reasonably expect to happen to these promises?
If a retiree is distraught now because his savings is not earning anything think of how he will feel if/when his pension is cut. Two out of the three legs of his retirement funding will be kicked away. The only leg that will be left standing of the three will be Social Security.
Luckily Social Security is not threatened in any way.
Oh, wait!
‘what should one reasonably expect to happen to these promises’
This is possibly the most colossal mistake in the history of central banking. We have an ivory tower bunch of ‘technocrats’ as they call themselves, betting that a reflated housing and stock bubble will save the economy. And if they are wrong, millions will have an unfunded retirement during a prolonged recession. If they are right, the bubbles do what they did in Canada, Australia and China. Either way, it will end very badly.
Bernanke speaks like an abusive psychopath. We should enjoy our pain and destruction, because it for our own good…
Obama’s war on savers is working.
And obama is winning.
But you can still go ahead and buy a house or stocks to make a decent return.
And it is really safe. Housing always goes up.
“Obama’s war on savers is working.”
He’s part of the problem, but methinks you’re missing the larger wealth transfer picture painted pretty well in this article.
Speaking of “wealth transfer”, I turned on the Fox channel this morning while still rubbing my eyes to awaken. I caught the end of a finance and taxes story with a take-away that the “welfare” payouts from government now amount to $60,000 per household.
Could that be right?
It doesn’t sound right, so let’s try a little math just with the 1.4 Trillion or so that Obama is adding to the deficit (without passing a budget).
The latest info. I have is about 8% of the population gets “welfare” of some form. The number I got was about 29 million.
If my math is right, that’s 1400 Billion divided by 29 million, or about $48,000 per recipient. So that may work out okay. I guess if you have a 3 person, on average household, so it’s only about 10 million “families”, then you don’t really need $48,000 per person, so the 1.4 Trillion in extra annual spending can be shuffled to other places, like wars and stuff like that. Maybe a few solar energy projects.
I didn’t see how that got their numbers, so missed the gist of the story. I’m still thinking this was an error in my still sleeping brain. But a TRILLION dollars is a lot of money.
3 zeros gets a thousand
6 zeros gets a million.
9 zeros gets a Billion.
12 zeros, that’s right, 12 zeroes. So, 1400 Billion is correct.
That’s right then, you can give 29 Million people $48,000 dollars for the extra.
I didn’t get any. How about you?
Is part of the 23 million not working a part of the 29 million on welfare? Or is the 23 million “unemployed” just an outlier of the 29 million that regularly live off the government?
Where do I sign up?
I just can’t see how those numbers work, so perhaps the story was…the average income of families getting some form of welfare is $60,000, with the goverment transfer payments leading to the Total.
That could possible work, but it makes being “poor” a really comfortable place.
“If my math is right, that’s 1400 Billion divided by 29 million, or about $48,000 per recipient.”
Does that include the value of the mortgage interest deduction to wealthy (1%) households (aka Welfare for the Wealthy)?
KENNETH HARNEY NATION’S HOUSING
STAKES ARE HIGH FOR MORTGAGE DEDUCTION
By Union-Tribune
12:01 a.m., Oct. 28, 2012
Limiting the homeowner mortgage interest deduction came up in two of the presidential debates, but specifics about who would be affected and how much they might lose in tax benefits were minimal. To put some rough numbers on the issue, here’s a quick primer on the mortgage interest deduction and related housing write-offs.
How big are they? Very big — which is why they have become such a tempting revenue-raising target for candidates seeking to reduce the massive federal deficit. According to estimates from the congressional Joint Committee on Taxation, the mortgage interest deduction alone will “cost” the federal government $484.1 billion between fiscal 2010 and 2014 — $98.5 billion in 2013 and $106.8 billion in 2014. Write-offs by homeowners of local and state property taxes account for another $120.9 billion during the same five-year period.
Keep in mind: What “costs” the federal government also represents significant tax savings for the people who take the deductions, in this case the millions of homeowners who save thousands of dollars a year that they are not paying to the IRS. In fact, according to a new analysis by Jed Kolko, chief economist for the real estate information site Trulia.com, among those taxpayers who itemize on their federal returns, 49 percent of total write-offs are housing-related — primarily mortgage interest and local property taxes. For homeowners as a group, this is a big deal.
But since only about one-third of all taxpayers itemize on their returns — the rest opt for the standard deductions — who’s really getting these tax savings? As you might guess, people who have higher incomes are more likely to itemize and claim mortgage interest and other housing deductions. Citing the latest data on the subject, published by the IRS in 2009, Kolko found that while just 15 percent of households with incomes below $50,000 took itemized deductions, 65 percent of those with incomes between $50,000 and $200,000 did. Just about everybody with income above $200,000 — 96 percent — itemized on their returns.
…
You are getting your hating all mixed up. The 1% do not need the MID. It supports the inflated price of housing for the middle class.
“So by denying individuals savings or interest on income on their savings, it is causing hoarding which is driving down consumption which is hurting the economy.”
Anyone who can’t see this (BB et al.) has no common sense whatsoever!
Ha! Pushing on a string closely resembles shooting yourself in the foot…
At least The Economist writers seem to get the picture.
How long will it take the Fed to acknowledge and deal with the situation?
Stockmarkets
Black marks from Black Monday
A big market crash happened 25 years ago this week. The wrong lessons were taken from it
Oct 20th 2012
TWENTY-FIVE years ago, on October 19th 1987, global stockmarkets suddenly, and unexpectedly, collapsed on what instantly became known as Black Monday. The Dow Jones Industrial Average fell by almost 23% in a single session, still a record decline. At the time analysts rushed to look backwards. Parallels with the 1929 crash, which preceded the Great Depression, were immediately made. In fact they should have been looking forward. Three of the main reasons why the crunch happened in 2007 date back to 1987.
The biggest mistake was to do with monetary policy. Central banks around the world responded quickly to the crash, some cutting interest rates, others pumping money into the system. “The Federal Reserve, consistent with its responsibilities as the nation’s central bank, affirmed today its readiness to serve as a source of liquidity to support the economic and financial system,” said Alan Greenspan, recently appointed as head of the Fed. Calming a fraught financial system made sense at the time, but it introduced the idea of the “Greenspan put”, the notion that central banks would always intervene to support the markets when they fell sharply.
This was compounded by Mr Greenspan taking the opposite position when it came to asset bubbles: that even when prices were sky-high, it was not the job of central banks to outguess markets by trying to bring them back to earth.
…
Put in its place
With trading, then, investors (and their regulators) simply failed to learn anything, and made the same mistake again. But the other two errors sprang more from policymakers opting for a solution that itself created problems. Perhaps the biggest conclusion of all is that any extended period of rapidly rising prices is an indication of a bubble—and that sadly there is no painless way to clean up the mess after the bubble pops.
Perhaps the biggest conclusion of all is that any extended period of rapidly rising prices is an indication of a bubble—and that sadly there is no painless way to clean up the mess after the bubble pops……………….
And yet, the FED keeps trying to intervene in the markets and “Fix” them. This requires more Debt. We are having a battle between government spending and individuals trying to deleverage and pay down all the back-loaded debts.
To “save” the economy, you need to get out there and spend, mister, whether you have any money or not.
How’s that supposed to work?
‘To “save” the economy, you need to get out there and spend, mister, whether you have any money or not.
How’s that supposed to work?’
Refer to your other post (on welfare payments) for the answer.
I’ve been to the mall. People have no self control. Debt will be with use forever.
When banks, credit card companies, Wall Street Houses, General Motors, etc. have to EAT THEIR LOSSES instead of selling them to government at par - the debt game will end.
There will always be money in pimping debt, the companies just need to manage risk properly.
“When banks, credit card companies, Wall Street Houses, General Motors, etc. have to EAT THEIR LOSSES instead of selling them to government at par - the debt game will end.”
Yep…no more tax payer-funded programs to keep FB’s in “their” homes.
The SF Chronicle ran an article today about the “Keep Your Home California” program with up to $100K principal reduction for financially stressed borrowers. Financed in part by the US Treasury’s Hardest Hit Fund, funded of course by all of us.
funded of course by all of us.
“…funded of course by all of us.”
In what universe is it fair to force renters to pony up for real estate investor losses?
Our universe. The one with the money lenders at the helm.
And once you figure out which universe you reside in (read first post above), such matters of “fairness” cease to be interesting.
The renters are winners. That’s all that matters.
Grow some fine dangling objects, ladies and gentlemen!
Banana,
That is effective. Why? Because it’s truthful without the rhetoric of the duopoly.
Thank you.
“Unprecedented Opportunity”
“Stable Investment”
It will all come crashing down when the bailouts and QE policies end.
————————————————-
Hamptons Home Prices Fall as Buyers Seek Cheaper Retreats
Oshrat Carmiel - Oct 25, 2012 - Bloomberg
Home prices in New York’s Hamptons, the Long Island oceanside retreat for summering Manhattanites, declined in the third quarter as mortgage rates near record lows focused buyer attention on cheaper properties.
The median price of homes that sold in the period fell 10 percent from a year earlier to $765,000, according to a report today by New York appraiser Miller Samuel Inc. and broker Prudential Douglas Elliman Real Estate. In the Hamptons and North Fork, the median for luxury properties, defined as the top 10 percent of all sales, fell 23 percent to $4.23 million. About 63 percent of luxury deals were for properties under $5 million.
Property prices that are 30 percent below their 2007 peak have drawn new buyers to the second-home market in the Hamptons, according to Miller. Homes priced at less than $1 million, which draw buyers who rely on mortgages, accounted for 70 percent of sales in the quarter as borrowing costs approached all-time lows, he said.
“If you look at monthly payments on mortgages, the prices have become very competitive with rental prices,” said Terry Thompson, a Southampton-based broker with Prudential Douglas Elliman. “Low interest rates and lower-priced homes are giving renters an unprecedented opportunity to own versus rent.”
“It will all come crashing down when the bailouts and QE policies end.”
Also when Romney gets elected and ends the MID for the wealthy.
He did say he was going to do that, didn’t he?
“It will all come crashing down when the bailouts and QE policies end.”
I’m not so sure. Lots of folks think it’s perfectly okay, it’s normal to have 50% of their income go to the roof over their head (housing’s a great investment!), to take 5+ years to pay off a vehicle (or better yet, lease and never pay it off!), graduate with massive amounts of student debt, etc.
I just turned 50, and this certainly isn’t how I was raised. But outside this blog, I’m in the minority on the debt thing.
And even with so many friends underwater on houses, I know plenty who are looking to buy…you know, because interest rates are at a generational low.
Americans will borrow every penny and then some.
Anyone expecting frugality is living in a dream world. It will be forced upon them at gunpoint but at the slightest chance they will go out and borrow all that they can.
It’s not even very American. Give access to tons of debt to any human and they would do the same. Borrow now then raise your hands and say you can’t pay it back. What’s not to like?
Debtor’s prison. But that’s obsolete, right?
Not for student debt.
Still very much alive, bro!
The student loan “business” has become a sham designed to make debt slaves out of the maximum number of people.
Colleges charge outrageous amounts of money because they know thew government is going to step right up and “help” with easy money. There is no way for the average person to afford to pay for college. They take out loans. They have parent and grandparents co-sign the loans.
Student loans NEVER, EVER go away. They can not be discharged in bankruptcy. The US government will hound you until the day you die to collect - to even taking money from your social security checks.
———————————–
New Peril for Parents: Their Kids’ Student Loans
Wall Street Journal | 10/26/2012 | Kelly Greene
Cyndee Marcoux already was stretched thin, thanks to the $80,000 in student loans she racked up after getting divorced and going back to school a decade ago. Her breaking point came in 2010, when her daughter defaulted on student-loan payments of her own.
That’s because Ms. Marcoux, a 53-year-old library administrator in Seekonk, Mass., co-signed for about $55,000 of her daughter’s loans. When the daughter was unable to keep making payments, Ms. Marcoux was on the hook—a burden that forced her to reshuffle her entire life. To scrape up the extra $550 a month she owed, she sold her house, then took a second job registering emergency-room patients on the weekend overnight shift. “You work your whole life and never pay a bill late,” says Ms. Marcoux. “You don’t ever think your kid isn’t going to pay.”
After years of facing all sorts of financial pressures they never expected, from adult kids moving back home to their own parents needing help to retire, empty nest parents are struggling with a new headache. Thinking it was only natural to want to help children and grandchildren, many co-signed student loans. Now, they’re becoming the latest victims of the nation’s mounting problem with student-loan debt, which surpassed the $1 trillion mark last year.
At a growing rate, young graduates who are either out of work or who didn’t land high-paying jobs find themselves unable to pay their loans. When primary borrowers stop paying, co-signers are expected to pick up the tab—and soon find themselves fending off debt collectors. “People are confused about what it means to co-sign, and their ongoing obligation,” says Deanne Loonin, director of the Student Loan Borrower Assistance Project at the National Consumer Law Center, a consumer-advocacy group in Boston. “When they come to understand that they are equally liable,
“You don’t ever think your kid isn’t going to pay.”
“People are confused about what it means to co-sign, and their ongoing obligation,”
As WE ALL learn sooner or later….. Ignorance is (eventually) expensive.
…and stupid SHOULD hurt.
I’m proud to say that our son will graduate from college next semester with zero dollars owed on college loans.
I think that’s very bad. You, sir, are not helping “stimulate” the economy with further debt purchases. Your job is to go into DEBT to provide a regular skim of “earnings” for Bankster operations.
THAT is what America relies on for it’s daily operations: Debt.
You are Not help here.
So, stop this ridiculous money-grubbing attitude. Stop this frugality and go out their and Borrow!!!
Love a Bankster. Save America.
FWIW, I see that capital goods orders are shrinking fast. This is an extension of the trend that I first noticed in July/Aug. The demand for goods over 1 mil is just not there to sustain existing employment. There will be layoffs pretty soon in these big ticket item manufacturers.
Further the supply chain situation is getting worse, the low cost sourcing is there, but without the quality. A lot of capex projects were planned to excess capacity and this capacity is waiting to be unleashed - to what end I cannot fathom - hence the slow down in demand.
And this with 3 years of near zero interest rates. One might think that this situation would signal something to the central bank. But as Einhorn points out, the zero rate policy is making things worse, not better.
A similar situation is housing rents. Almost every day the media will reports rents are up! How is that in a recession? Obviously there are some external factors at work. Besides, this isn’t an economic positive like the media would have us believe.
What about Bernanke’s goal of boosting the economy through house prices? Has one single reporter asked about the housing bubble in regards to his goal? It’s almost a forgotten topic. Now, we are told, the housing crisis was the result of bad lending. Prices don’t enter into it. So the Fed feels free to try and engineer a return of these prices; prices that were commonly called unsustainable just a couple of years back.
The 3 years of low interest brought forward demand in capital goods just like it did with housing. The story that is not told in the media is that manufacturers raised prices on capital goods much faster than during 2003-2006. Look at the amount of activity in the natural gas business - the raw product prices are at rock bottom. However, equipment costs are escalating so much so that natural gas companies are not making money. This is what low interest does.
The increase in price of gas and price of ag produce is a direct result of this increase in capital goods (for expansion projects & replacement machinery) and increase in repair cost to existing equipment.
Right now most of the these vendors are not sinking any money into new capex projects since have capacity available. They want to manage the prices that consumers are accustomed to paying. Which is why I think california will get used to $5 gas soon.
The thing that the fed is missing is that even if housing stops its slide, there is no way the they can stop the capital goods industry from shrinking and consolidating, thus losing high paying jobs in the process. And note that the good old days of housing paying a solid wage are gone forever.
“And note that the good old days of housing paying a solid wage are gone forever.”
+1 Agreed. The shadow inventory’s backlog means new housing starts will be anemic for many years.
“A lot of capex projects were planned to excess capacity… slow down in demand.”
Excess production capacity + falling demand = deflation, unless the central bank steps up to support prices at levels above what the market will bear.
The capex goods are long lead time items - 60 to 80 weeks. If the backlog is not there or dropping off as seen now, something has to give. This is not a matter of fed stepping in and saving the day.
“The capex goods are long lead time items - 60 to 80 weeks.”
= “time to build” effect, and why real investment intrinsically involves gambling, unless you are lucky enough to enjoy federal guarantees…
The thing that most economists (and people, generally) overlook is that there is excess capacity everywhere in the world that makes/produces something. This capacity was dragged forward because “we can”. i.e improvements in productivity via computers, people working long hours etc.
The result is that prices of almost every capital good has increased by over 20% without increasing the cost of labor. (In a good year, labor got raises of 1 to 2% in these industries). There is no competition in these industries since the capital cost to build something is not just prohibitive despite the low borrowing costs. Plus this would mean poaching staff from established companies thereby raising the operating costs…
The backlog of orders are dwindling and so capital goods manufactures are raising prices to match their overheads. Like I said something has to give.
‘there is excess capacity everywhere in the world’
About 9 years ago I lived near the Mexican border. I’d pick up these Spanish language papers. One day I read about 700 maquilladoras being closed and the work sent to China. Basically the WTO had kicked in and Chinese workers were paid less. It’s been a global race to the bottom. And remember there were factories closed in the US prior to the Mexican border boom. For every working factory, there are probably 2 sitting idle somewhere.
Vacant homes = excess (living space) capacity
Good stuff.
“He can’t decide whether to pay the mortgage off and have no debt or hold onto all the cash he can. My first reaction is always to pay off debt if you can, but if I were worried about my future income, I might not want to part with any cash before I had to. What would you guys do in his situation?”
Depends on the interest rate of the loan. If it’s over 5%, then he wouldn’t get a better yield elsewhere (especially one guaranteed like this) so it would make sense to pay it off. Furthermore, at a $75K balance, unless he has high property taxes and a state income tax, he probably doesn’t have enough to itemize deductions on his federal income tax return and so loses out on that loophole as well.
My advice would be to pay off the $75K regardless of the interest rate and sign up for a $100K home equity line of credit. This has two significant advantages:
1) He would qualify very easily since the HELOC would be in first position with no other lien on the property. HELOC lenders like that.
2) He would maintain liquidity to meet unexpected expenses (provided he doesn’t abuse it), and still maintain a high level of equity in the property. And if he doesn’t use it, there’s no risk at all!
A brand new poster and he talks straight up his ass…
Maybe the rebbe’s just shmeggegie?
Right at you.