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Spectre Of The Double-Dip Haunts Uneasy Us

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http://www.guardian.co.uk/business/2010/jul/25/us-economy-bernanke-recession-fears

A crippled housing market. Stubbornly high levels of unemployment. Falling consumer confidence. Slower growth in industrial production. No wonder Ben Bernanke, the world's most powerful central banker, appeared a worried man in his testimony to Congress about the state of the US economy last week.

Bernanke's most striking observation was that the prospects for America were "unusually uncertain" – central-bank-speak for concern at the highest levels that the US was at risk of tipping back into a double-dip recession.

The Fed's critics, such as Nobel prizewinning economist Paul Krugman, say it is time for Bernanke to do more than express concern. They point to a drying up of bank credit, 10 million lost jobs in the past three years and a mounting toll of foreclosures from Las Vegas to Detroit. They also warn that America has been here before: in 1937, when a pick-up in activity from the depths of the Great Depression was cut short by a premature tightening of policy.

The Fed chairman has no desire to go down in history as being responsible for a double-dip recession, and stressed in his testimony on Capitol Hill that there were contingency plans in the event of a second leg to the downturn, which began with the crisis in global financial markets almost three years ago. "We are ready to act and we will act," he said.

Bernanke's attempt to show that the Fed has a Plan B represented a marked change in emphasis. Until recently, the talk was of when and how policymakers in Washington would remove the stimulus that helped revive the economy after its worst postwar downturn. Plan A involved cutting short-term interest rates as low as they would go, allowing the US budget deficit to expand to record peacetime levels and giving blanket guarantees to the banking system.

Cheap money, tax breaks, higher public spending and bank bailouts acted like a massive shot of adrenaline and appeared to do the trick. The US economy has traditionally had good self-healing properties, and after plunging into recession in late 2008 and early 2009 it returned to growth in the middle of last year. In the final quarter of 2009, it grew by 1.4%. But growth since the start of 2010 has dropped back, and leading indicators point to even weaker activity in the second half of the year.

There are those who think the US is simply going through a temporary soft patch and point to the strength of company balance sheets as a sign that higher investment will power recovery. Keith Wade, chief economist at Schroders, says there has been a "significant improvement in the corporate sector's finances". He adds: "US business investment rose at a double-digit rate in the first half of 2010 and should match this over the next six months."

The possibility of an investment-led recovery is not the only reason to be cheerful cited by bulls on Wall Street. They argue growth is being supported by cheap money, with short-term interest rates negative once adjusted for inflation. Companies are lean, they say, after getting rid of unwanted stocks.

This fails to convince the pessimists. They point out that despite the colossal stimulus, recovery has been weak by American standards. In the past, the labour market has recovered quickly in the early stages of upswings, with millions of new jobs created.

Bernanke warned last week that growth was not strong enough to repair the damage caused to the labour market by the recession, which has saddled the country with an official unemployment rate of 9.5%. Recent data shows that an increasing number of Americans have withdrawn from the labour market after giving up hope of finding a job. Others are working part-time even though they would like full-time employment. Once those groups are accounted for, about one in six Americans of working age is unemployed or underemployed. What's more, many Americans still in work are living in houses worth less than they paid for them. The days when consumers used their homes as cashpoints, borrowing against rising property values, are long over.

Dhaval Joshi at RAB Capital believes it is not feasible for the US economy to return to anything like "business as usual" when it has 4m more homes than it needs, when one in four homes is in negative equity, and when there is an overhang of mortgage debt worth an estimated $4tn – 30% of national output.

Over the years, Joshi says, total mortgage debt in the US has been equivalent to 40% of the value of the housing stock. In 1990, $2.5tn of mortgages supported $6tn of housing collateral, while at the peak of the boom in 2006 there was $10tn of mortgage debt against housing valued at $23tn. "But since then, the US housing stock's value has slumped to $16tn, which means the amount of mortgage lending supportable by the collateral [should have] plunged to $6tn. However, actual mortgage debt has remained at $10tn – $4tn too high.

"The fact that mortgage debt has barely declined suggests that relatively few homeowners have defaulted on their mortgages or paid off debt yet. Instead, a quarter of all borrowers are sitting on negative equity. That's just as well – because were mortgage debt to shrink by even half of $4tn [for example, if homeowners crystallised the debt by defaulting], the US economy would slump."

Stubbornly high unemployment and the bombed-out state of the housing market help to explain why consumer confidence has nose-dived recently. Those who fear a double dip warn that companies, even if awash with cash, are not going to invest unless they can expect strong demand for their products.

Graham Turner of GFC Economics says the notion that a healthy corporate sector will prompt a virtuous circle of rising employment and thus even higher profits is fundamentally flawed. "It overlooks the reason why the credit crunch occurred in the first place. It was not an accident born of poor regulation within the financial sector. The steady downward trend in wages as a share of GDP, reflected in the stagnation of the median wage, left a vacuum, which was filled by strong credit growth."

All this leaves Bernanke in something of a quandary. As he explained it last week, Plan B looks very much like a rehash of Plan A – a commitment to keep interest rates low, the possibility of more quantitative easing and attempts to discourage banks from hoarding cash.

"We don't expect this slowdown to develop into a second recession," says Paul Ashworth of Capital Economics. "But if it does, policymakers may struggle to alleviate it when the scope and support for further fiscal stimulus appears limited."

Americans can expect the Fed to leave interest rates at current emergency levels for some time to come. But Stephen Lewis at Monument Securities says cheap money alone is unlikely to turn the economy around soon. "On the balance of probabilities it seems that, in at least one quarter in the next three, US GDP will record a quarter-on-quarter decline. Such a development would excite talk of a 'double-dip' recession. But it should, more accurately, be interpreted as evidence of an economy in depression."

It seems hard to see anything other than a double dip, although to be fair the US still hasn't officially come out of recession yet. Perhaps Bernanke will avoid his place in history because the recession hasn't ended yet, therefore there will be no double dip?

The cornerstone of the fiat system is trust, that trust is facing total collapse.

Still it's all contained and it's all happy clappy news, rejoice and don't think. Just accept the good vibes and party on...

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Paul Volcker caused a double dip recession, and a severe one at that, back in 1982 and is now seen as a hero for slaying the inflation beast.

If Bernanke let the natural deflationary course happen and purged the debt out of the system maybe he could have the same reputation in 30 years time. He'll never let it happen of course - just passing the buck to another generation.

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The US is a good few steps ahead of the UK along its path to hell. Since we have a very similar non-productive economy then whatever they suffer we'll be experiencing in around 6-12 months time. The main difference seems to be with regard to the hpc, we have a lot of ground to make up on this, a real lot of ground.

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The US is a good few steps ahead of the UK along its path to hell. Since we have a very similar non-productive economy then whatever they suffer we'll be experiencing in around 6-12 months time. The main difference seems to be with regard to the hpc, we have a lot of ground to make up on this, a real lot of ground.

These kind of numbers always cheer me up:

Median house price in Las Vegas fell from $297,700 in 2007 to $137,000 now.

In Los Angeles fell from $593,600 in 2007 to $331,400 now.

In Orlando fell from $261,300 to $131,600.

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These kind of numbers always cheer me up:

Median house price in Las Vegas fell from $297,700 in 2007 to $137,000 now.

In Los Angeles fell from $593,600 in 2007 to $331,400 now.

In Orlando fell from $261,300 to $131,600.

Yet it has not even begun here... Perhaps we all should move to the US?

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These kind of numbers always cheer me up:

Median house price in Las Vegas fell from $297,700 in 2007 to $137,000 now.

In Los Angeles fell from $593,600 in 2007 to $331,400 now.

In Orlando fell from $261,300 to $131,600.

The UK so desperately needs falls like these to make houses affordable again. It really cheeses me off when I look at what I can buy in the US in comparison to what I can buy here in the UK. To be honest it feels like someone is having a laugh with me, only I'm not finding it funny.

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Perhaps the cost of the asset contra what you can afford or the net yield is a more relevant number set than the "high" to "now" price.

The median rent in Orlando was $946 a month in 2008 so the rental yield will be at least 8.6%. I say at least as those rents are primarily for apartments but the $130,000 median price will be mainly houses.

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I suspect rents haven't fallen that much in Orlando.

I don't care for the place, too much froth and shysterism to say nothing of hurricanes and oil spills but I suspect a net rental yield (that is post expenses and local taxes but pre-federal tax exposure) of 10% is eminently achievable with merely modest asset acquisition skill.

I don't know if anyone else would agree with that?

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I suspect rents haven't fallen that much in Orlando.

I don't care for the place, too much froth and shysterism to say nothing of hurricanes and oil spills but I suspect a net rental yield (that is post expenses and local taxes but pre-federal tax exposure) of 10% is eminently achievable with merely modest asset acquisition skill.

I don't know if anyone else would agree with that?

Local property taxes can be a killer and it really depends on when your the house was assessed. If unlucky and it is based on 2007 prices then you would be looking at well over $300 a month. That will put a serious dent in your rental income.

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Can't you get that revised down at the next round of assessments off the back of a new purchase price that is unequivocal proof of current market value?

My understanding is that some counties are amenable to this and some aren't, so stick to the amenable ones.

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Yet it has not even begun here... Perhaps we all should move to the US?

There mistake was not letting Brown run the US economy. If he'd have run there economy for over a decade then the US too would have had sustainable house prices.

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Can't you get that revised down at the next round of assessments off the back of a new purchase price that is unequivocal proof of current market value?

My understanding is that some counties are amenable to this and some aren't, so stick to the amenable ones.

Sounds like you know far more about it than me. My worry would be that with the dire shape of local and state finances this option might not be available for very long.

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Which is why I don't fancy Florida, Calif, Arizona or Nevada, the states that have had the biggest drops.

Have you thought about Texas? It has about the cheapest housing in the country and has a much more diversified economy than it did in the 70s and 80s when it was all about oil.

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Have you thought about Texas? It has about the cheapest housing in the country and has a much more diversified economy than it did in the 70s and 80s when it was all about oil.

USA Today had a feature on Texas housing last month. Apparently house prices in Texas are the only place in the US where they have continued to rise. Houston in particular soaring apparently.

This was put down to the diverse sectors of oil, tech and military in the State - all booming. Texas cities are apparently having people flock to them from elsewhere in the US.

Apparently people are leaving New York for Florida but even more people are leaving Florida than coming in - mostly going to Texas, the Carolinas and the Georgias.

I have no idea whether the above is true - just what I heard a USA Today guy saying on BBC Fivelive late one night.

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USA Today had a feature on Texas housing last month. Apparently house prices in Texas are the only place in the US where they have continued to rise. Houston in particular soaring apparently.

This was put down to the diverse sectors of oil, tech and military in the State - all booming. Texas cities are apparently having people flock to them from elsewhere in the US.

Apparently people are leaving New York for Florida but even more people are leaving Florida than coming in - mostly going to Texas, the Carolinas and the Georgias.

I have no idea whether the above is true - just what I heard a USA Today guy saying on BBC Fivelive late one night.

Houston may be booming but the house prices there refuse to go up. $160,000 will get you a typical 2,200 square foot house with 4 bedrooms and 2 1/2 baths according to the Coldwell Banker Index (that looks at homes suitable for middle management types that are transferring).

Then again it has a god-awful climate and you will spend a lot of time in the car. The only way to keep prices that low is lots and lots of sprawl.

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Houston may be booming but the house prices there refuse to go up. $160,000 will get you a typical 2,200 square foot house with 4 bedrooms and 2 1/2 baths according to the Coldwell Banker Index (that looks at homes suitable for middle management types that are transferring).

Then again it has a god-awful climate and you will spend a lot of time in the car. The only way to keep prices that low is lots and lots of sprawl.

Yes, awful place Houston from what I hear. Fattest city in the World apparently. Hardly any pavements so everyon drives, rubbish public transport and hardly any green spaces.

I remember some sci-fi show from the 70s about Humans lost in an alternative World and much of it was shot around the modern buildings built in Houston IIRC? People thought they were the future but, boy, just concrete and steel is not healthy for Humans.

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  • 244 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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