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The Masked Tulip

Beyond Keynes To Inflation

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Cleaning up the first bubble required dropping interest rates to virtually nothing and creating an even bigger bubble in housing. The real estate bubble was far more powerful for spending because of the asset-backed and mortgaged-backed debt markets, which allowed for the virtual unlimited creation of new mortgage credit and money. Moreover, it was seductive telling a potential homeowner to feel comfortable about spending a lot of money to buy a home because property values were always going up. By 2004, it was time to help another sitting President to get re-elected. The housing market was booming and home equity extraction added about $800 billion (a year) to spending, even though this spending left a massive trail of debt.

In looking back now, you can’t help but notice how the economic model has changed. For decades, America had an economic model built around recycling savings into investment. In a few short years, those savings have simply vanished and our society has become comfortably cavalier about borrowing far more than they earn.

The first bubble in stocks taught Americans how not to save. The second bubble in housing taught them how to live off their house and spend even more than they make. From a macro-economic perspective, our country no longer has savings to recycle as part of a stimulus package.

What about the housing bubble? Mr. Bernanke may be left with only one course of action: Given housing price inflation of 50 to 100 percent in some areas over the past few years, the Fed’s goal for the next several years will be how to get inflation up without crushing housing prices because of rising interest rates. A housing price crash could severely affect the financial markets in our country and take the economic system down with it. Mr. Bernanke has spent his entire adult life studying to prevent this from happening and I suspect he will do everything in his power to keep inflation going. When everything else is inflated, housing prices (at their current levels) won’t appear to be so over-valued. Getting money into the hands of consumers who can’t tap their savings (because most Americans don’t have any), or use their credit cards (because they’re over-extended - welcome to the new bankruptcy law), or draw cash from the home equity loan ATM installed on the side of their house (housing prices are stagnant or falling), will be a real challenge. To get money into the consumer’s hands, the Fed will have to print more money and encourage the creation of more debt. Mr. Bernanke’s illusion about dropping “money from helicopters” may actually come to pass as a direct way to distribute money to the consumer to service old debts and keep spending alive. The new economic model should be “inflate, or face deflationary collapse”.


Edited by The Masked Tulip

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"From an historical economic perspective, we are clearly in the middle of a very interesting time."

"For 2006 and beyond, I expect the inflationary war on savers will continue, and I just don’t see how financial assets – stocks and bonds – will keep up. The preservation of real wealth at a time when the Federal Reserve will be dedicated to building debt, money and inflation, is not going to be an easy task"

Yep he's right on both counts.

Although I wouldn't describe these times as 'interesting' more like 'sphincter loosening'.

Though perhaps a ray of light is that the decline of the $ relative to other currencies ( and in the UK the falling £ ) will offer investors with holdings overseas a currency dervied appreciation in their holdings in $ or £ terms.

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Although I wouldn't describe these times as 'interesting' more like 'sphincter loosening'.


Spot on, but this image is going to be a hard one to get out of my mind. :blink::lol:

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  • 337 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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