Guest Post: How Increasing Inflation Could Affect Housing Prices - Correlating Mortgage Rates And Housing Prices

Tyler Durden's picture

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Gully Foyle's picture

"Given the risk of future"_____

Fill in the blank. Alien invasion, Zombie plague, Penis shrinking malt liquor...

It's like listening to psychics.

I thought the other seers were going the deflation for a long period then inflation then hyperinflation.

 

Whizbang's picture

It's a very interesting and well thought out piece, which reflects the somewhat complicated mathematics in predicting how interest rates and prices cycle. however...

1. I don't think inflation is anywhere near 5% and hasn't been for two-three years. With revolving debt plummeting and non-revolving stagnant, I don't see where it's going to come from.

2. All of your correlations are based on data leading up to 2006, when the whole shit show broke down

 

 

edwardscpa's picture

I'm hijacking the top thread.  Sorry.

There is a saying I like... it's better to be roughly right than precisely wrong.  The author's efforts, however detailed, seem to ignore the fact that anyone who is buying right now is probably trying to take advantage of 4.5% money, and is thus, "leveraged".  Focusing on real housing prices vs implied nominal rates is entirely irrelevant unless you are thinking of a cash buyer.  If the CPI doubles and rates skyrocket, but housing prices remain flat, then for argument's sake a cash buyer would show a 50% real loss in net worth (as related to housing), while a 100% financed buyer (again, for argument's sake let's say they still exist) would have no change in net worth, real or otherwise.  Further, any nominal increase in house prices will result in a real increase to the leveraged buyer's net worth.

The author's thesis is still interesting, and I would be very interested to see him revise the analysis to show nominal house prices vs interest rates and CPI, especially b/n 1970 and 1985.

Mako's picture

I have no idea what that article is. 

Inflation is dead and has been dead for 2 years.  Rates are not going up, mortgage rates are not going up.  Slow death comes to mind.

Heck who wouldn't want to loan someone at 10% on a mortgage, unfortunately you ran out of lemmings.  You can't find the amount of lemmings at sub 5% let alone 10%.  

"If there was a significant increase in inflation"

Sorry there is no inflation now and the only way you are going to get inflation is if the US consumer request the commercial banks to manufacture additional credit.  Currently credit creation is NEGATIVE at a -$808B annualized rate based on Q1 numbers.

packman's picture

Inflation is dead and has been dead for 2 years.  Rates are not going up, mortgage rates are not going up.  Slow death comes to mind.

Yes because what happens for two years always continues to infinity, right?

How in the world is the U.S. government going to conceivably not default on its debt, if we don't introduce significant inflation soon?

Mako's picture

"Yes because what happens for two years always continues to infinity, right?"

No, the collapse will continue until it's hits it's max, life is a series of cycles or waves.   Last down cycle lasted about 20-25 years or most of a generation.   This down cycle will be magnitudes larger and longer in duration.  Never said it would "infinity", two years nor two decades or two centuries is not "infinity".  You are still living in the good times, the collapse has only just begun. 

"How in the world is the U.S. government going to conceivably not default on its debt, if we don't introduce significant inflation soon?"

You actually answered your own question above, humans have no ability to inflate to infinity.

packman's picture

humans have no ability to inflate to infinity.

We beg to differ.

Sincerely:

 - Robert Mugabe

 - Friedrich Ebert

 - Jorge Videla and successors

 - etc.

 

packman's picture

Sorry there is no inflation now and the only way you are going to get inflation is if the US consumer request the commercial banks to manufacture additional credit.  Currently credit creation is NEGATIVE at a -$808B annualized rate based on Q1 numbers.

You're making a big leap of logic here - the same one made by the MSM - that consumer credit is down because the consumer doesn't want to borrow money.  IMO that's not the case - it's more a case because the banks are tightening credit and lending less; especially given the high unemployment.

If/when banks decide to loosen credit again (when they're finally able to offload all their s*** assets to the public via the government and FedRes), you'll see that consumer credit number jump right back up again.  Not because people all of the sudden want to borrow again, but because the banks are willing to lend.

 

Mako's picture

"IMO that's not the case - it's more a case because the banks are tightening credit and lending less; especially given the high unemployment."

I can go get a mortgage tomorrow for about 5%.  You simply ran out of lemmings.   

I know 2 people that closed on houses in just the last month, no problems what so ever. 

The current standards are no worse than they were 30 years ago, matter of fact to me they are still quite easy.    The only way you are going to get inflation is to find the amount of lemmings that are wil$ling to take on the amount new credit as they were in 2007 which was at a nearly $4.7T rate.... which is only  $5.5T rate change from today's levels.   Good luck with all that. 

MachoMan's picture

Bingo.  I bought in 08, fiance bought in 09 and refinanced in November...  no problems getting credit.  Lenders were scrambling all over themselves to give the loans.

The issue can also be seen in commercial real estate.  CRE is just like credit.  If a business wants to utilize credit (or commercial space) the return needs to be greater than the juice.  Simply put, businesses cannot borrow money and put it to use greater than the cost of capital (unless they have access to the discount window).  This is why commercial real estate is dead.  They ran out of lemmings.

Time for the "liquidation of nonperforming assets" Mako?

Mako's picture

It's as simple as that, people want to make it complex because the gravity of the situation gets deadly.  

The system ran out of lemmings at the rate needed, the only thing that can happen after that is collapse.... yes, we are very early in the collapse phase.  There will be bounces within the larger down cycle as well.  

mophead's picture

Lender's are scrambling to offer loans only because they now get to flip 95% of them over to Fanny and Freddie. They're after the loan fees. If they had to carry the loans, this wouldn't be happing.

packman's picture

 

Yes of course it's still easy relative to 30 years ago.  We've also had 180% inflation in that time (CPI 85 to now 218). 

I'm talking relative to 3 years ago, not 30 years ago, because your comment:

Sorry there is no inflation now and the only way you are going to get inflation is if the US consumer request the commercial banks to manufacture additional credit.  Currently credit creation is NEGATIVE at a -$808B annualized rate based on Q1 numbers.

refers to recent history.  Consumer credit has only been negative for 2 years now, not 30.  And only barely negative at that - $2.58B at its peak to now $2.42B.  Not exactly a huge drop at all.  In 2000 it was only $1.6B.

 

Mako's picture

Total credit of the system is $52.1T(2010 Q1) down from $52.9T(2009 Q1).  Never once said consumer credit was negative for 30 years, don't know why people have to make up stuff.

"Not exactly a huge drop at all."

Consumer credit that you speak of is a drop in the bucket of the whole system, I have no idea what you are talking about... total credit market debt is $52.1T and you are talking about a few billion.  The fact of the matter is the system is in a death spiral, what spirals up will spiral down. 

http://www.federalreserve.gov/releases/z1/Current/z1.pdf

Now the $52.1T of the system, well, it needs to be serviced interest... whoops.  You can't pay with what doesn't exist or is disappearing at a negative rate.

"I'm talking relative to 3 years ago, not 30 years ago, because your comment:"

I have no idea what you are talking about, no they are not going to give an illegal alien a $500,000 mortgage like they were doing in CA. back in 2006, but they have no problem loaning anyone money.  I have no idea what you are talking, you in fact can go down and get a loan for a house, matter of fact they are giving away at ALL-TIME low rates.   The system is begging for people to take on more but the people are either unwilling or unable to take on more at the RATE NEEDED... the rate needed is exponential.

The bank would just love for me go on in and take out a million dollar mortgage.   No, if you have no documentation to prove your ability to service they are not going to give you a million, they tapped that system out in 2006/2007.  They only way they could extend the system in 2007 was to go to the cemetry and start digging up dead bodies and forcing them to sign up for a thirty year. 

packman's picture

You implied consumer credit with your statement:

Sorry there is no inflation now and the only way you are going to get inflation is if the US consumer request the commercial banks to manufacture additional credit.  Currently credit creation is NEGATIVE at a -$808B annualized rate based on Q1 numbers.

You are correct that total credit is of course much higher and is as you mention contracting.

However:

 - It has a long way to go if it is to get down to pre-bubble levels.  Current is $49.6T, peak was $50.7, but pre-bubble (mid-1990's) was in the teens.  1995 total credit was $17 Trillion.

 - Given that the U.S. federal debt alone is $13.2T and rising like a rocket still - there's no way we get back even close to pre-bubble credit levels in nominal terms.  The only way we can get there in GDP terms is massive inflation.

Of course in the end we'll simply never get there at all.  We'll probably level off at a higher plateau of somewhere around 320% of GDP (currently we're at 340%) and then start back up again.  Then the final bubble - treasuries - will pop, and that'll be it for the dollar (and possibly the U.S. as a sovereign politicaly entity).

 

robobbob's picture

Maybe its no problem for personal loans, but loans on investment rental properties is dead, even with big cash deposits and heavy collateral.

The only people willing to put out loans on rental investments are hard money lenders at 15 - 20%

How much of the RE market is professional investors who are closed out of loans?

Lux Fiat's picture

Lenders are like a hoard of flies buzzing around creditworthy potential borrowers.  Many who are creditworthy are that way because they didn't borrow, borrow, borrow in the past, and have no desire to do so in today's environment.

Strider52's picture

Lux, you just described me. I have a nice career, great job, plenty of dry powder, I am a TNSOG (True 'Nuff Stacker of Gold), and the last thing I want on this God's earth is a mortgage.

  I am, as one friend put it, "Off the Radar". I rent a nice house, grow lots of veggies, have stacks of supplies (more for the Calif earthquakes I fear), and I love camping.

  I could get a loan, just don't want one.

pitz's picture

Deflation is created by excess lending, not inflation. 

You people have it all backwards.  An expansion in lending creates additional supply.  A contraction in lending destroys supply. 

Demand remains relatively constant, I mean, we all have to eat after all, eh?

People who merely look to lending statistics, and think there must be a correlation between credit growth, and inflation, quite frankly, are going to be in for a huge dissappointment.

Weimar Germany didn't have much, if any consumer lending.  Certainly nothing like we have today.  Yet they experienced a hyperinflation.  Same with Zimbawbwe; your average man on the street in Zimbawbwe has no credit whatsoever, and they still manage to hyperinflate over there.

Keep an eye on supply.  That's where you get hyperinflation from.  And from my vantage point, supply is collapsing, along with productivity and capital utilization. 

packman's picture

Weimar Germany didn't have much, if any consumer lending.  Certainly nothing like we have today.  Yet they experienced a hyperinflation.

Price inflation isn't necessarily experienced by the lenders though - it's experienced by the borrowers.  Weimar borrowed heavily, not in the form of consumer debt but in the form of war reparations debt, that they couldn't pay off, and thus had to inflate; in their case hyperly so.  Same with Zimbabwe, who had to hyperinflate to pay off IMF loans.

Much like the U.S.'s heavy borrowing that we may very well not be able to pay off.

In the end if things get bad enough - internal debt, be it consumer, mortgage, business, etc. gets lost in the overwhelming wave of sovereign debt.  Consumer debt etc. may end up being miniscule but it doesn't matter - what matters is the sovereign debt.

 

LeBalance's picture

THE issue is SUPPLY.

The above article lumped massively different scenarios together under one umbrella and did not de-convolute the SUPPLY.

Oooops!

Thesis core malfunction.  Reset.

The reality of massive REO and other shadow inventory will continue to crush housing prices, even as other sectors experience inflation.  Expect continue price decreases in the housing sector until the Nx Trillions in malinvestments is unwound.  And considering the amount of off-book and off-off-book MBS and 1-8th order derivate circular file "mark-to-please don't make us shoot ourselves" nuclear waste is in the malinvestment column, that may be along time.  And to be real, it should all be written off today as a total loss if we want to gate jump to the endgame.

Just my $0.0000000002.

ozziindaus's picture

There are more contradictions in your post than I care to list but I"ll try.

Deflation is created by excess lending, not inflation.

Excess lending is the inflation. Where else does it come from?

An expansion in lending creates additional supply.  A contraction in lending destroys supply. 

Credit pulls future demand forward. When demand is not met, you have deflation through capital destruction. Remember the loan is still due at this stage. Default confirms the deflation.

Demand remains relatively constant, I mean, we all have to eat after all, eh?

For what?? Food?? see FDR policies.

People who merely look to lending statistics, and think there must be a correlation between credit growth, and inflation, quite frankly, are going to be in for a huge disappointment.

Your interpretation of the definition of inflation is disappointing. Credit growth = inflation.

Weimar Germany....Zimbabwe.... hyperinflation.

These were currancy crisis's with a destruction in confidence. Different dynamic to inflation/deflation.

Keep an eye on supply.  That's where you get hyperinflation from.  And from my vantage point, supply is collapsing, along with productivity and capital utilization. 

All demand driven and that is what's collapsing. We still have excess supply including food. That's why there are sooooo many great deals out there.

pitz's picture

"Excess lending is the inflation. Where else does it come from?"

No, excess lending is the deflation.  Excess lending causes the creation of excess supply.  Pull back the excess supply of credit, and you get inflation because supply contracts.

For instance, let's say there's 1 sandwich counter in my community.  The owner runs a perfectly good business selling sandwiches for $10 a piece, enough to pay his employees, send his kids to school, and live a modest life.

Now, the banker comes into my community.  Finds someone to lend $100k to, in order to set up a second sandwich counter.  With the competition, sandwiches are no longer $10 a piece, but are rather, $7 a piece.  Another banker comes along, lends another $100k, and a third sandwich counter is set up, and the market price of sandwiches settles at $6 a piece.  Each participant barely makes any money, and the weakest manager burns through equity.

The credit has enabled additional supply.  When the credit starts to contract, ie: the bank finally calls the loan of the weakest sandwich counter, supply is removed.  Sandwiches start rising in price.  As sandwiches start rising in price, everyone senses "inflation!", and they demand higher interest rates.  The higher interest rates force another (debt-financed!) sandwich counter out of business, and prices rise even further.

See what's happening here? 

"Credit growth = inflation."

No, credit growth = consumer price deflation, but leveraged asset appreciation.

"All demand driven and that is what's collapsing"

Don't see any evidence that people aren't eating out there, or consuming other day-to-day consumables.  Prices on staples are rising like crazy around here.

ozziindaus's picture

Let's start by defining inflation since it is too commonly misinterpreted. Inflation is simply the increase in the money supply (Check M3). This is the cause. The effect may be what many misdiagnose as inflation (price increase or appreciation). 

So more money in the system through credit demand means the purchasing power of those dollars decreases and can, in some cases, lead to price appreciation. 

Remember that appreciation in price does not mean inflation but is instead one of the effects of inflation. 

Your example of the sandwich shop has more to do with supply vs demand. The shop owner can demand higher prices because he can due to lack of alternatives. This is a monopoly and the original owner should have known better than to think there was any secret in making sandwiches.

By extending credit to competition (inflation), it brings more supply into the market where demand remains unchanged. This drives prices down (depreciation) but it is not deflationary since the money that was credited into the system, with leverage, still remains in circulation. The more competition that enters into the market brings with it more inflation by definition (provided that it was financed). 

Now, as credit is contracted and not lent back out for other ventures (deflation), this raises the value of the remaining dollars in circulation. If demand remains unchanged for sandwiches, then the price may increase due to falling supply BUT the economy of this small town still takes a hit in other sectors due to less credit availability. The "weakest sandwich shop" owner has no money to spend into the economy. 

 As sandwiches start rising in price, everyone senses "inflation!", and they demand higher interest rates.

Again you are talking about price appreciation due to dropping supply. This is not inflation. Interest rates are determined by the market and are future projections of money supply. The banks don't set the rates at will. The public does through the bond markets in anticipation of credit expansion or contraction. Low rates mean deflation of the money supply ahead and vise versa for inflation. By definition, high interest rates with dropping demand is stagflation and requires more inputs than sandwich shops competing for business. 

Also credit expansion targeted towards sandwich shop investment with the intention of increasing supply leads to price depreciation of sandwiches but this is unsustainable if demand remains unchanged. Good example is Starbucks. 

In the food industry, you must adapt quickly to changes in the economic environment which many don't do well which is why it's a lagging indicator. The big players have all adjusted because they can afford to. Others that don't realize very soon that they are insolvent. 

GoinFawr's picture

"Inflation is simply the increase in the money supply (Check M3). "

M3 isn't being reported anymore. All figures for it are conjured up from cauldrons. Both M1 and M2 are still being reported and are increasing, even in this supposedly deflationary environment. Only one way to do that if credit is contracting...so it follows that True Money Supply is expanding dramatically.

Oh, and credit isn't real money, but a means to 'creating' a hocus pocus version of it.

Just sayin'

Regards

aurum's picture

How any of you can attempt to conclude anything from the last 30 years during the largest unsustainable creation of credit in the history of mankind is beyond me.. We lived and currently live in an anomaly that should not exist. We are headed out of the anomaly and into a new world.

Calls and Putz's picture

We're entering "Youflation."

That's when the prices of things you own go down, and the prices of things you need go up.

Mako's picture

You have entered a process where the things you call assets go down and the things you need just slowly stopped being produced.   The collapse is only at it's beginning stage. 

Groceries at the store are not going to go down drastically, the grocery stores will just close it's doors one day.  Production will continue to decline on a global level for many decades.  The process of getting a crop from the farm to a product that is sitting on a shelf at the store can't be reduced in priced in general, fixed long and short term costs.  They will just shutdown production and distribution for the lack of demand.

I know someone that works for a company that produces wood products for houses, medium sized company and they distribute their products through all the big retailers that you know of.   Well, in 2007 their peak and has collapsed from that point.

Now the nutbags out here think, well that means I can go in the store and get that product cheaper.... NO!  The company just shutdown unneeded plants to cut cost and not produce what isn't demanded.  The company nor it's competitors has any ability to cut cost to half.  

Production will continue to decline, distribution will decline, eventually all those stores will just start to disappear.  You might get some sales and close out sales but no most companies can't just cut prices, they will shutdown production.  Death spiral comes to mind.

 

Rogerwilco's picture

"You have entered a process where the things you call assets go down and the things you need just slowly stopped being produced.   The collapse is only at it's beginning stage. "

Excellent analysis -- this is what most are missing in this deflation versus inflation debate. Scarcity from diminished supply will raise some prices even as the overall economy contracts.

Mako's picture

Food will be the last to go.  Of course I don't see where food would drop half or anything either... it will just stop being produced because of the lack of demand.

Just read an article about a woman that claims she is 130 year old from Georgia old Sovient Union.   She said she had two kids die from sarvation in WWII.  People just don't get it. 

Cathartes Aura's picture

great analysis Mako.

with regards food production, I wonder how many people have noticed the volume decreasing in packaged products. . . such things as crackers, chips, cereals, all getting "new improved" packages, and smaller volumes of actual foods. . . it's been going on for at least 2 years (I know it's always a claw-back, but it's been very noticeable across the board lately). . .

bought some pre-made pesto last week for an outdoor gathering - while making the dressing, tasted - it was bitter, didn't taste like pesto - checked the ingredients - they'd padded out the more expensive basil with parsley - not an ingredient in basic pesto, but, hey, it was "green", lol. . . gotta watch the ingredients if not making things yourself, but that's always been the case. . .

Augustus's picture

I just bought a can of coffee.

It was once a standard 1 lb can.

Several years ago it went to 13 oz.

today's can was 11.5 oz.

Smaller cans of coffee cannot be cheaper to produce.  However, delivering a slightly smaller amount can reduce the sticker price / can and fool a poorly informed consumer into paying a few cents less for a product that has quite a few cents less product.  I belive the coffee example demonstrates that generally consumers don't know much about what they are buying for a whole range of consumer products.

Canoe Driver's picture

and what's worse, canned coffee is absolute shit.

pitz's picture

And how exactly does food suffer deflation or a reduction in demand?  People are going to stop eating?  Good one... 

eatandtravel's picture

I agree.  He lost lost me on that one.

ozziindaus's picture

The cost of production, transportation etc also drops. Remember that FDR burnt crops and slaughtered livestock to keep prices from falling.

pitz's picture

I live in farming country, and almost without exception, most of the farmers around here are running little other than debt Ponzi schemes.  Mortgaging their land, for ever-increasing amounts, simply to afford inputs.

Rationing credit (ie: because of the credit collapse) simply causes those guys to be tipped over the edge, which is exactly what is happening right now.  Serial refinancings and chronic dependance on financing for farming is a catastrophe in the making, and supply, at least around here, is indeed collapsing, if not from flooding, from a severe reduction in fertilizer application.

eatandtravel's picture

During the WW1, food prices did increase because America was pretty much the only bread basket.  American farmers made the false assumption those prices would remain after the WW1. 

jdrose1985's picture

When people can no longer afford to buy food. Simple enough?

jmc8888's picture

Yep I think you're spot on here.

Supply and demand aren't in a vacuum.   When you consider all the debt putting a floor on how low people can charge for their goods/services and still survive, we're literally staring over the cliff of the vast majority of our businesses, and thus all that are related to it, from simply being unable to produce anything at which they can sell above cost.  I saw this stuff coming even before I saw the Nasdaq crash coming.  Except now, it's getting to the point it matters, because everything else is so effed up.  The trend has been obvious that even a grade schooler could see it decades ago.

As for how the article's writer uses the data, it is purely a guess, and doesn't represent the entire view necessary to ultimately be accurate.  In a sense, it's luck.  Also looks like he kept his outliers in, at least in the graph.

But since he was on the right track initially it isn't completely useless.  But he didn't need the data chopped up in that way to figure it out, so he kind of went ass backwards and got lucky in his result.  Prices will drop when interest rates rise, when the glut of homes is put onto the market, etc.  It's one of many factors that could push prices down, whether it rears its head is another story.

Like my grandfather did in the first depression...and ended up with a 3 unit, 3 story flat building near Wrigley field very close to Lake Michigan for $4,600. 

In july 1929 a lawyer, from back east, who bought a house from my granfather (who built them) was talking to my grandfather about how two east coast banks had gone bankrupt and actually closed, and that this was going to cause a chain reaction. 

My grandfather, who was not just a simple builder, and even worked at the chicago board of trade, among many other jobs he had previously and would later come to have.   He then went downstate on friday night after work.  As the banker said it, if your father has money in the bank, get it out.  if you have any other houses as well, sell them at cost....and 'sell now or cry like a baby'.

He drove back to the town from chicago about 90 miles south to get his father's money out of the bank.  He got back after the bank had closed.   He called the president of bank at his house and got him to come down and reopen the bank. See the kind of service you USED to be able to get lol.

While there, the president pointed a finger in my grandfather's face and shook it and then pointed it at the police station nearby and said you'll get your money, but there's a police station down on the other end of the block for troublemakers like you.  He then pointed at the bank and the 1880 on it and said we've been around since 1880, don't you trust us?  Any of this sound familiar?

So he got his money out.  Waited for the crash.  Then they put the money to work, buying that three story flat, which obviously wasn't in the boondocks, and was only 2-2 1/2 years old....basically brand new.  It cost $20,000-22,500 to BUILD the flat, and he paid only $4,600.  So when people talk about real estate, how many talk about 75 percent off the COST TO BUILD the house/property. 

Not many, and we could easily see such things again, especially considering the numbers are far worse this time, then in the great depression.  But that is what is coming.  Now maybe not ALL transactions emulate this, but many will, and those that don't, won't be too much higher.

The prices just kept going down, and once the bs runs off this time, the true nature of THIS collapse will set in.  If rates do go up, it will absolutely be as big or bigger of an effect on housing than the 8k mortgate bribe that recently expired. 

People just don't understand HOW bad that was, and this time will be worse...considering everything is interrelated, JIT inventory abounds everything...because you can't have any money tied up in inventory, any more than 1 unit is too much, so when the crap hits the fan, we're oh so much more screwed than our ancestors.

So everyone should remember what came before us, and how bad things got, because we're headed not only there, but probably another thousand miles down the tracks.

Even though I never met my grandfather (dead), I'm sure we would have hit it off nicely.  Legitimate skeptics.

 

Good luck.

spartan117's picture

Great post.  Thanks for sharing.

B9K9's picture

I always enjoy Mako's posts because he's one of the very few who understand the really big picture. He in turn engenders comments/responses from others who actually "get it". I really liked your story - we shall see many more like that before this episode is over.

Of course, Bernanke & Geithner also clearly understand the really big picture as well, which is why they are perfectly willing to break every conceivable law on the books in a mad attempt towards reflating the market. I mean, the way they probably figure it is, if they aren't able to reflate the market (which they aren't), then the USA as a viable political entity isn't going to be around in order to prosecute their sorry asses.

It isn't so much the lack of lemmings, but the psychology behind lemming herding. You know, manias and all that. Once the party is over and everyone sheepishly slinks off hoping no one remembers their antics from the night before, private vows are made not to soon repeat that behavior.

Even worse, the boomer/X generations who are now learning these hard lessons (once again) are passing on warnings to the next. Kids of course are going to experience these events first hand during their childhood years. The out-of-work parent(s) forcing a move to a shittier neighborhood (or in with relatives, perhaps in a different state), the school shut downs (Hawaii was been on four-day week all last year), etc are all going to make, shall we say, an impression. That's why it took until 1955 to reach the previous highs of 1929 - almost 30 years!

The only point I differ with Mako is the outcome - he expects famine, etc, whereas I see just a slow grind. Go back & look at some of those Lange photos from the 30s. People weren't starving, marching, rioting, etc. They just accepted their reality and lived through it. That's what I fully expect to see happen again. Nothing glamorous, no Hollywood dramas, just existence.

Dont Taze Me Bro's picture

Good post JMC.

But one big difference between your grandfather's era and the current environment is the difference in political regime in charge of the US. People like helicopter Ben and his cheerleaders weren't in charge back then.

Analysts who are forecasting deflation are assuming that policy makers are rational (or will stay rational), but every piece of evidence points to the contrary. From the insane bubblenomics that got us in the mess, to government's subsequent reaction to the crises, all indicates a continuation of all the insane policies plus more.

Do you think there will deflation if Bernanke were to expand the M1 money by $5-10 trillion?

DosZap's picture

Mako,

Good splanation Lucy, left out one point, already happening.........

"Now the nutbags out here think, well that means I can go in the store and get that product cheaper.... NO!  The company just shutdown unneeded plants to cut cost and not produce what isn't demanded.  The company nor it's competitors has any ability to cut cost to half."  

The fact this has/is begining to happen, has had the opposite effect, prices are going UP, not down.....as the supply has dropped below demand.

Augustus's picture

Companies are much more aware of daily and weekly volumes, costs, and cash flows than just 10 years ago, let alone 80 years ago.  They will not produce product at marginal cost losses for very long.  As you write, they will shut down facilities and source from the lower cost locations.  They will also stop supplying the low profit outlets.

One factor that has not been mentioned is that there were no minimum wage laws in 1930.  Combine that with an understanding that all costs of product are really just accumulated wages being recovered for every process stage, plus some energy cost outlay, and it is pretty evident that it is more difficult for prices to decline today.  There will be little price inflation until there is wage inflation.

Another unmentioned factor is the percentage of the population engaged in on-the-farm agriculture.  I have not looked it up but would not be surprised if it was greater than 50% in 1930.  While they were not going to actually starve, they sure had hardship.  Now, consider that that agriculture population is now living in a city and on the welfare roll with guaranteed subsistance and no need to produce and it becomes an entirely different economy.

It has always been my belief that people will pay a reasonable part of their income for housing.  IF wages inflate then the payments for housing will also go up.  How that effects the actual house price is not certain as the higher outlay can simply become higher interest, not higher principal.  However, it seems almost certain to me that an investment today is a well located residential property with positive cash flow will be a winner over time.  Maybe not next year, but certainly over a decade.  Today's financing rates will not be seen again for a very long time, IMHO.  If I buy with substantial down and finance, say 70%, at 5%, I really don't have to worry much about the price.  The rental income increases with inflation and the major cost of holding is fixed for 30 yrs. 

eatandtravel's picture

During the Depression, Hoover and Roosevelt asked firms not to reduce wages although overall prices fell.  Real wages increased during the Depression according to Lee Ohanian.

1/3 of the GDP was related to farming back in the 1930s.

 

GoinFawr's picture

"We're entering "Youflation."

That's when the prices of things you own go down, and the prices of things you need go up."

+10 To that.