No Housing Bubble Trouble (2005)
cato.org
cato.org
It's basically a bunch of people screaming at Peter Schiff that he has no idea what he is talking about, when he was basically predicting everything that happened. Apparently Peter Schiff is pretty smart, I watched a bunch of these videos and listened to his radio show. He is now predicting a massive drop in the dollar due to inflation.
"The worldwide rise in house prices is the biggest bubble in history. Prepare for the economic pain when it pops"
http://www.economist.com/node/4079027?story_id=4079027
That article was instrumental in convincing me to quit being an architect in 2007, since it was obvious that a real estate crash would bode ill for that profession.
When it comes to economic advice, I won't be taking any from the Cato Institute.
In short, we are asked to worry about something that has
never happened for reasons still to be coherently
explained. “Housing bubble” worrywarts have long been
hopelessly confused. It would have been financially
foolhardy to listen to them in 2002. It still is.
This is false. For example, it's not contradictory to believe in Keynesian fundamentals and supply-side economics, if you think tax cuts would indeed stimulate private spending to the point of increased tax revenue (which actually did happen when marginal tax rates were cut from 91% to 70% as was done in 1964[0]). You can also be a Keynesian and believe in a balanced budget, if you think deficits are causing inflation that the Fed needs to keep interest rates high to fight, and thus those high interest rates are suppressing private sector economic activity (as was true in the 1990s[1]).
The Great Recession has caused the bizarre circumstance of a liquidity trap[2] -- simply lowering interest rates isn't stimulating economic activity, and inflation is low. The Keynesian prescriptions for this are unconventional monetary policy (the Fed's "quantitative easing," which can be done because there's little risk of inflation) and government fiscal deficits (to make up for the lack of consumer demand). Somehow this gets warped into thinking that people like Ben Bernanke and Paul Krugman think you can solve any economic problem by printing dollars and/or getting into more debt.
[0] http://en.wikipedia.org/wiki/Revenue_Act_of_1964
[1] http://www.washingtonpost.com/blogs/wonkblog/wp/2012/08/06/w...
Housing is skyrocketing again right now, fueled by a massive inflation binge the likes of which the planet has never seen before. The cheap money is flowing into assets (stocks, real estate), as the Fed said it intentionally wanted to have happen.
Nationally housing values are now climbing at a 10%+ annual clip again (20% in Phoenix, with markets like DC at all time highs), driven by the Fed's inflationary posture of QE + hyper low interest rates. That equates to trillions of dollars worth of asset inflation annually. Housing is one of the most important inflation metrics, and it's going up massively right now.
It's not the economy rebounding causing it. How do I know? Well beyond the obvious QE + low mortgage rates + lack of job creation, we're creating almost zero construction jobs right now (compare that to the last two times housing prices soared).
Stocks have been juiced (inflated) by the easy money policies, leading to an S&P that now has a higher PE ratio than the last bubble. And given that S&P earnings are now eroding backwards, said PE ratio will probably continue to expand beyond that.
College costs? Massive inflation. College costs doubled in ten years against the backdrop of the great recession. Welcome to government inflation.
Healthcare costs? Massive inflation.
Food prices? Near all time highs.
Energy costs? $90 oil, $3.60 gasoline. Both are prices that would have been considered beyond outrageous just 10 or 12 years ago. Now that's the new normal. Meanwhile the US is producing more oil than at any time in the last 30 years, so it's not a supply problem (it's easy to see that by comparing the available supply of oil and gasoline against 2003 numbers). Our gasoline usage is back to 2002x levels, but prices are up 175% or so.
Home prices are up 75% to 150% in most major markets over 15 years. Given incomes aren't soaring, and we have 14.x% real unemployment, that's a dramatic increase.
Even with gold's sizable pullback with the climb of the dollar in the last few months, at $1400+, it's also a price that would have been considered impossible just ten years ago. Ditto silver (up 500% in 10 years) or platinum.
Everything screams: inflation wave.
Or it's a combination of the following:
* We just had a housing bubble in the mid-2000's that entailed building lots and lots of houses. Since the population hasn't appreciably increased since then, there are actually enough houses to go around.
* The foreclosures and short-sales caused by the housing bubble popping have shook out, and this is just a reversion to the mean.
> College costs? Massive inflation.
Yeah, who guessed that federally incentivized lending would make the cost of something go up?
> Healthcare costs? Massive inflation.
Mostly trackable to US health care policy.
> Food prices? Near all time highs.
> Energy costs? $90 oil, $3.60 gasoline.
Well yeah, that's what's making the food costs go up.
> Meanwhile the US is producing more oil than at any time in the last 30 years, so it's not a supply problem
The US might be, but oil is a global market. Plus, the world is increasingly forced to use more and more expensive sources of petroleum, like oil sands and shale, which were not cost-effective just 10 or 12 years ago.
Nonetheless, it's not (purely) a supply problem. You really think that quantitative easing has a higher impact on energy prices than literally millions of people in China and India buying petroleum-fueled vehicles and driving them around? If rising oil prices are an inflationary USD phenomenon, why do we see the same pattern for Swiss Francs, Emirati Dirhams, Mexican Pesos, Euros, Iceland Kronas, or Pounds Sterling? http://www.indexmundi.com/commodities/?commodity=crude-oil&#...
As for precious metals, the simple fact is that the world's mineral resources are harder and harder to get at over the years, and with the rest of the world rapidly developing, demand for natural resources is going to increase. But yes, if you cherry pick parts of the economy where prices are going up and ignore parts where they aren't, you're going to see an inflation wave.
Yes. Again, supply of oil has increased, and oil/gold ratios are pretty static. The big leg of the movement is in the USD.
>If rising oil prices are an inflationary USD phenomenon, why do we see the same pattern for Swiss Francs, Emirati Dirhams, Mexican Pesos, Euros, Iceland Kronas, or Pounds Sterling?
Most of those currencies have engaged in competitive devaluation against the USD to prevent exports becoming uncompetitive.
In countries where the currencies have not matched the USD depreciation, energy prices aren't anywhere near as high.
>As for precious metals, the simple fact is that the world's mineral resources are harder and harder to get at over the years, and with the rest of the world rapidly developing, demand for natural resources is going to increase.
Population growth isn't that fast as to force a doubling of commodities in the short timeframe that has happening. What is required is a flooding of the denominator - USD.
Printing any currency leads to inflation across the board. When it is the 'reserve' currency of the world, you get global inflation. There is nothing to argue in this; it is the stated aim of the QE policies.
Name a currency where oil prices have remained stable over the past ten years. I can't find one. Even oil-rich countries have seen their oil prices skyrocket.
> Population growth
It's not about population growth. It's about economic development. 2 billion Chinese and Indians doing subsistence farming or riding bicycles don't raise the price of oil. 2 billion Chinese and Indians buying cars for the first time does. You honestly think there's no relationship between the rising cost of oil and the smog blanketing Chinese cities in recent years?
You want to talk precious metals? Half of platinum is used for automobiles, and another 30% is used for jewelry. Two sectors where demand goes up when previously poor countries suddenly get richer. Half of gold is jewelry as well. About 40% of gold is bought for investment, which if anything indicates a speculative bubble.
> What is required is a flooding of the denominator - USD.
So name another currency that doesn't show this. I picked Icelandic krona specifically because most critics of how the US responded to the global economic crisis hail Iceland as an example of doing it right. But their petroleum costs have risen as much as ours.
> Printing any currency leads to inflation across the board.
False. Expanding the monetary base in excess of economic growth leads to inflation.
I have not seen any convincing data to support the idea that this had anything to do with college costs increases. Looking at tuition costs at top private schools, costs have risen pretty steadily for at least the last 90 years. I didn't see any obvious difference between pre and post Federal loan program eras.
(I looked at private schools because public schools are often highly influenced by what is going on in their state government. For instance, if a state is having a budget shortfall, one of the things they often due is cut college funding, and the colleges make that up with tuition increases).
People who assume that Federal loans are responsible for high college costs seem to be assuming that college costs follow "normal" market rules. That is a questionable assumption, for if the college marked did follow those rules, then college costs would actually be much higher than they are now. Good colleges turn away students, and so if they were in a "normal" market, they would be raising prices to the point where they are just able to fill their seats.
Hardly the whole story, especially since sticker-price tuition at "top private schools" is more a mechanism for price discrimination than anything. Do what you will to justify cherry-picking your evidence--you're still cherry-picking your evidence.
Google maps inside grocery stores: Use video in phones to capture UPC and price per unit in grocery store aisles.
This way true inflation can be measured, instead of only tracking certain products, and excluding others.
But the reverse is not the case.
Just about all money-printing 'stimulators' like to throw Keynes around as justification for doing so, no matter how far away it is from the original theme.
The basic tenet of running surpluses to fund deficit spending in years where confidence has dipped isn't all bad. But there are plenty of people who endlessly bang the 'spend spend spend' drum and justify it by pointing at Keynes.
(Yes, the economy blue-screened, we re-booted in safe mode but we're still not sure if we've fixed the drivers yet)
I bought a house in June 2005, being fully aware that there is a big chance the bubble could pop. As a result, even though I could've gotten a bigger house or taken out a home equity loan, I bought the smallest house I could be comfortable in for 5+ years and did not take out any loans. Meanwhile my coworkers who were also in my salary range bought houses 25-50% more expensive.
From the article:
> That would be unpleasant news for home sellers, but good news for buyers. And what sellers lose when selling one house they often save when buying another. Any risk of loan defaults would be negligible.
When a lot of sellers lose, it brings down the market.
> At the national level, what could possibly kick national home prices downstairs? There is nothing to suggest massive job loss ahead or a huge oversupply of new homes.
When there are a lot of sellers and too few buyers, there is a huge oversupply of homes (new and old).
You're right that nobody can tell the truth about future. E.g. who knows if 1 bitcoin is going to be worth $100, $1, or $1,000,000 some day. However, the author was clearly ignoring the signs that worried a lot of people, including myself.
But then, we should already know that.
I think (but could well be mis-remembering) one of his conclusions was that since these pundits are for entertainment value rather than serious prediction, nobody in charge of putting them in front of the camera cares much.