Ground rush is the sensation that you get when parachuting out of a plane. For a very long time, you have the impression that you are just floating in air. And then, suddenly, you see the ground rushing up at you.
Well, we wonder if there isn’t a kind of ‘ground rush’ in the economy too. For a very long time, everything remains more or less the same – floating in air. Stocks rising gently. Credit flowing by like a jet stream. The dollar slipping down softly.
Then, when you begin to think that these comfy trends are permanent, suddenly, everything changes. All that ‘flation’ in the system explodes…prices soar…or collapse. Markets are hit – as though by people whose parachutes had failed to open. And then, you can’t quite recall what it was like before…you are dazed at first…and then the reality of ‘ground rush’ focuses your attention so vividly that you can’t think of anything else. You lose perspective. What is becomes so much more important than what used to be.
Ben Bernanke opened up an auxiliary parachute on Tuesday. It lifted investors’ spirits. But will it really stop the fall? Will it greatly prolong this period of floating in air? We’ll have to wait to find out.
But it appears to us that the direction of the economy…and the markets…remains the same.
“The decline in house prices stands to create future dislocations, like the credit crisis we have just seen,” said Yale economist Robert Shiller to the US Senate’s joint economic committee.
Applications for building permits fell to a 12-year-low. They’re now at their lowest level since June 1995. And consumer prices actually fell last month – led by the price of gasoline. Government reports tell us that the inflation rate has gone down, from 2.2% to 2.1%.
As inflation eased off, it gave the Fed time to turn its forces from fighting inflation to fighting the other kind of “flation”.
Alan Greenspan, whom you all know by reputation, told the Financial Times this week that he thought house prices in the United States might fall by more than 10%. House prices more than doubled in the last 10 years. A 10% correction seems like a minor adjustment. But it would have grave consequences, says Shiller.
The Center for Responsible Lending predicts that foreclosures on subprime loans will lead to a total loss of US$164 billion worth of home equity. Financial institutions are said to be facing losses of more than US$300 billion from mortgage financing. But the real losses will be suffered by ordinary homeowners. The total value of residential real estate in the United States is about US$21 trillion. A 15% loss would be the equivalent of a US$3 trillion loss in household wealth. Things aren’t looking so good for the average homeowner.
That would be a whole lot of ‘flation’ taken out of the system…and a hard landing for the millions of people who’ve been floating in air for the last 20 years.
Markets and Money