After the biggest spending and borrowing binge in history, Americans need time and money. They need to pay their debts. They need to build savings for their retirements. They need time and money to recover from their mistakes.
What kind of mistakes?
Well, down near the bottom of the ladder, people bought houses they couldn’t really afford to own in places they couldn’t afford to live. And cars they couldn’t afford to run. Those mistakes need to be undone. Which is why there are so many foreclosed houses on the market…and why house prices generally are falling.
S&P/Case-Shiller reports that house prices took their biggest hit ever in the second quarter of this year. They were down 15.4% from the year before.
Further up on the ladder, the rich are now embarrassed by their own housing mistakes. New Yorker magazine reports that it is the ‘season of white elephants’ in Greenwich, Connecticut. Speculators began huge mansions – in the “Georgian Stockbroker” style, for example, complete with indoor swimming pools, wine cellars, movie theatres, dozens of bathrooms, even ice-skating rinks – and now find the buyers have disappeared. Want to buy a $28 million spec house? Go to Greenwich.
At the investment level there were plenty of mistakes too. Subprime mortgage lending dominated the headlines for the last 12 months, but the same reckless spirit found its way into transactions all over the economy. Private equity, IPOs, student loans, shopping malls, fast-food joints – while the going was good, everyone wanted to go along.
And now, they all need time and money to pay for their errors.
The baby boomers say they are postponing retirement. Some are going back to the office.
A county in Alabama says it will have to declare bankruptcy.
The FDIC says its “problem list” of banks lengthened by 30% during the second quarter.
Bank earnings fell to their second lowest level in 19 years, says Bloomberg.
In London, tens of thousands of jobs have already been lost in the financial sector, says the Financial Times. IPOs, where the City (equivalent to Wall Street in New York) made much of its money, have “fallen off a cliff.”
We have lived through the biggest credit expansion ever. Ahead is perhaps the biggest credit contraction ever. Why? Because it takes time and money to correct mistakes. The bigger the mistakes; the longer and more expensive the correction.
When money and credit flow, they tend to raise prices. You get inflation – first of asset prices…later, of consumer prices. When money stops flowing, prices come down. As George Soros puts it, the willingness to lend is directly related to the value of the collateral. Both tend to rise and fall together.
Currently, lenders are wary and the value of the collateral is falling. Everyone knows house prices are going down. But U.S. stock prices are going down too. Adjusted for consumer price inflation, they’ve been going down since the end of 1999. That is, a $50 stock is still worth about $50…but the 50 bucks ain’t what it used to be. It buys only 1/5th as much oil, for example.
This trend, towards lower asset prices, is likely to last a long time. To protect ourselves, we began buying gold in 2000. So far…so good.
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