OT: Economics

I am making a rare off-topic (non-Baseball, non collectible) post to bring up a concern that has had me thinking about the economy. The markets appear to be in trouble. In the NYSE the DOW has experienced a nearly 800 point drop over the past several days as housing and lending news roil the markets. The cost of capital is increasing, interest rates are increasing for home owners and real estate values are falling in concert. Gasoline and energy prices are heading skyward. CNBC, over the past week, have been whispering that $100.00 per barrel oil is on the horizon. Everything seems to be heading in the wrong direction.

Inflation, Deflation, Recession... Where are we headed? What does it all mean? What can we reasonably forecast?

All of these issues give me a big headache. I guess you can say that I'm still in the process of trying to understand some of the basics, while, at the same time, trying to apply it to the real world. As a primer I thought I would add the following from the Agonist blog who is asking the same questions.

I’m no economist. But I live at the mercy of the economy, so I read quite a bit on the subject with hopes of learning a thing or two. Understanding the causes for inflation was relatively simple concept for me to grasp. With an ever-increasing supply of money and shortages of essential elements, higher prices are inevitable.

But how inflation morphs into deflation is another matter. I never could quite understand how that could happen, if not created by central banks removing money from the system. Until now.

I am beginning to see how money disappears.

It started when lending institutions loaned money to people on no-money-down, adjustable-rate-mortgages for homes and real estate, and in so doing created a buying frenzy. Good sales created competition and drove up real-estate prices. As values for real-estate grew in what was really a stagnant economy when looked at just from the standpoint of producing and selling products, people took out additional equity loans. Real-estate outpaced other goods in value for a number of consecutive years—somewhere around 15% per year. This could not go on forever. And it hasn’t.

Wages couldn’t keep pace with the rise in value of real-estate, not without breaking companies having to compete with off-shore businesses and producers.

Now interest rates have risen; mortgage payments are re-setting at higher numbers and people are not earning enough money at their job to make payments. Gas and food prices, not included in the government’s inflation rate numbers, are on the rise at an exponential rate.

So people load additional debt on credit cards.

Then they put the house up for sale. But it doesn’t sell. So they lower the price. And it still doesn’t sell. Money they thought they had in equity vanishes into thin air. At some point, they owe more on the house than it is worth.

Home owners can’t keep the job if they don’t have gas, and everyone must eat. The credit card is essential for these expenditures, so it gets paid before the house payment. With time, the home owner gets farther and farther behind. The day comes when the bank forecloses. The home-owner walks away from the home and finds a cheaper place to rent.

But this owner is not alone. Many of his neighbors are in similar situations—stretched to the limit with debt.

Banks try to sell homes to recuperate money they loaned and they don’t sell. So money the bank thought it had in the form of promises to pay isn’t there. Vanished into thin air. Many of these loans have been packaged and have become part of someone’s retirement fund or investment package. And that retirement fund or investment package ain’t worth a nickel, because masses of people quit making their payments. They are written off of the books; the money they represented also has vanished into thin air.

Money we thought we had was nothing more than a figment of our imagination and a few binary numbers in a computer. Unfulfilled promises based on expectations of more and more growth at every level.

When all of his happens in enough places at the same time, the people wake up and realize they have no money. They tear up the credit card, leaving another unpaid debt, and consequently destroy more money, and start paying with cash which means they quit buying so much stuff because they don’t have enough money to do so. The stuff doesn’t sell, so the store lowers its prices. And it still doesn’t sell. Before long, the store is in trouble. As are the employees of the store. Stores close, more jobs are lost.

New construction comes to a standstill and construction workers lose their jobs. Quit making payments. The snake eats its own tail.

Now you have deflation. Collapse of an economy. A Depression.

I wonder if printing and reintroducing new cash can keep up with the disappearance of all of this money and forestall a collapse. I guess time will tell, because I doubt the fed is going to quit printing money as long as the rest of the world allows them to.

If the fed does tighten cash supplies, what happens when China and a handful of Saudi princes, each of which sit on a trillion or so dollars decide to buy our country? If the fed keeps printing money and we keep buying stuff made in other countries without selling them something in exchange, they end up holding more dollars (now you know why bush wanted to sell our shipping ports).

Our economy is based on its ability to grow continually. But there are limits to growth and we’ve come near realizing what those limits are. This planet has given us all it had to offer and we’re still not satisfied.

Something has to give.

And so on.. and so on. Are we anywhere near this scenario? I don't think so, but cautious optimism should be your guiding light. As they say in the market, "there are only two emotions on Wall Street: fear and greed." Right now there appears to be a healthy dose of fear to go around.

BTW, I ran across an interesting housing blog that is worth a look. Its called the Irvine Housing Blog. The writer is as bearish as the markets look. He provides plenty of anecdotal information about a looming housing crisis in Irvine.