-- Posted Thursday, 5 April 2007 | Digg This Article
| Source: GoldSeek.com
Rick’s Picks
Thursday, April 5, 2007
“Phenomenally accurate forecasts”
Is the economy about to experience one last boom before everything comes crashing down? iTulip founder Eric Janszen evidently thinks so, and that is the crux of my argument with him. We debated this issue yesterday, along with some others, including whether economic life as we know it will end in inflation or deflation. Regular readers of Rick’s Picks will already know where I stand on that last question. As far as I’m concerned, there is no avoiding deflation. Eric doesn’t entirely disagree with his, but he does think the Fed will be able to avoid economic disaster for at least a few more years. My strong opinion is that no amount of stimulus will surmount the deflationary drag that has already begun to pull the U.S. economy into a black hole. And yet…
I thought we’d had it back in 1991, when debt had reached what many observers concluded at the time was unmanageable levels. In retrospect, the U.S. household was a relative model of thrift fifteen years ago. No one could have imagined the extent of the further borrowing that would ensue in order to keep the economy nominally afloat. And that’s exactly what we’ve been doing -- living well, off inflated assets values and mounting debt if not income growth.
What Helicopter?
Could this continue for at least a little while longer? I seriously doubt it, especially since the erstwhile Helicopter Man, Ben Bernanke, appears reluctant to stomp on the throttle at the moment. It’s inconceivable to me that he would be unaware of the mounting threat posed by a real estate collapse. But my earlier expectation that easing would have commenced by now is mistaken, and at this point it would come too late to save us from the impending spring/summer collapse of the housing sector.
In an economy that has been crucially dependent on mortgage borrowing to support consumer spending, one would think that even a moderate decline in home prices would drive us into deep recession. But home prices have already declined more than 10% nationally without crippling spending. Does this mean, perhaps, that real estate prices were so juiced to begin with that they could absorb a 10% hit without wreaking austerity on homeowners? Possibly. But my strong suspicion is that consumer spending is about to plummet, causing an already scary real estate market to “actualize” the deflationary juggernaut of debt.
Only time will tell whether, instead, a relatively benign period of stagflation awaits us, as Eric thinks. I think he’ll be wrong, but I have been wrong myself before. [Note: Check iTulip.com in a few days, since the audio replay of our discussion will be available at the Web site.]
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-- Posted Thursday, 5 April 2007 | Digg This Article | Source: GoldSeek.com
