It's the economy, stupid
The Consumer Price Index increased 0.6% last month on a seasonally adjusted basis, 0.9% without the seasonal adjustment. That's equivalent to an annual rate of about 7.4%. A good part of that was due to a rapid rise in energy costs, but even if you exclude food and energy from the index, the price index rose 0.3% on a seasonally adjusted basis.
That's not good news, folks, if it continues.
There are a whole bunch of people who purchased homes during the housing bubble that's just beginning to deflate. Many paid too much for their property to begin with, over-borrowed by any reasonable historic standards, and were able to afford to do so only because the took out adjustable rate mortgages (ARMs) with artificially low introductory rates during the first few years. Now, with inflation rising, interest rates are likely to rise significantly, and the rates on these ARMs are likely to sky-rocket. Inevitably, many of these people will be forced to default at exactly the moment when the demand for houses will dry up due to the high cost of money.
Housing prices don't collapse overnight the way stock prices are doing today, but they can and probably will fall significantly over the next few years. That will mean many of those forced to vacate their houses will have negative equity in their properties.
As housing prices fall, the primary factor that has fueled consumer spending growth over the past five years -- home equity loans based on huge paper profits in people's homes -- will disappear. Since we haven't seen any significant wage growth (in real terms), there will be nothing left to fuel consumer spending growth, and we're likely to see that collapse as well.
Without consumer spending, new investment in plant and equipment, which was weak in the early years of the Bush administration but has been growing recently, will become unnecessary, and this form of spending will likely wither as well.
That's a pretty bleak outlook. Perhaps the only silver lining on this cloud is that were likely to be in the depths of this recession around the time of the next presidential elections. My guess is that a rotten economy will not favor Republicans.
That's not good news, folks, if it continues.
There are a whole bunch of people who purchased homes during the housing bubble that's just beginning to deflate. Many paid too much for their property to begin with, over-borrowed by any reasonable historic standards, and were able to afford to do so only because the took out adjustable rate mortgages (ARMs) with artificially low introductory rates during the first few years. Now, with inflation rising, interest rates are likely to rise significantly, and the rates on these ARMs are likely to sky-rocket. Inevitably, many of these people will be forced to default at exactly the moment when the demand for houses will dry up due to the high cost of money.
Housing prices don't collapse overnight the way stock prices are doing today, but they can and probably will fall significantly over the next few years. That will mean many of those forced to vacate their houses will have negative equity in their properties.
As housing prices fall, the primary factor that has fueled consumer spending growth over the past five years -- home equity loans based on huge paper profits in people's homes -- will disappear. Since we haven't seen any significant wage growth (in real terms), there will be nothing left to fuel consumer spending growth, and we're likely to see that collapse as well.
Without consumer spending, new investment in plant and equipment, which was weak in the early years of the Bush administration but has been growing recently, will become unnecessary, and this form of spending will likely wither as well.
That's a pretty bleak outlook. Perhaps the only silver lining on this cloud is that were likely to be in the depths of this recession around the time of the next presidential elections. My guess is that a rotten economy will not favor Republicans.
posted by walldon | 4:09 PM
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