Anonymous writes:
Good morning, first?
Anonymous | 08.14.08 - 9:27 am | #

spencer writes:
Over the past three months real weekly earnings fell at an 8.8% annual rate.
spencer | 08.14.08 - 9:29 am | #

richinar writes:
I am truly at ease with regards to inflation. The fed says it is under control and they absolutely nailed it on the Subprime thing being contained.
richinar | 08.14.08 - 9:30 am | #

safe_as_apartments writes:
CR, you are so persistent with the belief that inflation helps with real house prices, I conclude that I must be wrong. I had held the belief that what matters for real housing prices is real wage, not an increase in the nominal price of a basket of goods.

What am I missing? You might want to devote a post to this issue, because it is a bit confusing.
safe_as_apartments | 08.14.08 - 9:30 am | #

poszi writes:
Inflation does not help with the house prices at all. It squeezes the consumers even more. What helps is the "wage inflation". And I'm not sure we are going to have it.
poszi | 08.14.08 - 9:31 am | #

crispy&cole writes:
The key to this report was the fact that wages are down...j6pack is losing ground fast
crispy&cole | 08.14.08 - 9:31 am | #

Nemo writes:
And inflation helps with real house prices too!

By that logic, inflation helps with real food/energy/etc. prices, too...

Looking at these numbers, I propose a change in terminology. Instead of "nominal prices", we should call them "unreal prices".
Nemo | Homepage | 08.14.08 - 9:32 am | #

crispy&cole writes:
CPI does not include home prices...CPI uses a rental factor for housing costs. there is no correlation in CPI to home prices.
crispy&cole | 08.14.08 - 9:34 am | #

David Pearson writes:
CR,

The effect of inflation on house prices could well be negative.

The reason, of course, is the high percentage of ARM loans outstanding (I'm not sure, but I believe this number is in the 33% range). Of course, persistent high inflation increases nominal interest rates. This increase, in turn, would cause ARM foreclosures to jump and increase the supply of housing.

Picture the increase in housing supply as a "one time" event which would drive down prices. Thereafter, prices would rise with inflation, as you suggest.

This pattern was seen in Mexico and Argentina, where house prices plummeted following devaluations and inflation. The house price decline was then followed by a quick recovery driven in part by inflation.
David Pearson | 08.14.08 - 9:35 am | #

El Cliffo writes:
Inflation helps in the short term with nominal house prices, but maybe not even then, considering the present credit situation.
El Cliffo | 08.14.08 - 9:35 am | #

Jim A. writes:
Safe as Apartments- Of course it's NOMINAL, not REAL wages that influence NOMINAL house prices. And people pay nominal prices for houses. In fact it is the ability to pay off the later years of one's mortgage in inflation-debased dollars that is one of the main advantages of home ownership.
Jim A. | 08.14.08 - 9:36 am | #

doom writes:
If companies are laying off people on one side to cut their costs, would it make sense for them to increase salaries on the other side and increase their costs.

And as always, there is the supply and demand balance of business. Lots of people unemployed adds to the supply of available workers side. Few jobs being created lowers the demand. Not a good combo.

I just don't see any reason for an increase in salaries (regardless of inflation).
doom | 08.14.08 - 9:36 am | #

Lawyerliz writes:
Every day I ask myself, who is going to finance the REOs? There will be no bottom until this is addressed.
Lawyerliz | 08.14.08 - 9:37 am | #

rich writes:
One of the first things Bernanke said when he became Fed chairman was how important it is to take steps to keep Social Security solvent.

The annual Social Security COLA is calculated by averaging the YOY increase in CPI each year from July through September. For this year, the COLA could be close to 6%, the highest since 1982. All Social Security checks will increase that much starting next December. And unless the law is changed, every Social Security check cut in the future will be built on the higher benefit base.

With the weakening economy cutting into payroll taxes and low interest rates on special Treasury bonds in the trust fund, I'll bet you will see the Trustees report that Social Security's fiscal situation has deteriorated, when they report next (spring 09).

It's partly Bernanke's fault. He chose the short-term fix instead of the long-term discipline.

Don't feel sorry for retired people. They are partly protected against inflation. Feel sorry for younger people. Bernanke is robbing the young.
rich | 08.14.08 - 9:37 am | #

Rob Dawg writes:
Wal-mart guides higher on lower consumer spending. Go figure.

Inflation:
Annualized rate 12 months 5.6%
Annualized rate 3 months 10.6%
Annualized rate 1 month 11%

And this is the official CPI. Money creation and artificially low interest rates; whocoodanode those things would create inflation? Certainly not the Fed. Good thing too that deficits don't matter.
Rob Dawg | Homepage | 08.14.08 - 9:37 am | #

Lawyerliz writes:
If everyone pays their employees like serfs, then they will spend like serfs. Not the recipe for a vibrant economy
Lawyerliz | 08.14.08 - 9:39 am | #

crispy&cole writes:
US Basketball just blew out Greece...maybe the Bulls can rally the market based on this news...Go long Nike..
crispy&cole | 08.14.08 - 9:39 am | #

safe_as_apartments writes:
Jim A.: That doesn't answer my question. I must have been confusing: How does a rise in the nominal price of a basket of goods for an urban consumer make housing more affordable, if nominal wages do not increase at the same rate?
safe_as_apartments | 08.14.08 - 9:40 am | #

Calculated Risk writes:
safe_as_apartments, you are correct - what matters most is the change in wages, and real wages are declining (as Spencer noted).

Best Wishes
Calculated Risk | Homepage | 08.14.08 - 9:41 am | #

One Salient Oversight writes:

Direct link to official inflation figures here (pdf, 108.3kb)

One Salient Oversight | Homepage | 08.14.08 - 9:42 am | #

crispy&cole writes:
Yes 8.8% decline in wages is a killer. For the average american everything is going up except their House ATM and their paycheck...looks like the fed and govt policies has failed again
crispy&cole | 08.14.08 - 9:44 am | #

safe_as_apartments writes:
I suspect what CR is doing is projecting that in the long run, nominal wage growth should correlate with nominal basket of good price growth, thereby making nominal house prices more affordable in a "real" sense.

But there is no guarantee going forward (in the medium, 5-10 year term) that nominal wage growth will outstrip the growth price of a basket of goods.
safe_as_apartments | 08.14.08 - 9:45 am | #

Ross writes:
Little to no growth.

Rapidly rising prices.

Where did I put that definition of stagflation.

Time to break out the bellbottoms.
Ross | 08.14.08 - 9:47 am | #

Rob Dawg writes:
Whocoodanode that a policy of creating a world economy would not only raise low wage nations but lower high wage nations as well?
Rob Dawg | Homepage | 08.14.08 - 9:47 am | #

JimPortlandOR writes:
Things that make you go 'huh?'

- Freddy up 5% this AM
- Fannie up 4% this AM
- WM up 3% this AM.

Whocoodanode that higher foreclosures are great for any of these losers?
JimPortlandOR | 08.14.08 - 9:47 am | #

rtalcott writes:
would be interesting to see the recession gray on that chart too.
rt
rtalcott | Homepage | 08.14.08 - 9:48 am | #

One Salient Oversight writes:
Inflation 5.6%
Unemployment 5.7%
Misery Index now 11.3 - the highest since 1991.
I would not find it hard to say "stagflation".
One Salient Oversight | Homepage | 08.14.08 - 9:48 am | #

David Pearson writes:
Here's a concrete example of the impact of inflation on an ARM borrower:

Say inflation rises from 2% to 4%. With a loan of 4x income, an increase in the ARM rate from 6% to 8% would result in an increase in the interest bill of 8% of income (2% of 400%). Let's say inflation of nominal wages also rises to 4% from 2%. In this case, the borrower's income after interest payments declines by a net 6%. For any increase in inflation that is captured by nominal rates, this borrower is worst off.
David Pearson | 08.14.08 - 9:52 am | #

crispy&cole writes:
Some clown on CNBC said the guberment is going to bailout MTG...is everyone too big to fail?
crispy&cole | 08.14.08 - 9:54 am | #

Hanging by a thread writes:
Housing prices have to start rising to turn the economy around and it will take a huge increase in spendable income and expectations for that to happen. We are seeing the results of building an economy based on increased consumption fueled by Home Equity Loans. If Obama wins, they will have to send out very large checks to every tax payer to jump start this. I will need a gift of about $20,000 to regain my optimism!
Hanging by a thread | Homepage | 08.14.08 - 9:55 am | #

Doc at the Radar Station writes:
Of course, persistent high inflation increases nominal interest rates. This increase, in turn, would cause ARM foreclosures to jump and increase the supply of housing.
-David Pearson

Depends on the product. My ARM is tied to 1yrT and will reset lower to 5.6% next month. I wouldn't be surprised if it drops to 4.6% next year at this time.
Doc at the Radar Station | 08.14.08 - 9:56 am | #

Eddie J writes:
How does this play out with all the talk about DEflation?
Eddie J | Homepage | 08.14.08 - 9:57 am | #

curious-er writes:
Also note that CPI has persistently been running ahead of Core for most of the last 5+ years.

When the metric the Fed uses (the core) consistently (for 5+ years) gives the wrong answer, you'd think they would change it to make it more realistic.
curious-er | 08.14.08 - 9:57 am | #

Yearning to Learn writes:
"Whocoodanode that a policy of creating a world economy would not only raise low wage nations but lower high wage nations as well?"

Ah, yes here is the sticky wicket. All these years Americans and other "first worlders" were promised that a rising tide lifts all boats. And that we could have free trade that would allow an increase in BOTH the first and third world standard of living. However, what is in fact happening is that we are seeing constraints on world resources from increased demand.

and we are seeing the brazilification of the first world as we have to 'compete' with the third world.

anybody watch the Olympics lately? see the air quality in Beijing. And did you know that this is IMPROVED from the normal Beijing air quality since the central govt shut down tons of factories and barred driving in the city to decrease population?

we, the peons, will have to compete with the peons of the world. We surely can't do it on price (but soon will be able to if we keep up current trends). and we can't do it from a regulation standpoint either. Thus we just need to get rid of those Pesky EPA standards and stupid child and slave labor laws.
Yearning to Learn | 08.14.08 - 9:58 am | #

JimPortlandOR writes:
Yearning: bring on the 'nasty, brutish and short' descriptor for life.
JimPortlandOR | 08.14.08 - 10:00 am | #

Yearning to Learn writes:
oops: to decrease POLLUTION (not population!)
Yearning to Learn | 08.14.08 - 10:00 am | #

David Pearson writes:
Doc,

Aha! You have put your finger on the biggest bubble out there. Despite years of persistently high inflation, there is very little inflation premium in short term treasury yields. It is likely that this is caused by irrational (or noneconomic) buying of Treasuries by Central Banks. The T-bill purchases by these CB's the past 2-3 years have resulted in negative real returns on their investment, and yet they sign up again and again. This will continue as long as CB's like China peg their currency to the dollar. Those pegs are becoming more problematic as they result in domestic money supply expansion and higher inflation (which they then export back to us). What can't go on forever won't, so I'd be careful with that ARM.
David Pearson | 08.14.08 - 10:00 am | #

ac writes:

And inflation helps with real house prices too!

Wage inflation would be helpful for housing, but that's not what's been happening.

This is why the Fed's inflation campaign of the past 10 years is yielding such poor results -- that inflation never made it to wages, just assets.

ac | 08.14.08 - 10:03 am | #

safe_as_apartments writes:
But there is no guarantee going forward (in the medium, 5-10 year term) that nominal wage growth will outstrip the growth price of a basket of goods.

I should say "correlate as strongly" instead of "outstrip". Nominal wages don't have to outstrip CPI growth to help with nominal housing prices. It's generally pretty complicated, I think.

An example:

In period 1, after tax I make nominal 100. My expenses, ex housing payments, are 60. I save 10, and my house payments are fixed at 30 (reflecting fixed nominal housing prices and interest rates). I just breaking even.


In period 2, after tax I make 105--up 5% nominal. For the same basket of goods, my expenses are up to 64--CPI ex housing is up 6.7%. My real wages ex housing are negative. I save 10, and my house payments are again 30. So after expenses, I now have 31 to cover 30, a net improvement. Note that if housing has stayed at the same nominal cost, it is more affordable in the community.

Of course, a CPI ex housing growth of 10% for period 2 (expenses now at 66) would require one of two things: (1) nominal housing must come down in order to change the 30 to 29 for those entering into mortgage contracts or (2) my outside expenses diminish.

(2) would presumable cause nominal wages in the community to decline, thereby causing the 105 to be harder to attain, which should eventually trickle to nominal housing prices.

Damned if you do, damned if you don't.
safe_as_apartments | 08.14.08 - 10:04 am | #

vader writes:
What will happen is that the standard of living will fall in a few years instead of many. The leadership elite that hid the decline for 25 years by substituting debt for wages will keep their ill gotten gains while the blame will fall upon those who have to preside over the mess and try to clean it up.

Just like American business where one guy gets the bonuses by short term decisions that are crap in the long term and leaves the mess for someone else to clean up.

Without the debt both the leadership elites and corporate bosses would have to face the effects of their decisions at the time they were made instead of much later.
vader | 08.14.08 - 10:05 am | #

Escariot writes:
Upper Management Meeting yesterday: Agenda item one, layoffs on September 1. We had to list who was critical.
Then, the next agenda items was how MUCH to reduce payroll across the board...10% was decided.
Item three: which equipment can be sold this week to meet payroll and cost of goods.
Item four: progress on getting credit line unfrozen (unsuccessful)

Around here there will be no wage inflation any time soon.
Escariot | 08.14.08 - 10:05 am | #

Doc at the Radar Station writes:
Those pegs are becoming more problematic as they result in domestic money supply expansion and higher inflation (which they then export back to us). What can't go on forever won't, so I'd be careful with that ARM.
-David Pearson

Yep, it will be okeedokee though, for another 3-4 years. Chances are I will need to sell before that time frame is up.
Doc at the Radar Station | 08.14.08 - 10:06 am | #

Bob_in_MA writes:
The good news is inflation should slow as energy prices fall (if they continue to decline). And inflation helps with real house prices too!

CR, I was wondering about this myself. It seems intuitive that relatively high inflation would mitigate any price drop in nominal terms.

But isn't it wage inflation that's key? How does the fact that the average family's costs went up 5+% over the last year lend support to home prices, even in nominal terms, if average wages only went up 3%?

The average family has less income available for housing after other expenses then they did a year ago.

I think the key to the housing-CPI link was having wages increase at, or faster, than the CPI rate.
Bob_in_MA | 08.14.08 - 10:08 am | #

AlphaBeta writes:
Why don't you guys write about something more interesting, like the number of porn movies produced yearly. Now when that number starts to go down and I mean seriously down, then we are all truly f*cked.
AlphaBeta | 08.14.08 - 10:10 am | #

safe_as_apartments writes:
I think the key to the housing-CPI link was having wages increase at, or faster, than the CPI rate.

I was just trying to work this out. I think that it has to do with whether CPI-ex housing*weight median cost of annual house payments outstrips nominal wages.
safe_as_apartments | 08.14.08 - 10:12 am | #

sparks writes:
Lawyerliz writes:
If everyone pays their employees like serfs, then they will spend like serfs. Not the recipe for a vibrant economy.

Liz,
There is only a thin grey line between capitalism and feudalism. The physical gesture has changed from a formal bow, but that's about all.
sparks | 08.14.08 - 10:12 am | #

Anonymous writes:
escariot-

Selling equipment to meet payroll.....

What industry to you work in??

unless you want to name names....;-)

Ciao
MS
Anonymous | 08.14.08 - 10:13 am | #

RayOnTheFarm writes:
Wal-mart guides higher on lower consumer spending. Go figure.

Wal-mart tweaks prices on consumer food items from store to store. I bought the exact same items, two different Wal-marts about 4 days and 200 miles apart... 9% difference in prices.
RayOnTheFarm | 08.14.08 - 10:15 am | #

Outsider writes:
"first worlders" were promised that a rising tide lifts all boats. And that we could have free trade that would allow an increase in BOTH the first and third world standard of living.

Were there really people who looked at offshoring our manufacturing jobs as a positive for our economy?

I remember sensing a lot of unease when those changes were being made.

Maybe the only ones cheerleading were the corporates who were going to profit.

The World Economic Equalizing. Maybe that's our age now.
Outsider | 08.14.08 - 10:17 am | #

Mel writes:
poszi writes:
Inflation does not help with the house prices at all. It squeezes the consumers even more. What helps is the "wage inflation". And I'm not sure we are going to have it.

The whole GOP agenda is to prevent wage inflation. Once they emasculated unions, they set this collapse in motion.
Mel | 08.14.08 - 10:18 am | #

kiewi writes:
well, bugger me, total silence

let me toss this into the ring then


UBS, whose losses from the credit crisis are now approaching $US50 billion, said it would separate its wealth management (traditional banking) business, its asset management division and its investment bank into three autonomous units. It would align incentives directly with the performance of each business within a rigorous risk framework that fully recognised the risk/reward profiles of the different businesses.

The new structure would, it said, result in more transparency on the sources of value creation within UBS, and would impose strict standards on the availability and usage of capital. The new model would enhance the incentive for each business to be successful on its own merits without relying on capital and funding cross-subsidies from other businesses.

Previous UBS analyses of what went wrong in its investment bank have focused on cultural issues, incentives and, most particularly, the way in which the investment bank used the previously pristine credit rating of its parent, and the cheap funding that it had access to, to pursue what were effectively risky and volume-driven arbitrages in the sub-prime credit markets.

In the wake of the credit crisis, the whole appeal of the "universal banking" model that UBS had pursued – a strategy embraced in recent decades by many of the big European and US banks that have been ravaged by the crisis – is being questioned.

The issue isn’t just the demonstrated risks of allowing deal-driven investment bankers motivated by short term incentives access to a commercial bank’s capital base, but a growing realisation that the kinds of internal reforms announced by UBS are going to be emulated by regulators now paranoid about the stability of their financial systems.

The commercial banks will have to hold more capital against the risk within their investment banks and the regulators are inevitably going to want to know a lot more about those risks – the scope to pursue riskier businesses at apparent arms-length from the parents’ balance sheets will be significantly reduced, as will the rewards
kiewi | 08.14.08 - 10:20 am | #

Escariot writes:
Leisure Resort Property Mangement

no names, private family owned business (not traded) a small fry
heavy equipment is gone
storage buildings sold for scrap 4 months ago.
Prudent reserve (6 months) funded all of 2008 to date and is now gone.
running on fumes
Escariot | 08.14.08 - 10:20 am | #

jim writes:
It's always when people think inflation will be "coming down" that it doesn't and instead it goes up and then..........
jim | 08.14.08 - 10:21 am | #

Rob Dawg writes:
The problem with porn as a market indicator is that the business depends on inflation. ;-)

Seriously though. Porn is a big business but I don't see why/how. Net porn is crowding out any low end opportunity and price pressure is crushing the higher production values products. And not just porn. I don't go o the movies anymore. Why when DVDs are $3.99 at Fry's? And the recession is being very good to my collection. Recently bought 3 craigslist collections. 80+ discs for less than $2.40 average.

Inflation statistics are just not capable of capturing the competing price forces in the modern economy. They don't call it chart porn for nothing.
Rob Dawg | Homepage | 08.14.08 - 10:22 am | #

DonKei writes:
"Whocoodanode that a policy of creating a world economy would not only raise low wage nations but lower high wage nations as well?"

Every economist in the world, including all the central banker economists, that's who.

Inflation is their (the US central bank's) mechanism for conducting international wage arbitrage. I assume they think that it seems less painful than an actual wage cut.
DonKei | Homepage | 08.14.08 - 10:24 am | #

Bob_in_MA writes:
Sorry for not reading the previous posts, half of which made the same point I did. Great minds... ;-)
Bob_in_MA | 08.14.08 - 10:25 am | #

Elvis writes:
Rob Dawg,
No offense, but movie collections make me laugh.

"Honey, should we watch "Honey, I Shrunk the Kids" for the 28th time tonight or should we watch "Pretty Woman" for the 215th time?"

"Why don't you watch "Pretty Woman," and I'll go learn something on Calculated Risk."
Elvis | 08.14.08 - 10:27 am | #

How do I profit? writes:
The only place where inflation will help with real state prices is wherever there is labor power (strong unions). This is not the case in the USA. The reason there is not more inflation is that corporations are able to keep wages depressed. The US consumer is being hit from all sides and what the FED wanted will not happen. I see a longer and deeper recession because of their actions
How do I profit? | 08.14.08 - 10:28 am | #

ac writes:

CR, I was wondering about this myself. It seems intuitive that relatively high inflation would mitigate any price drop in nominal terms.

But isn't it wage inflation that's key? How does the fact that the average family's costs went up 5+% over the last year lend support to home prices, even in nominal terms, if average wages only went up 3%?

The average family has less income available for housing after other expenses then they did a year ago.

I think the key to the housing-CPI link was having wages increase at, or faster, than the CPI rate.

As an example look at what happened when gas prices went up. Did automobile prices go up too? Or are they languishing in the lots with deep discounts because nobody can afford to put gas in them?

ac | 08.14.08 - 10:30 am | #

MPinCO writes:
Ah, the Carter years. Let's do it again!
MPinCO | 08.14.08 - 10:33 am | #

WAWAWA writes:
If inflation is eroding people earnings, how that can help with the housing?
WAWAWA | Homepage | 08.14.08 - 10:34 am | #

Elvis writes:
We all know the key to beat inflation is stockpiling 50 lb. bags of rice. Why pay more for food in the future when you can buy truckloads of rice now? Not incidentally, rice also makes a fine mattress. My whole family sleeps on it, and, in the morning, we grab a handful of rice for breakfast. So simple, yet so genius.
Elvis | 08.14.08 - 10:35 am | #

Anonymous writes:
thanks for sharing Escariot

best of luck to you and your business. Luck seems to be all that we will have going forward-to a certain extent.

I thought you were going to say some large multi-national co. At least you keep it real.

Where are you located?

Ciao
MS
Anonymous | 08.14.08 - 10:40 am | #

Anonymous writes:
elvis-

My father in-law did it with VHS and now he's doing it with DVD's. He has something like 300+ VHS tapes STILL...and a growing number of DVD's. I continue to give him a Netflix membership each year to combat his purchases but he still seems to think that he "needs" to own them.......

The movie studios rarely mention renting any longer just to "own it today".....

Ciao
MS
Anonymous | 08.14.08 - 10:43 am | #

we are all screwed writes:
I have a bit of a problem with the whole inflation is contained and will moderate in the near term argument. Consumers are still seeing cost increases. Most retailers require 60 days on cost change notices, and many companies are still playing catch up. Food prices are going to remain elevated, and perhaps inflation on wants will moderate, but we aren't going to see cost decreases coming down the pike soon. Prices will not fall as fast as they went up, and with all the wage pressures we may get a moderating percent increase, but real purchasing power is going to continue to get hammered
we are all screwed | 08.14.08 - 10:44 am | #

zendiet writes:
crispy&cole writes:
CPI does not include home prices...CPI uses a rental factor for housing costs. there is no correlation in CPI to home prices.
crispy&cole | 08.14.08 - 9:34 am | #

Well that makes the CPI about as as useful as a coca-cola douche.
So all of inflationary effects of mortgage resets etc vanish into thin air
zendiet | 08.14.08 - 10:47 am | #

Fast Eddie writes:
Yes, both SS and VA benes will go up ~6% next year plus military and other Government jobs will follow. Plus more boomers unemployed and getting in the SS soup line. What will be the cost of that?
Fast Eddie | 08.14.08 - 10:48 am | #

Escariot writes:
Metro Atlanta

thanks MS

interesting times....
Escariot | 08.14.08 - 10:56 am | #

k harris writes:
"Despite years of persistently high inflation, there is very little inflation premium in short term treasury yields. It is likely that this is caused by irrational (or noneconomic) buying of Treasuries by Central Banks."

I think we need to give OCBs (other central banks) some credit. Merchantilist policies have worked far better than Washington Consensus types have been willing to admit. If buying Treasuries to suppress the dollar value of the local currency results in rapid growth and rapid growth provides political stability, what's irrational or noneconomic about that? In the long run, there are costs to pay for this policy, but even Chinese policy makers are all dead in the long run.
k harris | 08.14.08 - 11:08 am | #

Lazy Smurf writes:
I disagree completely, I think the higher prices we are seeing (not CPI, think real life at the grocery store) are here to stay. I work for a manufacturer who with around $1B in sales each year, and so far this year we have passed through to price increases totaling roughly 7% which has been passed on at the retail level. I can tell you right now that even if oil drops to $20 a barrel we will not lower prices (at least according to management) we will forgo future price increases until our costs justify raising them again in the future.

Personally I believe if the economy tanks and our sales are falling we'll get more aggressive in our pricing, but right now I think the higher prices we are seeing on most consumer goods are here to stay.
Lazy Smurf | 08.14.08 - 11:17 am | #

Dirk van Dijk writes:
Eddie J writes:
How does this play out with all the talk about DEflation?
Eddie J | Homepage | 08.14.08 - 9:57 am | #

Looks like we have both inflation and deflation at the same time. Inflation in goods and services, deflation in assets...not a good combo.
Dirk van Dijk | 08.14.08 - 11:20 am | #

Doc at the Radar Station writes:
If buying Treasuries to suppress the dollar value of the local currency results in rapid growth and rapid growth provides political stability, what's irrational or noneconomic about that?
-k_harris

I agree with your reasoning. But, this policy only "works" when you've got a market for export. When our domestic consumption falls off a cliff due to the credit spigot being turned off, what then? The only alternative would be a stimulus check every two months. What I would want to see is some good data on how the stimulus checks were used.
Doc at the Radar Station | 08.14.08 - 11:26 am | #

Dirk van Dijk writes:
Why don't you guys write about something more interesting, like the number of porn movies produced yearly. Now when that number starts to go down and I mean seriously down, then we are all truly f*cked.
AlphaBeta | 08.14.08 - 10:10 am | #

Given the primary activity in those movies, don't you have it backwards? And going down in porn movies is hardly new.
Dirk van Dijk | 08.14.08 - 11:28 am | #

Anonymous writes:
The standard of living in the developed economies must fall, whether rates are kept high (EU) or not (US). There is no alternative, citizens of developed countries are the victoms of their own success, as capitalism/consumerism spreads to the undeveloped world economies.
Anonymous | 08.14.08 - 11:32 am | #

Hangtown writes:
Elvis, don't forget to lay in some soy sauce. My shredder is working overtime chewing up all those credit card checks I keep getting with my statements, I wonder how many people are using them to make their mortgage payments. Also, a high end wine bar in my neck of the woods just went tits up, times are tough all over.
Hangtown | 08.14.08 - 11:32 am | #

Shaniqua Kwanza writes:
This inflation is causing me to poop my pants.

I cannot afford Twinkies. I cannot afford adult diapers. I cannot make the payment on my Trabant.

What will I do about little Henry and his hare lip? What will I do about Sally who thought tampons were supposed to go up her anus? She got five up there before we took her to the hospital.

And I can't afford even my daily comfort of Pabst Blue Ribbon anymore.
Shaniqua Kwanza | Homepage | 08.14.08 - 12:24 pm | #

Easyenough writes:
In the context of housing supply surplus, the argument for housing "prices" being helped by inflation is more complicated (though still arguable) than it is without that additional factor. The effects on real housing cost, however, are easy to understand and very positive.

Most mortgages are 30 year fixed. ANY NOMINAL wage increase percentage above that factored into the expected inflation rate at the time of the mortgage origination is a relative decrease in housing cost for the mortgage holder. That's why housing is an inflation hedge - because fixed rate mortgages make nominal and real synonymous - "fixed".

Over the longer term, in almost every case, inflation eventually pervades the whole system. Many income sources (though not as many as in the past) have Cost of Living Adjustments, like social security, and local, state, and federal employees. Over time other wages must at least respond to these COLA wage changes even if these other wages and income only represent 10% of the total. Until that catch up happens, real spending power, as everyone has said, declines.

For example, in my case, anticipating inflation, I recently got myself a 3% fixed 30 year mortgage and a job with a COLA. With inflation around 5.6% I'm looking at a significant long-term reduction in housing costs as a proportion of my income.

In fact, the way I see it, since I put nothing down, I am getting a payment of 2.6% of the outstanding principal deposited into home equity each year - which, added to tax and the cost of housing myself, are significant additions to green side of the ledger. That 2.6% difference may not seem like much, but over the long term, I won't mind getting paid that proportion of my total debt as a dividend.
Easyenough | 08.14.08 - 12:46 pm | #

ChefVisar writes:
zendiet - So all of inflationary effects of mortgage resets etc vanish into thin air.

The inflationary effects only occur when the mortgagee pays the new higher rate. If the "homeowner" walks, there is no inflation.

By the way, i didn't know about that alternative use for coca-cola.

ChefVisar
ChefVisar | 08.14.08 - 12:53 pm | #

golfersteve writes:
17 yr. high CPI = 200 pt. day (and counting) in DJIA WHOOOPPPEEE !!!

How can this not end badly ?
golfersteve | 08.14.08 - 12:56 pm | #

Pondering the Mess writes:
Great news!

And the stock market is up on this, because clearly we've reached a bottom, or a top, or something - just BUY, BUY, BUY!!! It's all great!

Hyperinflation for the win! Bail out the debt-people - yeah!
Pondering the Mess | 08.14.08 - 12:59 pm | #

Easyenough writes:
The fed will definitely tolerate higher levels of inflation because of the positive effects on debt. Just make sure your interests are lined up with the interests of the influential and away we go!
Easyenough | 08.14.08 - 1:08 pm | #

Shrek writes:
Cant agree with AC more about wages. A 70's style wage price spiral would actually be beneficial to wiping out the mass amount of consumer debt. I view it as the best option in a world with no good options

Global imbalances are really hurting the world right now. China and a lot of EMs are close to what the 70s was in the US. They need less wage pressure and we need more. of course no on cares until this whole system fails. which it wil
Shrek | 08.14.08 - 1:19 pm | #

Lawyerliz writes:
House price drops will only be helpful when we reach the 50-60% off phase, and for people who have cash or excellent credit.

And I repeat, who is going to finance the REOs.

Good luck, Escariot.

You seem like a sensible guy (?), so I assume you're doing what it takes to personally survive.
Lawyerliz | 08.14.08 - 2:25 pm | #

Richard writes:
>>I recently got myself a 3% fixed 30 year mortgage

and you put nothing down? liar.
Richard | 08.14.08 - 2:32 pm | #

Easyenough writes:
Eloquent Richard. Anticipating inflation, I capitalized a lot of seller funded points - on the order of 8% of the total transaction through a special (non-income dependent) program.

I am not a liar. Not even an exaggerator. The lender paid closing costs too, in case you wanted to be more jealous.
Easyenough | 08.14.08 - 3:13 pm | #

Anonymous writes:
shaniqua kwanza: i haven't laughed so hard in months. WTF was that post all about? I don't know but I laughed until i cried.
Anonymous | 08.14.08 - 3:24 pm | #

Billy Hill writes:
Fearless forecast: the guys running the CPI will whip inflation soon by re-defining the owner-equivalent rent component.
Billy Hill | 08.14.08 - 4:00 pm | #

John S writes:
"If inflation is eroding people earnings, how that can help with the housing?"

Easy. Because of inflation your $650,000 top-of-the-bubble house will again be worth $650,000 -- the same as a cup of coffee.
John S | 08.14.08 - 7:21 pm | #

Jim A. writes:
Safe-as-apartments- You were perfectly clear, it is I who wasn't clear in my agreement that WAGES are what matter, not the PRICES of other stuff. I have to say I've also wondered what exactly the traditional 30% of income guidance is based on. I mean if we look at the long term, and ignore our recent bubble/bust, over the last 50years or so we've seen significant increases in real wages. People COULD choose to spend the extra money on houses or other stuff. Especially considering the improvements in the productivity of the housing industry have shifted the supply curve. It takes many fewer man-hours/sq foot to construct a house. On the materials side, it they're constructed of a smaller amount of scarcer resources, (wood and land) so that's probably a wash.

But overall, the response to the shift in the supply curve has been that people have bought bigger houses on smaller lots, spending a similar percentage of their income. Yes we've seen some of these numbers become asymptotoic during the bubble/bust, but the long term trend seems to be that in aggregage people DO spend the same percentage of their income on housing. Of course for INDIVIDUALS, that percentage goes down as nominal incomes increase and nominal payments don't.
Jim A. | 08.15.08 - 8:20 am | #