Strategically Defaulting on “Shadow Inventory”

12/19/09 Paris, France – Ben Bernanke is Time’s “Man of the Year.” Reading the commentary, it is clear that the popular press has even less of an idea of what is going on than Bernanke himself.

The more we think about it, the more our jaw drops. In Copenhagen this week, a large group of apparatchiks and hacks got together to discuss a ‘climate deal.’ There, Hillary Clinton pledged US support to a plan to spend $1 trillion to try to influence the earth’s climate. Governments can do many things, but can they really improve the weather? There is no evidence for it. Not even a respectable theory.

In Washington, meanwhile, Ben Bernanke is spending trillions to try to improve the economy. Can he really do that? Again, there’s no evidence for it.

The depression continues…

Jobless claims went up last week. And Bloomberg reports that the “shadow inventory” of houses is going up with it.

In the “shadow inventory” are houses that would be for sale if owners thought they could find a buyer at a decent price. We would add in the houses of people who are about to make “strategic defaults” on their mortgages.

The WSJ reports:

“A growing number of people in Arizona, California, Florida and Nevada, where home prices have plunged, are considering what it known as a ‘strategic default,’ walking away from their mortgages not out of necessity but because they believe it is in their best financial interests.”

Some 5.5 million people have houses that are 20% or more underwater. One of them, spotlighted in the WSJ, had a house worth $230,000 and a mortgage of $318,000.

Here is one way the problem of too much debt is solved…not by paying it off, but by writing it off. The homeowner in this situation can improve his balance sheet – wiping out $88,000 worth of debt – without lifting a finger. Logically, he could go to the lender and cut a deal. But lenders won’t want to get their customers started on bad habits. So, he will just cease paying his mortgage. His credit rating will suffer. But what does he care? He’s fed up with debt.

The house will be seized by the bank. Then, it will come out of the shadow inventory and into the light of the active housing market – pushing prices down.

The good ol’ WSJ has noticed the big shift in attitudes. No longer able to afford spending, Americans are deciding that spending isn’t cool.

“We seem to be at a cultural inflection point that we haven’t seen since WWII,” said one market researcher.

“Their value system is shifting from aspiring to material wealth to aspiring to a better life,” said another one.

Yes, dear reader, runaway consumerism has run off the road. With 6 billion people now competing for stuff, the whole idea of having a lot of stuff is being called into question. In the first place, there’s not enough stuff around to permit everyone to have as much as Americans – at least not without some huge technological breakthroughs. In the second place, Americans have run out of money to buy stuff. In the third place, it takes a lot of energy to make and transport so much stuff; the US no longer has access to cheap energy. And finally, the US economic model – in which growth is a result of stimulating consumers to buy more stuff – no longer works.

What will replace consumerism? Hey…we don’t know. Besides, we feel pretty proud of ourselves for just figuring out this much.

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning. Dice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill’s daily reckonings from more than a decade: 1999-2010. 

 

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