03/24/11 Paris, France – We’re in the airport. We can’t seem to get a signal. So, here’s an abbreviated reckoning.
From what we can tell from the newspapers, the US housing market got very bad news yesterday. New house sales dipped to a record low. Never before since they began keeping records a half century ago have so few new houses been sold.
Naturally, house prices are falling too. Why is that? Because the housing industry built and sold today’s houses yesterday. A credit bubble takes from the future. Now we’re in the future. Naturally, there’s not much here. It’s already been taken away…used up…built…spent…consumed. We’ve got yesterday’s houses on the market. And today’s. And tomorrow’s.
Which shows how ridiculous the feds can be. First, they nationalized Freddie Mac and Fannie Mae…to keep them from going broke. Then, they bought mortgaged-backed securities by the boatload…and lent money at zero interest rates…to re-flate the banking/mortgage industry. Then, they tell us that we (the taxpayers) are making money on those securities. Yes, we’re supposed to make a profit as they are sold back into the market!
But now the housing market is in a double dip, and a report in today’s news tells us that Fannie and Freddie may be hiding $100 billion in losses.
Our advice: if you buy a house today, mortgage it heavily. Long term. Fixed rate. Your house will go down in price…but your mortgage may disappear completely.
Another thing taking a beating today is Europe’s periphery debt after the Portuguese voted against austerity. To put this into perspective, there are only two ways to go. When you borrow too much money from the future, you either have to pay it back or you go broke. The Portuguese were trying to pay down their debts, by cutting “services.” But it’s harder to cut services than you might think. Modern democratic welfare states are built on a fraud – that the government can give people more in services than they pay for. Typically, the government takes the extra money from groups that are politically weak – such as the next generation, which doesn’t get a vote.
Citizens don’t like it when the government tries to cut back. And when a majority of voters are on the taking end of the exchange – getting more from the feds than they pay in taxes – it’s very hard (maybe impossible) to impose “austerity” measures.
What the Portuguese election is telling us is that many governments will go broke before they pay down their debt. At least, that’s what it implies…
As Dear Readers know, the US situation is a little more complicated. We have the world’s reserve currency. Our debt is largely held by foreigners. And it is denominated in a currency we alone control. So, we have the ability to go broke in two different ways.
We can do it the old-fashioned way, that is, by being unable to pay our bills when they come due.
Or we can do it the inflationary way – by paying our bills in a currency that is not worth as much as the stuff we borrowed.
Clearly, the second way is the preferred approach. It’s what the feds are aiming for. It’s a major reason the Fed is pumping $4 billion per day into the world economy. And it’s an additional reason to keep interest rates at zero – even after, by the feds’ own reckoning, the emergency is past.
In short, you can cheat your creditors in two ways. You can default honestly. Or you can inflate.
The trouble with inflation is that it is like a bad dog. It doesn’t come when it is called. And when it does come, it comes on so fast it knocks you over. Then, it goes into the house and tears up the furniture.
Japan hasn’t been able to get the cur in the door in over 20 years of calling. And when it came to Argentina, Zimbabwe and Weimar Germany, it what such a nuisance they wished they had never whistled.
But there’s Ben, Tim, and all the rest – dog lovers, everyone of them.
Bill Bonner
for The Daily Reckoning
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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Why is Bill traveling so frequently?
-BB
Bill said:
You can default honestly.
hmmm You can be honest and default on your debts?
That’s an oxymoron.
Bill, we are already surronded by morons, the last thing we need from you is an oxymoron. How about an anti-moron?
Well I am sure Bill will have “more on” this topic later.
Why is Bill traveling so frequently?
’cause he is stinkin’ rich and has a far flung empire, that is why.
Good for him. He’s no moron.
“…it what such a nuisance they wished they had never whistled.” should be “…it was such a nuisance they wished they had never whistled.”
“Our advice: if you buy a house today, mortgage it heavily.” Should if be If (after colon)?
The headline of a current California newspaper reads “Report: State an economic zombie”.
Looks like Bill’s message is starting to sink in.
shaun,
i wood lik to pour over Birkshire finanshul reportz with U.
How can a reply ask if a someone can “be honest and default on their debts”?
Tons if people thought that they were making an honest buck in real estate and had to default personally when the market went bust. They couldn’t tell the future and didn’t know that they would personally default and they had no active part in causing the housing collapse. But when housing collapsed so did their finances… an honest default.
“You can default honestly.
hmmm You can be honest and default on your debts?
That’s an oxymoron.”
uhhh..I think Bill was just being sarcastic there….
And No, I did not personally default because of the housing crisis and I don’t blame anyone who did.
Personally, I am 35 and have never had enough money to get a mortgage. Forget that they say that banks were giving mortgages to anyone even if they had no pulse. I graduated from what was (at the time) one of the top ten universities in the country with a degree in engineering and economics. I can’t for the life of me figure out how anyone can make any money at all.
I graduated with so much debt that when I actually did pre-qualify for a mortgage it was for $15,000. All I could find for that was literal crack house where the floors had holes that could be used to see into the basement.
Yea, I bought gold in 2001. My econ degree made that work, but it’s not like quadrupling nothing works out to be much more than nothing.
My comment wasn’t aimed at Bill, it was at the person who said “honest default is an oxy-moron”.
Bill once wrote that people with master’s degrees who were once making over $50K/yr. are finding out that their labor is really worth $9/hr. That was my situation, until I could no longer find a job for even minimum wage.
In 2001, I took the good advice to buy gold because it was trading at not much more than production cost (not to mention fabrication costs). I sold it years later to buy the materials to build a 195 sq ft cabin. I later had to sell (sale/lease back type deal) it because of a car accident. The insurance paid most of what I owed, but left me without transportation. Except for 2.5 months working with the census and an equal amount of time on unemployment (I didn’t qualify for any extensions), I have been unemployed and living in a 195 sq ft self-built box (that I no longer own) for more than four years.
Yea, I’m waiting for the reckoning if my state has any indication of the current economy.
And two months ago, someone broke into my box and stole over $5000 worth of leather books and collectables that I aquired when I had a job. No, I didn’t have insurance this time.
I suspect that the burglar was someone with much money who moved into the area after I did, but didn’t like how the local poor where lowering his property values.
I took offense from the reader that said that honest default is an oxy-moron.
I consider myself poor by choice and honest to a fault. Does that mean that I’ll never default? No, it means that I am more likely to default because I won’t partake in transactions that would be considered sound by businessmen and politicians. I’m more likely to do what our country should have been doing economically for decades (not borrowing from a future that rationally has no hope – just like there is no rational hope to repay the $70 trillion in unfunded liabilities that our government faces without inflation).
Which books? I’ll keep an eye out.
“Reform” is the upcoming magnum opus by Tom Friedman. This is THE book you need to keep an eye out!
“As Dear Readers know, the US situation is a little more complicated.” should read “As Our Long Suffering Readers know, the US situation is a little more complicated.”
Why is Bill traveling so frequently?
Have you checked with Interpol ????
JMR, you are right.
I was just having fun with words (like moron).
You are right some defaults are certainly not dishonest.
Shawn,
Let’s talk merger?
-BB
JMR couldn’t get a mortgage. He must be white.
Bill just likes to travel.
Will inflating the debt really work for us, since so much of our debt has been financed with short term T-bills to keep the interest rate down and QE has been buying up the long term debt? I think about half of our debt will have to be refinanced in the next 5 years. Inflation will stick to the long tem debt holders, but once we start that game we will have start refinancing existing debt at a much higher rate or in inflation adjustable T-bills. I just don’t see the gain outweighing the pain.
JMR is white, but what does that have to do with anything? Have you seen the wealth demographics for this country? Median wealth in 2004 was $79,800, but if you were black or hispanic it droped to under $9000 or $14,000, respectively.
Damn, and I bought a house that I could afford and got it paid for. Now I get to help pay for those that overbought and bought houses they could not afford.