Wednesday, January 5, 2011


Here we are in a brand new year. The sun is high, the air is warm and mild and that lovely young lady in the bikini is about to bring me another refreshing beverage with a little umbrella shading the frosty glass. Not! It's cold and dark too early and it's supposed to snow again tomorrow. I really hate winter.

That said, what, you may ask, has been on the Curmudgeon's mind over this past month of lousy weather? Unfortunately, I'm still thinking mostly about the financial mess we are in and why the answers to it seem so hard for our elected leaders to comprehend. In particular I wonder why the mortgage meltdown continues to expand and why no one seems to have a way to fix it.

Just for fun I'm going to state my position up front and then justify it, rather than build an argument that then ends with my particular point of view. So here goes.

I think that one path out of our current economic quagmire is for the Federal Reserve to print more money! Okay, all you conservatives out there, just take a deep breath and relax. Your Curmudgeon, unfortunately, doesn't have the power to actually do that. But I really do think that the only way out of this hole is to climb over a pile of new money.

Here's the story. As I've noted before, wages for 98% of the country have been flat for decades. Average incomes have only barely, and in some case not, kept up with inflation. And, that inflation has been historically low thanks to the Fed's aggressive low interest monetary policies. Those policies, of course, were a major component in the sub-prime mortgage mess that the banks and courts are now trying to repair. So why do I think that we now need more inflation?

All through the past decade, until it all went bust, we, the country and its citizens, pretty much lived on debt. At the state and federal government level we see that, sooner or later, the piper must be paid. But at the personal level the bust was much more devastating to many. It is estimated that $1.2 trillion of the value of our real estate has been lost over the last 3 years. $1.2 trillion! Gone! Now, there are a couple of ways one can look at that huge number. First, and this has been my position until recently, it doesn't really matter if your house is worth less than your mortgage unless you're trying to sell or refinance. Just keep making the payments and all will be fine. What I didn't take into account with that position was the cycle of debt that had developed over the last 10 or 15 years. Our collective borrowing, whether by credit card, purchase mortgage, refinance mortgage or whatever, was based upon a simple assumption; we'll be able to pay off the debt because our real estate will grow in value. Want to add a new bath to your home? No problem. New bathrooms add almost what they cost to your home equity. Wait a year or two and your house will be worth more that when you started the remodel. Simple and elegant. And, as we now see, wrong. And it's that wrongness that has thrown sand into the gears of recovery. If I can't feel and believe that the value of my home has, and will continue, to increase than my plans as a consumer have to change. I must, therefor, stop spending.

This is no different than what a business faces. In fact, I've argued before that the American homeowner has been acting much like a business by using leverage from their home's increases in value to support their lifestyles. But now the value is gone. $1.2 trillion simply wiped out.

Now, remember, 70% of the US economy had been driven by consumption. Business growth and hiring requires demand for the products and services those businesses provide.  No demand, no hiring. And $1.2 trillion is a whole lot of demand. So, what can we do about it?

The value of our property will, given enough time, recover. But we don't have a lot of time. Pouring federal dollars into the top of the hopper (the bank bailout) didn't work. Not that I thought it would, mind you. The amount that could trickle down to the consumers of this country was limited by the unmitigated greed of the bankers and brokers at the top. The tiny amount of money that escaped their hands would barely dampen a tissue, let alone create a trickle. Rewriting or adjusting mortgage loans isn't working because the foreclosure system starts from the assumption that the borrower is the wrongdoer. Any so called help for borrowers thus looks way to much like charity.

No, I'm afraid that the only way to recover the $1.2 trillion of lost wealth is to print money and get it into circulation. We need some inflation. Inflated dollars make debt, from the position of the debtor, easier to pay off. Across the board inflation means bigger paychecks and creates the urge to make purchases now, before prices go up. A little inflation, then, would be a good thing.

Now, clearly, inflation, in a general way, is a bad thing. But, as we have seen from Japan in the eighties and nineties, deflation is much worse. I'm in no way suggesting that we would all be better off with Zimbabwean style $100 trillion bank notes in our wallets (that will be $552 trillion for your cheeseburger sir, would you like fries with that?) or, like prewar Germany where it took a wheelbarrow full of money to buy a loaf of bread. What I am saying is, since the government can't cover the homeowners' losses on their property in the same way they covered the banks' losses with the bailout, inflation is the only way to get back the value that has been lost.

Well, another day another wacky idea. Happy New Year all.

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