Fed meets tomorrow, just getting a head start.

If rates go up, people can't buy houses even more.
If rates stay at their level now, inflation goes boom.

8/7/2006 7:06:39 PM

Nope. Neither of those is very true.

8/7/2006 7:28:21 PM

It's not gonna happen overnight...and if it did happen, it's probably gradual over the rest of the year (although it won't be acknowledged til next year cause there are elections in November).

And since we're the twentysomethings, we're the bagholders that have to work and not get much out of it while financing the Baby Boomers on our backs, so prepare for the worst and hope for the best.

Put it this way:

-Central banks (financiers of Americans being in lots of debt through buying our bonds) are getting rid of dollars and converting them to pounds, which makes the dollar less valuable: http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2006/08/03/cnboi03.xml
-Every central bank (Europe, England, Japan - which was at 0% for 5 years, has raised rates, meaning that worldwide inflation has increased, which the Fed can ignore at their own risk.
-Americans had a negative savings rate last year. That means the typical consumer on average spent more than he or she earned.
-No one is buying houses, whose equity people used to finance their purchases of "want" items, which helped company's bottom-line profits.
-Oil prices are a bit high. One pipeline 3000 miles away sprung a leak and the price of my gas went up 10 cents a gallon.
-The price of gold is up.

More info:

http://www.economist.com/opinion/displaystory.cfm?story_id=5385434
http://www.salon.com/opinion/feature/2006/08/03/recession/index_np.html
http://www.financialsense.com/editorials/navarro/2006/0807.html
http://www.itulip.com/forums/showthread.php?t=292
http://www.financialsense.com/fsu/editorials/schiff/2006/0804.html
http://thehousingbubbleblog.com/?p=1198
http://articles.moneycentral.msn.com/Investing/ContrarianChronicles/EvenIfTheFedPausesTheTrendIsDown.aspx
http://www.azcentral.com/news/articles/0804fed04-ON.html
http://www.nytimes.com/2006/08/05/business/05charts.html?ex=1312430400&en=f7da720e7942a548&ei=5090&partner=rssuserland&emc=rss
http://www.msnbc.msn.com/id/14231663/

Quote :

"Aug 3rd 2006 From The Economist print edition America’s economy is slowing, but the Fed should still raise interest rates next week WHEN Ben Bernanke succeeded Alan Greenspan as the chairman of America’s Federal Reserve earlier this year, The Economist’s cover illustration depicted Mr Greenspan as a relay runner, passing on a baton, in the form of a lighted stick of dynamite, to his successor. Mr Bernanke, this newspaper suggested, was inheriting an economy in much worse shape than popularly assumed. Six months later, the fuse has burned low, with growth slowing and inflation on the rise. Output grew at an annual rate of just 2.5% in the second quarter of the year, well below capacity. And the speed with which the housing market is cooling suggests that a sharper slowdown may lie ahead. A growing number of commentators are now talking about a recession next year. At the same time, inflation is higher than America’s central bankers would like, and increasing. The price gauge that they watch most closely, the deflator for personal consumption expenditure excluding food and energy, went up by an annualised 2.9% between April and June, far above their preferred range of 1-2%. Well over half the components of the consumer-price index are rising at an annual rate above 3%. This combination of strengthening inflation and flagging growth poses an awkward dilemma for Mr Bernanke and his colleagues, who next gather on August 8th. After raising short-term interest rates at 17 consecutive meetings, America’s central bankers have brought the federal funds rate to 5.25%. Monetary policy is no longer loose. By some measures it is a little restrictive. And since higher interest rates take several months to work their way through the economy, the impact of some of the Fed’s earlier actions is yet to be felt. If Mr Bernanke and his colleagues raise rates too far, they risk pushing a faltering economy into recession. But if they stop tightening policy too soon, inflation may get out of hand. Thanks to the weak growth figures, financial markets are betting that the central bankers are more likely to stand pat next week than raise rates again. That would be a mistake. America’s economy may be losing steam, but the dangers of rising inflation outweigh those of slowing growth. If Mr Bernanke is prudent, he will increase rates once again. For a start, the recent deceleration should not be exaggerated. Growth has indeed slowed abruptly, but from a blistering, unsustainable pace—5.6%, at an annualised rate, in the first three months of the year. Some of the second quarter’s weakness, especially in firms’ investment and in exports, may prove temporary. The rest of the world is still growing healthily. In the housing market, it is true, things are likely to get worse. Residential construction is falling, property prices are flat and the number of unsold homes is rising fast. But in the absence of a full-blown collapse of house prices—which, though possible, is by no means assured—America is a long way from recession. A period of sluggish growth is a far more likely outcome. And with inflation straining at the leash, that is exactly what the economy needs. Moreover, it needs it to last much longer than many people realise. Unwinding the excesses An extended diet of sub-par growth is essential to quell rising price pressure. It is also the only way to unwind the imbalances—households’ heavy debts and negative saving rate, the vast current-account deficit—that are the legacy of Mr Greenspan’s loose monetary policy. Few in America like to admit this. Even the Fed foresees only a couple of quarters of sluggish growth this year before the economy bounces back in 2007 with inflation declining nonetheless. That makes no sense. Unless demand growth stays weaker for longer than they now expect, the central bankers will neither get the economy back into balance nor quash inflation. And the need to get a grip on price pressure is becoming more urgent. Every measure of inflation has been too high for months. But many discounted the risks involved, largely because productivity growth was strong and wage pressure weak. If firms were becoming ever more efficient and wages were stagnant, the chances of a nasty wage-price spiral seemed low. Recent revisions to America’s national accounts, however, suggest less room for complacency. Productivity growth seems to have been lower and labour costs higher than initially thought. The new figures say wages are accelerating: America’s total wages and salaries rose by 6.8% in the year to the second quarter of 2006, the most in six years. Add together the need for a period of slower growth and the greater danger from inflation, and the unavoidable conclusion is that interest rates must go up again. After 17 rises in a row, Mr Bernanke may be tempted to call for a time-out. It is a temptation he should resist. "

[Edited on August 7, 2006 at 9:42 PM. Reason : .]

8/7/2006 9:32:25 PM

^ok....what website did you copy/paste all that from??

8/7/2006 11:07:27 PM

^ another economist.com article

8/8/2006 12:55:09 AM

i love the economist

8/8/2006 1:03:07 AM

its all good, we had a really big recession right before world war 2...hopefully history repeats itself with world war 3

8/8/2006 1:37:21 AM

You can't push rates up look at the oil prices how will people survive!

Anyways, they're raising rates, Green see's all!

8/8/2006 1:49:39 AM

Quote :

" The effect of falling home prices on the economy, as per The Daily Reckoning: The gods have gone over to the other side. What is happening is that trends that worked so beautifully on the upside are now slipping into reverse. People still watch Fed policy setters as if it were a live sex show. They don’t want to miss anything. But the thrill is gone. The magic no longer works. The most important of these is the housing market. When house prices were rising, homeowners enjoyed what economists call a “positive wealth effect.” Interest rates fell. Housing boomed as more and more people went to work in the industry; 20% to 40% of all new employment in the last five years was in the housing sector. As everyone’s house rose in price, people felt richer and spent more money. But now house prices have stalled…and are beginning to slip back. From Dallas comes news that house sellers are offering incentives such as free maid service, swimming pools and appliances - whatever it takes to move stuck merchandise. The trouble is, after ten years of boom conditions, there’s a lot of merchandise to move. And much of it is not really suited to buyers’ interest. For ten years, people have bought expensive condos, for instance, not because they really want a condo…but because they think it is a way to magnify the wealth effect. The more condos they own, the more effect they get. Or, they might have decided to get more bang by putting up more bucks. A buyer signs up for a plusher, pricier house than he really needs, realizing that the wealth effect is proportional to the investment. Property, he sees, has been rising at 20% per year in many areas. Twenty percent of $1,000,000, he tells himself cannily, is more than 20% of $500,000. So he buys the million-dollar home, even though he really doesn’t need it. But now that that 20% per year froth has disappeared, homeowners no longer have an interest in more house than they need. “Homeowners say ‘downsize me,’ reports Reuters. It costs money to maintain a house. Property taxes, heat, mortgage payments and maintenance are all proportional to the size of the house. With nothing to gain, people naturally want to cut out the unnecessary expense. The positive wealth effect has gone negative. The more house you own, the more it costs you to hold onto the house…and the more you lose when house prices go down. Meanwhile, the homeowner is also getting squeezed by higher interest rates and higher fuel bills. “Gas prices inch up to another record high,” says an AP report. The national average rose to $3.03 last week. Now our hapless consumer is in a bind. His real income is flat or falling, while his expenses are starting to rise. He has to cut back. Naturally, the first thing to go will be the house he doesn’t need, which makes the negative wealth effect even more effective - and even more negative. Not just for the seller, but for everyone else. Every house sold at a discount drops the value of all equivalent housing stock - even for people who don’t intend to sell. All of a sudden, none of them are as rich as they used to be. They, too, cut back their spending. We know what the Fed will do once this trend builds up momentum: cut rates. But by then, the magic will have gone. And no matter how many passes in the air the magician makes, it will not come back. For, if the Fed really could manipulate the economy any way it chose, we need never have worried. It could have jerked the economy around like a puppet on a string. Want faster growth? Just cut rates. Want less inflation? Just raise them. But there comes a time when financial officials can fondle rates as much as they want; they will never get the response they’re looking for. As Nouriel Roubini explains in last week’s Financial Times: “Once the housing and consumption slump starts, demand for durable goods becomes interest-rate insensitive. Indeed, the recent housing bubble has led to a glut of housing stock, consumer durables and lingering excess capital capacity in the rest of the economy. Thus, as we saw in 2000-01, the housing and consumption slump will dominate any monetary easing effort by the Fed.” The Fed can chirrup as much as it likes; lower rates simply won’t reverse the negative wealth effect of a falling real estate market. Mortgage rates may go up or they may go down (the Fed only controls short rates), but people won’t borrow at all if they sense they will have a hard time making the payments. This is because the old star-spangled circus magic has turned into black magic…a kind of voodoo economics curse, where the tricks all go wrong: The magician pulls a rabbit out of his hat and it bites him on the nose. He saws his pretty assistant in half and finds her actually cut into two bloody pieces. And the ace up his sleeve turns out to be an Old Maid. It is what happened to Japan in the 1990s. Could it happen in the United States? We don’t doubt it. "

8/15/2006 9:02:36 AM

I doubt it. Sure, it could go that way, but I seriously doubt it. Real Estate prices are not going to drop 90% like they did in Japan. Not to mention, our financial system is far less real estate dependent. Even if it was, our financial system works differently from Japan's, ours does not hide bad debts well, they are usually out in the open and symbolic of immediate crashes (which recover quickly) instead of long drawn out deflations which last 10 years.

That said, many claim a slow down or slight loss of home prices will be a good thing since the wealth effect will engender savings, which is currently negative if you remember.

The money in people's hands is not going to disappear, it is merely going to be shifted from consumption to investment (through banks, mutual funds, etc).

This is not to say everything will be fine, this shift could be wrenching for some industries. This shock could hurt business confidence, which would shift money from investment to government securities, which would result in a slowdown of the economy. Of course, since everyone seems to know this is coming I doubt it would be a sufficient shock to hurt business confidence...

[Edited on August 15, 2006 at 9:53 AM. Reason : .,.]

8/15/2006 9:51:41 AM

A dip now wouldn't be out of the ordinary. We won't slump like Japan did simply because the US economy and Japanese economy are so vastly different.

8/15/2006 10:24:07 AM

http://tinyurl.com/o9kjr

[Edited on August 15, 2006 at 10:30 AM. Reason : tinurl]

8/15/2006 10:29:19 AM

Quote :

"Of course, since everyone seems to know this is coming I doubt it would be a sufficient shock to hurt business confidence..."

I'm not too sure that most people know it is coming. You're not going to find anything on the news about it. Politicians aren't going to tell you, there's an election in November and incumbents are already in bad shape.

Quote :

"Not to mention, our financial system is far less real estate dependent."

It's going to cost a lot though just by domino effect.

1.) A number of middle-class people are going to become financially poor.
2.) Banks that loaned out all this money are going to never get paid by the aforementioned bankrupt individuals, most of which never paid principal, which means that the bank will have to sell the foreclosure for a substantial loss (since it will sell for less than the value of the mortgage) and may not get all of their money back. As the financial system rests on the banks and they're lending easy money to people that should have never gotten loans to start with...
3.) A lot of people have being using home equity loans (i.e. borrowing against the value of their house) to buy "want" items: cars, boats, etc. Those items will therefore get a hit. Plus, if there is a general economic downturn, people tend to be tighter with money anyway.

Quote :

"That said, many claim a slow down or slight loss of home prices will be a good thing since the wealth effect will engender savings, which is currently negative if you remember."

Entirely agree, the less money I can pay for my future house the better.

[Edited on August 15, 2006 at 11:34 AM. Reason : /]

8/15/2006 11:33:26 AM

that is an incredibly gloomy scenario

the equation is right but the scale (of how bad it will be) is not

8/15/2006 12:54:47 PM

man fuck this...wheres the possible world war 3 thread

after world war 3 we wont have to worry about stuff like recessions

USA NUMBER 1 BABY

8/15/2006 1:04:53 PM

Quote :

"Banks that loaned out all this money are going to never get paid by the aforementioned bankrupt individuals, most of which never paid principal, which means that the bank will have to sell the foreclosure for a substantial loss"

Sounds like a good time to buy a house or be in real estate

8/16/2006 7:58:22 AM

http://www.fool.com/news/commentary/2006/commentary06082914.htm?source=eptyholnk303100&logvisit=y&npu=y&bounce=y&bounce2=y

8/30/2006 10:02:57 AM