patrick.net

Banks don't borrow from the government? Har, har. Stop it, you're killing me.

Troy we'll just have to agree to disagree. There's no way I'm getting caught up in theoretical causes of the business cycle. My only point is that it does exist and right now we are in the bottom end of a cyclical trend.
At some point both jobs and inflation will come back.

Probably sooner than later due to the massive amounts of stimulus response and padding of banks balance sheets. The money has to go somewhere.

toothfairy says

The money has to go somewhere.

Ah, that is the $64T question, isn't it?

The Republicans are saying no more stimulus, we need tax cuts instead.

Capacity utilization has recovered somewhat:

http://research.stlouisfed.org/fred2/series/TCU

but it's only back to the bottoms seen during past recessions!

I agree if J6P starts seeing some of this extra money coming his way then we'll get jobs & inflation again.

But more jobs and more wage income are tightly bound -- you can't have one without the other since it takes a tight labor market to put an upward trend on wages.

However, FEWER jobs and LESS income is the normal state of affairs, given the wage differential between the US and the rest of the world.

Part of the reason all recent "business cycles" have had increasingly jobless recoveries is due to globalization of the work force, we didn't have a $30B/mo trade flow with China in the 1970s.

Durable goods employment is back down to the Truman era:

http://research.stlouisfed.org/fred2/series/DMANEMP

Retail's lost about 2M jobs:

http://research.stlouisfed.org/fred2/series/USTRADE

If the Republicans allow Obama to triple the national debt like St Reagan did, then yeah, we should be OK this decade. Just more can-kicking I guess. I half expect this to happen.

But things can certainly go to Hooverville if all the small-government talk starts getting walked.

toothfairy says

There’s no way I’m getting caught up in theoretical causes of the business cycle. My only point is that it does exist and right now we are in the bottom end of a cyclical trend.

If you don't get the causes of a cycle right, you're not likely to predict it's future with any certainty. The article you posted didn't even mention the word "credit" or "debt" once. Irregardless of your opinion on the affect of debt levels on the business cycle, it pretty hard to argue that we are anywhere near the "bottom" of the debt cycle. Private sector debt levels are still at extremely high levels historically, after rising for two decades.

A couple points are important to me.

1. Business cycles do exist

2. Companies shed jobs bracing for a recession possibly depression

3. Recession officially ended in June 2009

In conjunction with the article I posted
it's enough evidence to tell me that jobs WILL be coming back. Maybe not to levels seen at the peak of the credit bubble (there I said credit)

private sector debt may be historically high level but it was like that during boom and bust so what am I missing?

toothfairy says

In conjunction with the article I posted

The one dated November 23rd, 2008?

The national debt ("Debt Held By The Public") on that day was $6,393,775,797,295.81.

Six months later it was $6,999,376,165,569.64 -- a deficit spending run rate of $100B/month.

Two years later the national debt was $9,205,377,401,824.96, a rise of $2.8T, a run rate of $116B/month.

Talking about "recessions ending" and "business cycles" strikes me as odd when such an immense external intervention occurred and is continuing.

private sector debt may be historically high level but it was like that during boom and bust so what am I missing?

You're missing the run-up of household debt that was allowed to occur (if not encouraged) 2002-2007.

So it was not really "like that during the boom". The run-up in debt -- from $9T in 1Q03 to $13.9T in 1Q08 WAS CREATING THE BOOM.

That was a shower of ONE TRILLION DOLLARS A YEAR entering the economy.

And as for the bust . . .

All we've done since the bubble crash of late 2008 is swap-in government deficit spending -- $120B per month -- for that lost credit stimulus.

We're running in a policy channel first carved out by Japan, 1990-now. Their debt-to-GDP is #2 to Zimbabwe. We'll be right up there if we continue this rate of debt expansion.

At least Japan's national debt is internal, so it's just an accounting artifact. I'm not entirely sure what's going to happen with our national debt -- if the Austerians take over policy we're going to be f---ed one way, and if they don't we're going to be f---ed another.

>> The one dated November 23rd, 2008?

yeah actually I could probably pull up an identical one from 1978. The ideas are nothing new and no it's not different this time.

>> Talking about “recessions ending” and “business cycles” strikes me as odd when such an immense external intervention occurred and is continuing.

again it's not me talking about it.
http://www.nber.org/cycles/cyclesmain.html

are you denying that the recession is over. NBER wrong? lying?

gameisrigged says

“If this is the case, and I can afford to buy a home within my means in the bay area, at a price where my mortgage is almost what I could rent the house for, isn’t it a good idea regardless just to protect my dollars?”
That’s a lot of “ifs”.
As far as I’m concerned, the only question you should be asking is, “Will house prices go up or down?” Let’s say you’re right, and buying a house is a hedge against inflation - If you can get the same house for less money in 6 months or a year, then it’s an EVEN BETTER hedge against inflation. So the hedge against inflation part of the argument isn’t relevant. The only way it would be relevant is if you’re deciding whether or not to buy a house AT ALL, and it would seem you’ve already made up your mind. The only question is when.

I disagree that the only thing you should ask “Will house prices go up or down?”. Might as well play the over/under in vegas. I also disagree that an inflation hedge is the only reason to buy a house. Inflation directly caused maintenance costs to go up. In my opinion if you are ever interested in buying a house the better question is "what kind of house can I get for what I can afford ?" If you are planning on living there and dont need financial trickery to make a purchase, then the price going up and down means little.

toothfairy says

are you denying that the recession is over. NBER wrong? lying?

NBER BCDC is just 9 academic economists doing what they are paid to do. They had more relevance back in the 1920s, back when government spending was not the dominant element it is today.

Calling the recession "over" when we are still well the fuck down from the 2003-2006 period of employment or output is sometihing of a deception, yes.

Things may have stopped getting worse -- perhaps temporarily -- but we are still in recession.

marko says

I disagree that the only thing you should ask “Will house prices go up or down?”. Might as well play the over/under in vegas. I also disagree that an inflation hedge is the only reason to buy a house. Inflation directly caused maintenance costs to go up. In my opinion if you are ever interested in buying a house the better question is “what kind of house can I get for what I can afford ?” If you are planning on living there and dont need financial trickery to make a purchase, then the price going up and down means little.

I think you missed the point and read my post way too literally. I didn't mean "will prices go up or down" is literally the only question you should ask. It goes without saying that you should be able to afford the house you're buying; I certainly wasn't implying anything to the contrary. If you had taken the full context of my post rather than zeroing in on one sentence to the exclusion of all others, it's obvious I was saying that affordability is more important than the concept of a house being a hedge against inflation. Finding a good deal is superior to overpaying for the first thing that comes along just to "get in", and is a wholly separate issue from whether it's a hedge against inflation.

I disagree that "the price going up and down means little". If you buy a house today that costs $500,000, but you could buy an equivalent house in 6 months that costs $400,000, the fact that prices went down would mean a great deal. It would save you $100,000. Just because you "plan on staying there" doesn't mean you should overpay. Money is money.

Whether housing is a hedge against inflation depends largely on how the property is acquired.

If a buyer pays cash then the price is locked in. (There is an opportunity cost with cash in the sense of not being able to get interest and other benefits.)

If the buyer pays with a fixed rate loan then the monthly cost is locked in.

If the buyer financing with an ARM then all bets are off, the risk of inflation has been moved in large part to the borrower from the lender. This is why ARMs are easier to get.

OurBroker says

Whether housing is a hedge against inflation depends largely on how the property is acquired.
If a buyer pays cash then the price is locked in. (There is an opportunity cost with cash in the sense of not being able to get interest and other benefits.)
If the buyer pays with a fixed rate loan then the monthly cost is locked in.
If the buyer financing with an ARM then all bets are off, the risk of inflation has been moved in large part to the borrower from the lender. This is why ARMs are easier to get.
Peter at OurBroker.com

Untrue. The inflation expectation is priced into the fixed rate products...that is, this is why a 30 year fixed rate is 2.5 points higher than a true ARM...and a 10/1 ARM has a higher initial rate than a 5/1, and 5/1 higher than 1/1, etc.

A fixed rate mortgage only wins if inflation outpaces expectations. Based upon the yield curve, which is relatively steep, there is an expectation of inflation and increasing interest rates. How inflation occurs vs. this expectation will determine whether or not an ARM or fixed rate product is superior.

Dave --

We disagree. While ARMs have been a good deal for a number of years because we have not seen rates at 7 percent, 8 percent and above, there's no certainty that such rates will not return. The idea that lenders can predict the future is obviously questionable -- just look at the smart folks who gave us option ARMs, the S&L crisiis, etc.

The European Central Bank has just raised its rates and its hard to believe that inflation will not catch up with us.

"As of January, the average interest rate paid on relatively safe vehicles such as short-term savings accounts, time deposits and money-market funds stood at only 0.24%. That's one-tenth the level of late 2007 and the lowest on records dating back to 1959. Such depressed rates don't come close to compensating for inflation, which was running at an annualized rate of 5.6% in the three months ended February." (See: The Wall Street Journal, Fed's Low Interest Rates Crack Retirees' Nest Eggs, April 4, 2011)

http://online.wsj.com/article/SB10001424052748703410604576216830941163492.html

I've been told that best inflation investment is into companies that can raise prices during inflation. Buying consumer goods themselves isn't going to net a profit necessarily, it's usually a money losing operation since under capitalism overproduction exists.

Everything I hear about Bay Area sounds like a bubble to me, so I'd advise against it. And if you really expect hyperinflation (very unlikely as people don't have the paychecks to back it) than you can invest into foreign currencies which are not pegged to the dollar.

I really though, do not see inflation. In our area too many are underemployed or unemployed.

Imagine that ARM interest rates rise to 7 percent from, say, 5 percent. That's not high by the standards of the past five decades, but monthly payments for a $100,000 ARM would go from $536.82 for principal and interest to $665.30. That may not seem like a big deal, except when you think about the unemployed and the underemployed. It's a bigger burden on top of other burdens.

If someone has a fixed-rate loan and not an ARM it's not an issue.

OurBroker says

The European Central Bank has just raised its rates and its hard to believe that inflation will not catch up with us.

All of the inflation experienced by the US and EU is due to commodity price surges. However Germany (er... I mean the EU, but really Germany calls the shots) has a different situation than the US:

1) The EU has a highly unionized workforce that can demand higher wages for the same productivity - setting off inflation. The United states does not.

2) In the US, really the only workers that have that kind of bargaining power are public unions, but states and municipalities are facing very serious debt problems so significant wage increases are unlikely for a years. Germany does not have that problem.

The EU has a much greater chance of inflation than the US from rising commodity prices. Already they're above 2% for their overall measure, while we are more like 1%, and they are less of a commodity dependent economy than we are.

Mark --

Agreed. The problem with commodity prices is that folks outside the US like the way we live and so there is increasing competition for oil, food, etc., and thus pressure to increase prices worldwide.

As well, if the Treasury cannot fund the debt at today's rates that will substantially increase government costs and be a huge problem.

Hi --

Also, a lot of US ARMs are based on the LIBOR.

It looks like China is a net buyer again as they pitched in for $700billion more of US debt last year. In the words of Joe Six Pack: "How much a month"? (I know, it should really be this chart, but the other one really drives home the point). So far, it looks like everyone is doing their part to help us out. It's going to get ugly if (when?) we are cut off...

toothfairy says

what makes anyone think jobs will come back? Look at any historical chart of unemployment.

But thos historical charts don't take into account that job can be outsourced today.

Fixed mortgage payment is a hedge insofar as you know what your payment will be for as long as you want to keep that mortgage. You don't know what rent will be. You also don't know what HOA fees will be if buying in a complex. If you never borrow additional principal, and are someday able to refinance to a lower rate, your payment can go down. Property tax will go up. Insurance will go up.

The amount I set aside each month for tax & insurance is $210/month higher today than when I bought my home 20+ years ago. Due to refinances at favorable interest rates, the principal & interest payment is $240/month lower than my earliest mortgage on this property. Because of extra principal payments, I will be paying off in 21 years instead of 30.

However, mortgage payment is not comparable to rent payment. I don't know about condos, but houses eat money! Be prepared for the home improvement store to suck money from your wallet every time you drive past it.

"Buying a house to protect against inflation, what am I missing"

Was true back in the 1970s when inflation impacted or was caused by increasing prices and wages. But that is no longer true, wages do not increase with price inflation.

In some industries you have deflation.. prices of goods sold have declining over the years which result into cutting into compensation.