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Jim Cook



Every once in a while I switch the TV channel from Fox to CNBC to see what the liberals are saying.  After listening awhile I get a deep sense of hopelessness and foreboding for our country.  The most important thing for the left is giving money to people.  They are happy to see the growth of food stamps, disability payments, housing subsidies, free healthcare and all the other welfare benefits.  They utterly fail to see the damage it is doing to the recipients.  Whole cities that once flourished have deteriorated into rotting eyesores populated with shambling hulks of chemically dependent drones.  These people are no longer employable.  They have become incompetent and helpless and the liberals can’t see that it’s their doing.

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The Best of Jim Cook Archive

Commentary Of The Month
December 8, 2004
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"Trickle Down Trouble from a Housing BubbleTurning back to the economy and its problems, I'd like to hand over the microphone to Stephen Roach. Last Friday, in an excellent article called "Bubble Day," he discussed a topic that I've been talking about for some time: the housing bubble, the fact that it's allowed the U.S. consumer to live beyond his means, the fact that the Fed has in essence tried to bail out one bubble with another bubble, and the fact that they've only made the problems worse. As you read this, think about what I said about the dollar and our need to reduce consumption/promote savings:

"The key to this puzzle is to recognize that the housing bubble and the saving shortfall go hand in hand. The 'asset economy' is a conceptual framework that brings these two seemingly disparate trends together. As seen through this lens, 'rational' consumers take their income-based saving rates to zero only if asset-based saving provides an offset.

"As long as asset markets keep rising, that makes perfect sense. However, when asset markets correct, this decision can backfire. That was the case when the equity bubble popped in 2000, and could well be the case following the bursting of today's rapidly expanding U.S. housing bubble. That's why the latest trends in house prices and saving are so disturbing. In my view, they underscore the distinct possibility that America's asset economy is in the midst of yet another bubble-induced blow-off.

Not surprisingly, these circumstances put the Fed in an especially difficult position. That's because the U.S. monetary authority used up most of its basis points in order to contain the damage from the equity bubble. Unfortunately, in doing so, the Fed kept interest rates at extraordinarily low levels for far too long — setting the stage for the housing bubble that was to follow.

"The risk all along is that the Fed had only a one-bubble damage-containment strategy -- leaving itself with little ammunition to deploy in the event of another serious problem. While the U.S. central bank has tightened to the tune of 100 basis points over the past four months, a federal funds rate of 2% hardly offers much leeway for easing should conditions take a turn for the worse.

"Yet there's an added complication to all this: The housing bubble-induced saving shortfall has pushed America's current account deficit into uncharted territory -- raising the risks of a sharp correction in the dollar and a related back-up in longer-term interest rates. The last thing America's housing bubble needs is an interest rate shock. That is a classic recipe for a sharp decline in U.S. housing prices -- an outcome that might spell curtains for an overly indebted American consumer. . . .

"Income-short consumers are playing this bubble for all it's worth -- enjoying the psychological benefits of the so-called wealth effect, and utilizing the technology of refinancing and second mortgages to extract purchasing power from this overvalued asset. Unfortunately, these trends have led to the virtual elimination of U.S. saving -- triggering a classic current account-adjustment dynamic with attendant risks to the dollar and interest rates. That makes the downside of this bubble potentially far worse than that of the equity bubble. That would be an especially worrisome development for the U.S. economy, since household real estate holdings of some $14 trillion currently are almost double the aggregate size of equity portfolios.

"While it has only been four and a half years since the bursting of the equity bubble, memories have already dimmed of that extraordinary speculative excess. Yet in retrospect, that may have only been the warm-up for the main event. Bubbles have a way of feeding on each other -- ultimately compounding the problem and leading to an even more treacherous shakeout. That's certainly the lesson from Japan, and could well be the case in the United States.

"America's housing bubble is now in the danger zone. So is its saving rate, current account deficit, and overhang of consumer indebtedness. It's been a U.S.-centric world for so long that everyone takes it for granted. Yet global rebalancing poses challenges for all major countries in the world. Saving-short America will not be spared -- especially if it must now come to grips with the biggest asset bubble of them all."

I agree. At some point, we are going to stop consuming and start saving. The only questions are: What's the catalyst, and how ugly will the train wreck leading up to that be?"

Bill Fleckenstein