Friday, May 31, 2013

The Great Reflation

“The ‘wealth effect’ from rising home prices combined with the similar influence of rising stock prices creates an aura of recovery. In fact, this week’s revisions to first quarter GDP revealed that consumer confidence and spending are up despite real discretionary per capita incomes plunging at a 9.03% annualized rate. That is worse than the largest plunge during the 2008-2009 crisis (7.52%). Additionally, the household savings rate fell to an abysmal 2.3%, the lowest since the 3rd quarter 2007. Debt-financed consumption supported by inflated asset prices is what led to the financial crisis of 2008. It’s amazing how willing we are to travel down that road again.
Of course rising asset prices are completely dependent on continued Fed support. As we have seen time and again, whenever the Fed even hints at tapering its massive QE programs the stock market sells off. The housing market is even more dependent on that support. Given the risks, it is arguable that no private market for home loans would even exist without government intervention. The bubble that popped in 2008 consisted mainly of government-guaranteed mortgages. This time, the mortgages are not merely government-guaranteed, but government owned.”

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