Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
Is Crude Oil Firmly on the Upswing Now? - 20th Feb 20
What Can Stop the Stocks Bull – Or At Least, Make It Pause? - 20th Feb 20
Trump and Economic News That Drive Gold, Not Just Coronavirus - 20th Feb 20
Coronavirus COVID19 UK Infection Prevention, Boosting Immune Systems, Birmingham, Sheffield - 20th Feb 20
Silver’s Valuable Insights Into the Upcoming PMs Rally - 20th Feb 20
Coronavirus Coming Storm Act Now to Protect Yourselves and Family to Survive COVID-19 Pandemic - 19th Feb 20
Future Silver Prices Will Shock People, and They’ll Kick Themselves for Not Buying Under $20… - 19th Feb 20
What Alexis Kennedy Learned from Launching Cultist Simulator - 19th Feb 20
Stock Market Potential Short-term top - 18th Feb 20
Coronavirus Fourth Turning - No One Gets Out Of Here Alive! - 18th Feb 20
The Stocks Hit Worst From the Coronavirus - 18th Feb 20
Tips on Pest Control: How to Prevent Pests and Rodents - 18th Feb 20
Buying a Custom Built Gaming PC From Overclockers.co.uk - 1. Delivery and Unboxing - 17th Feb 20
BAIDU (BIDU) Illustrates Why You Should NOT Invest in Chinese Stocks - 17th Feb 20
Financial Markets News Report: February 17, 2020 - February 21, 2020 - 17th Feb 20
NVIDIA (NVDA) GPU King For AI Mega-trend Tech Stocks Investing 2020 - 17th Feb 20
Stock Market Bubble - No One Gets Out Of Here Alive! - 17th Feb 20
British Pound GBP Trend Forecast 2020 - 16th Feb 20
SAMSUNG AI Mega-trend Tech Stocks Investing 2020 - 16th Feb 20
Ignore the Polls, the Markets Have Already Told You Who Wins in 2020 - 16th Feb 20
UK Coronavirus COVID-19 Pandemic WARNING! Sheffield, Manchester, Birmingham Outbreaks Probable - 16th Feb 20
iShares Nasdaq Biotechnology ETF IBB AI Mega-trend Tech Stocks Investing 2020 - 15th Feb 20
Gold Stocks Still Stalled - 15th Feb 20
Is The Technology Stocks Sector Setting Up For A Crash? - 15th Feb 20
UK Calm Before Corona Virus Storm - Infections Forecast into End March 2020 - 15th Feb 20
The Growing Weaponization of Space - 14th Feb 20
Will the 2020s Be Good or Bad for the Gold Market? - 14th Feb 20
Predictive Modeling Suggests Gold Price Will Break Above $1650 Within 15~30 Days - 14th Feb 20
UK Coronavirus COVID-19 Infections and Deaths Trend Forecast 2020 - 14th Feb 20
Coronavirus, Powell and Gold - 14th Feb 20
How the Corona Virus is Affecting Global Stock Markets - 14th Feb 20
British Pound GBP Trend and Elliott Wave Analysis - 13th Feb 20
Owning and Driving a Land Rover Discovery Sport in 2020 - 2 YEAR Review - 13th Feb 20
Shipping Rates Plunge, Commodities and Stocks May Follow - 13th Feb 20
Powell says Fed will aggressively use QE to fight next recession - 13th Feb 20
PALLADIUM - THIS Is What a Run on the Bank for Precious Metals Looks Like… - 13th Feb 20
Bitcoin: "Is it too late to get in?" Get Answers Now - 13th Feb 20
China Coronavirus Infections Soar by 1/3rd to 60,000, Deaths Jump to 1,367 - 13th Feb 20
Crude Oil Price Action – Like a Coiled Spring Already? - 13th Feb 20
China Under Reporting Coronavirus COVID-19 Infections, Africa and South America Hidden Outbreaks - 12th Feb 20
Will USD X Decline About to Trigger Precious Metals Rally - 12th Feb 20
Copper Market is a Coiled Spring - 12th Feb 20
Dow Theory Stock Market Warning from the Utilities Index - 12th Feb 20
How to Get Virgin Media Engineers to FIX Hub 3.0 Problems and NOT BS Customers - 12th Feb 20
China Under Reporting Coronavirus COVID-19 Infections by 66% Due to Capacity Constraints - 12th Feb 20
Is Coronavirus the Black Swan That Takes Gold To-Da-Moon? - 12th Feb 20
Stock Market 2020 – A Close Look At What To Expect - 12th Feb 20
IBM AI Mega-trend Tech Stocks Investing 2020 - 11th Feb 20
The US Dollar’s Subtle Message for Gold - 11th Feb 20
What All To Do Before Opening A Bank Account For Your Business - 11th Feb 20
How and When to Enter Day Trades & Swing Trade For Maximum Gains - 11th Feb 20
The Great Stock Market Dichotomy - 11th Feb 20
Stock Market Sector Rotation Should Peak Within 60+ Days – Part II - 11th Feb 20
CoronaVirus Pandemic Stocks Bear Market Risk 2020? - Video - 11th Feb 20

Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

The Housing & Economic Bubble in Real Life

Economics / Liquidity Bubble Apr 28, 2009 - 05:07 AM GMT

By: LewRockwell

Economics

Best Financial Markets Analysis ArticleMyron Weber writes: As my wife and I were on our way to the home improvement store this past weekend, I saw the economic bubble that brought about the current bust illustrated in stark reality. Near our home in Orange County, California, driving on a beautifully-paved, 6-lane street with a landscaped median and surrounded by relatively new housing developments, the conversation went something like this:


HER: Wow, look at this beautiful street! I remember back in the 1980s when this was just a 2-lane dirt road.

ME: That's right. In fact, I remember driving out here in 1997 or 1998. Even then all this land was nothing but vegetable fields.

HER: It's amazing how quickly it all developed.

ME: This is a microcosm of the bubble.

HER: What?

[She's deserves a lot of admiration for not changing the subject at that point.]

ME: This is a microcosm of the economic bubble.

When the Fed artificially lowered interest rates by creating more money out of thin air, it accelerated home buying ahead of what normally would have happened. This area would not have developed as quickly without that acceleration effect. There were people who otherwise would have stayed in their old home and eliminated some spending to save little-by-little for a down-payment. Suddenly they realized that with lower interest rates, they could afford to buy a new house without saving, and they could still buy all the consumer goods they wanted.

Also, because interest rates were low, home builders could borrow money to buy the farmland, bulldozers, and so forth to build all these homes. They hired workers and got the county to build these roads. In just 10 years, they totally developed this area. The problem is that without interference from the Fed, this area shouldn't have been developed that quickly – there wouldn't have been that natural demand. In reality, today there would probably be more demand for the vegetables they used to grow on this land than for the homes built on it. Our food prices are higher because we have to compete with other localities for the vegetables grown elsewhere and have them trucked in from greater distances.

Now, because the home purchases were accelerated, the home buyers who would have bought homes in 2009 had already bought a home in 2002 – over-simplifying, but you get the idea. So now all the people who would have bought a house in 2009 have already bought one. They have no savings because they have been paying on a big loan and buying all the consumer goods they wanted. As a result, there's greatly reduced demand for new houses, and the value of all these homes around us has dropped over 30%.

Given that this 6-lane road has about 3 cars on it as far as the eye can see, the developers were apparently expecting even more development that's not happening. So they had scaled up way beyond what real demand would support. The developer and construction company go bankrupt because no one is buying new homes and they are paying loans on the idle land and equipment they bought. They have to lay off all their employees, who had bought houses in the meantime and now can't make their payments. People who are upside-down on their mortgages and can't pay start to get foreclosed on. When that happens a few at a time, banks can handle it. But when it happens on a bunch of loans at the same time, then banks start to fail, too.

HER: And that's what's happening now.

ME: Exactly! Artificially lower interest rates cause future spending to happen now – that's the boom. But there's a limit to how long they can keep forcing the future into the present – it creates a big gap at some point, and that's the bust. What the politicians call "stimulating the economy" always amounts to nothing more than accelerating future economic growth to the present, creating a current boom and a future bust. And of course, things in the economy as a whole move slowly, so these economic cycles are longer than our election cycles. That's why the politicians have an incentive to do it.

When they force future spending into the present, it's absolutely inevitable that there will be a bust at some point. That's what we see here.

It's a microcosm of the bubble.

HER: Hmm... When you explain it that way, it makes sense to me.

Isn't she the best?

Myron Weber [send him mail] is a management and technology consultant who dabbles in psychology, economics, theology, autism research, and taekwondo (among other things). Follow him at http://twitter.com/myronweber.

    http://www.lewrockwell.com

    © 2009 Copyright LewRockwell.com - All Rights Reserved
    Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules