There Is Something In This More Than Natural - Part 3
Summary
Those who cannot learn from history are doomed to repeat it. Let's go back to the future for the basics, the fundamentals, the tried and true methods of building a sound economic foundation. It worked before and can again.
Although having very promising futures and they are certain to play a part in any recovery, at this juncture, the biotech, nanotech, high tech and alternative energy industries do not bring enough to the table to employ, feed and house the masses. What alternatives are there?
Another analysis that concurs with our Natterings... there is no way to fix this problem and the reality that real estate prices are unjustified, unsupportable and must come down. When the idiots that have run this country into the ground realize this, and let nature takes it course, everything will go back to normal.
From Fleck: "This is the crux of the problem, and the government cannot fix it. Either income must rise -- which seems unlikely on an inflated-adjusted basis -- or home prices must come down. The housing bubble was the enemy, and we should cheer its bursting. We should not attempt to re-create it."
- Of Economic Base Metamorphosis, Capital Misallocation and The McJob Malaise.
- There are unnatural side effects from the interrelationship of QE, ZIRP and Secular Stagnation.
- 35 years of economic deconstruction; the fallacies of central bank policies; and the resulting misallocation of capital; cannot be turned around without a return to the basics.
- An effort must be made to incentivize productive investment and reconstitute a durable domestic economic base.
In Part 1 we examined how it took 25 years of financial deregulation, globalization and outsourcing to labor at the margin to emasculate our durable domestic economic base.
In Part 2 we examined how this morphing effected household income; and how spending patterns were maintained during the period.
In Part 3 we examine the two requirements for a return to economic normalcy.
Those who cannot learn from history are doomed to repeat it. Let's go back to the future for the basics, the fundamentals, the tried and true methods of building a sound economic foundation. It worked before and can again.
Although having very promising futures and they are certain to play a part in any recovery, at this juncture, the biotech, nanotech, high tech and alternative energy industries do not bring enough to the table to employ, feed and house the masses. What alternatives are there?
The Fed is little more than a clearinghouse that sets a target interest rate on one type of money that impacts the economy and the bank lending rate in a loose fashion. The Fed's inability to control the economy is not something unique to today's environment. It has always been true. It just so happens that the crisis exposed this reality.The reason I care so much about this is because it has distracted all of us from what could actually be helping us get out of this mess. And so we go through the different iterations of "Quantitative Easing" and all of these other ineffective policies all the while distracting us from doing something that might actually help like tax cuts or public investment. And the economic stagnation continues as we turn to "unconventional" monetary policy to help steer us towards the natural rate of interest. And so it looks like we remain stuck in this permanent "liquidity trap" as economists say that "unconventional" policy just hasn't been unconventional enough. But all we're really trapped in is a horror story written by economists who have a theoretical narrative that doesn't actually reflect our reality. From Cullen Roche - Nobody Needs To Understand The Liquidity Trap
To escape the horror story with a theoretical narrative, written by economists, just two basic requirements exist for our current reality.
Requirement #1: as FDR did, whip out the WPA. Now is the time for business and government to swell their employment ranks with durable infrastructure build out projects. Read ex-military, highways, long rail, metro public transportation, water production, waste water reclamation, public hospitals, schools, housing for the homeless, traditional and alternative energy sources/production, etc.
Deployment into the industries listed above would probably result in near full employment. The Federal, State, County and City governments need to self insure, abandon "at risk" managers and take infrastructure projects on internally. Hire managers proven competent in infrastructure build-outs and value engineering. Bring back apprenticeship and journeyman programs, then staff up with local people and do the work in house.
Keep the money local (including the lending) utilizing small to medium sized local companies and employees (hire local people at prevailing wage). This will keep local people employed at a decent wage and local businesses that cater to them, up and running for some time to come.
Once employed with a decent wage, the local labor input will consume, spend, pay taxes, generate additional income and most importantly, more jobs throughout the local chain. Previously weakened (through outsourcing and upstreaming) local interactions, recycling of economic resources, and economic multiplier effects will progressively strengthen and rebuild. This is not the time to outsource or upstream to geographic outsiders, large multi-national companies (those that expatriate tax base or jobs) or foreign countries.
An adjunct to Requirement #1, as a taking or seizure of public assets has already happened in New Orleans, Jefferson County Alabama and of late Detroit, privatizing vital public resources or assets to "for profit" entities should be outlawed. Further privatizing only cripples the remnants of our durable domestic economic base, making a recovery less probable.
Onward to Requirement #2...The graph below demonstrates that mortgage debt service payments as a percentage of disposable income have reverted to 1985 levels, with the following caveat...
The graph below demonstrates the caveat by reminding us that in 1985 a 30 yr fixed was at 11 - 13%, today it is almost 1000 bps lower at only 4.1%
The graph below demonstrates that twenty years later, despite interest rates being almost 1000 basis points lower, the median new housing price/income ratio at 7.2 to 1 is completely out of control and has been since just after 1985 at 4.5 to 1.
Requirement #2: As median household income has remained stagnant and actually declined over the period, for any recovery to be possible, the housing price/income ratio must revert to pre 1995 levels or come back into harmony.
We Nattered about this in Catering To The Bailout Nation:
From Fleck: "This is the crux of the problem, and the government cannot fix it. Either income must rise -- which seems unlikely on an inflated-adjusted basis -- or home prices must come down. The housing bubble was the enemy, and we should cheer its bursting. We should not attempt to re-create it."
From our 2008 post, Quantum of Solace:
"Homes are sticks and bricks where people live their lives and raise families. If you lived in the home for an extended period and it appreciates, thats one thing. Homes should not be chattle for serial flippers or landlords.
Seek margin in video games or cars or stereos or durable manufacturing, not financial instruments tied to the necessities of life. When you turn your own backyard into a major source of wealth, thats when the trouble starts."
"Homes are sticks and bricks where people live their lives and raise families. If you lived in the home for an extended period and it appreciates, thats one thing. Homes should not be chattle for serial flippers or landlords.
Seek margin in video games or cars or stereos or durable manufacturing, not financial instruments tied to the necessities of life. When you turn your own backyard into a major source of wealth, thats when the trouble starts."
When did people forget that their home is: 1. Nothing more than sticks and bricks on a piece of dirt? 2. A place where you live out your life, perhaps raise a family, grow old and pass on?
This basic right of life has been misappropriated as a commodity and asset form which speculators have perverted into something that has been grossly mistaken for organic economic output which has masked the gradual morphing of our economic base.
We previously commented on how this perverted behavior has resulted in the average person being unable to afford this basic right, and many of those that can, have been converted into a debt slave or sharecropper for the house of finance.
To discourage this behavior, if you flip for profit (re-codification is required re: 3d's, death, displacement, divorce, 24 month domicile is not long enough), this activity should be subject to a stiff capital gains tax.
If the housing price/income ratio harmonizes, disposable income would increase, while the percentage of disposable income spent on mortgage indebtedness would decline further, freeing a large amount of money to chase goods and services, further boot-strapping the economy.
For the above to occur, either housing prices decline, income levels rise, flipping of primary residences is de-incentivized, or some combination of all the above.
More to come in Part 4, where we answer the multi-Trillion dollar question, just where would all the money for these projects come from?
Recommended reading:
More to come in Part 4, where we answer the multi-Trillion dollar question, just where would all the money for these projects come from?
Recommended reading:
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